Problem
Michael has purchased a homeowner's (HO) policy from Acme insurance company. When Michael purchased the policy it was written as Michael's primary residence. Three months later Michael files a claim for damage to the property. In the process of the investigation the insurer found that Michael has been using the home as a rental property. When asked Michael said that he thought the policy was written as a rental policy and got very upset because he believed that the insurer did not want to pay the claim.
Is this a case of material misrepresentation? If so what steps should the insurer take next? Pay the claim and act as though nothing has happened? Rescind (void) the policy and reimburse Michael his 3 months of premium? Or pay the claim and reevaluate Michael's policy and charge the correct premium? Defend your position.