Rescission, as we all know, is one of those last-resort legal remedies that is rarely granted. In the insurance world, it is especially difficult for an insurance company to rescind an insurance policy after it is issued to the policyholder.
Where, however, the policyholder misrepresents the risk or itself or some other critical element that goes to the underwriting decision, the remedy of rescission may be available to the insurance company to avoid any obligation to the policyholder. For example, if in the insurance application the policyholder or its agent misrepresents that the insured building has a working fire sprinkler system, the insurance company may have a good case to rescind the policy.
What happens if the insurance company finds out about the misrepresentation, but continues to accept the policyholder’s premium payments? That was one of the issues addressed in a recent New York appellate case.
In 5512 OEAAJB Corp. v. Hamilton Insurance Co., Nos. 2019-00249, 2019-00250 (N.Y. App. Div. 2d Dep’t, Dec. 16, 2020), the insurance company issued a property insurance policy to the insured based, in part, on an application indicating that the insured building had a sprinkler system. After the building was damaged by a fire and a claim was submitted, the insurance company continued to collect premium while it investigated whether the building had an automatic fire sprinkler system. Turns out it did not and the insurer disclaimed liability based on a material misrepresentation and reserved the right to cancel the policy. So far, so good.
But the insurer never cancelled the policy and, in fact, through its agent renewed the policy and continued to collect premium. It then sought to cancel the policy after it found out about the renewal. Various claims were filed and ultimately, the motion court decided against the insurance company. On the issue of rescission, the appellate court said the following:
The continued acceptance of premiums by an insurance carrier after learning of sufficient facts which allow for the rescission of the policy, constitutes a waiver of the right to rescind (see Leading Ins. Group Ins. Co., Ltd. v Xiao Wu Chen, 150 AD3d 977, 978; United States Life Ins. Co. in the City of N.Y. v Blumenfeld, 92 AD3d 487, 489; Scalia v Equitable Life Assur. Soc. of U.S., 251 AD2d 315). Here, contrary to [the insurance company’s] contentions regarding the granting of both the plaintiff’s motion for summary judgment on the issue of liability against [the insurance company] and that branch of [the broker’s] cross motion which was for summary judgment dismissing [the insurance company]’s cross claims against it, the record demonstrated, as a matter of law, that [the insurance company] waived its right to assert the plaintiff’s misrepresentation as a basis for rescinding the policy and disclaiming coverage by renewing the policy and accepting further premiums after it discovered the misrepresentation (see United States Life Ins. Co. in the City of N.Y. v Blumenfeld, 92 AD3d at 489; Scalia v Equitable Life Assur. Soc. of U.S., 251 AD2d at 315).
The case raises two issues for insurers. First, if you are going to rescind a contract for material misrepresentation, do it and don’t collect premium and renew the policy. Second, if you have a material misrepresentation situation, make sure any agent of yours that has policy issuing authority is aware of the situation and does not go ahead and renew the policy without your express knowledge and permission.
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