It has long been the law in New York that a misrepresentation contained within an insurance policy application, if material, will void the policy from inception even though the misrepresentation was "innocent". McLaughlin v. Nationwide Mutual Fire Ins. Co., 8 A.D.3d 739 (3d Dept. 2004). However, occasionally courts have rendered decisions that were arguably inconsistent with this rule.
The Appellate Division, Fourth Department, recently issued a decision reversing a lower court and reaffirming that the "innocent" nature of a material misrepresentation will not be a defense to an insurer's attempt to rescind the policy. In Precision Auto Accessories, Inc. v. Utica First Insurance Company, 2008 N.Y. App. Div. LEXIS 5182, the insured sought, after a substantial fire, to recover under its policy of insurance with Utica First Insurance Company (Utica First). After an investigation Utica First denied coverage and advised that it was rescinding the policy from its inception based on alleged material misrepresentations made in plaintiff's insurance application with respect to plaintiff's claims history. The company also refunded plaintiff's entire policy premium.
Plaintiff and defendant each moved for summary judgment. The lower court denied the motions and both parties appealed to the Fourth Department. The Fourth Department reversed the lower court and granted Utica First's motion for summary judgment holding:
Contrary to plaintiff's contention, defendant met its burden of establishing that it was entitled to rescind the insurance policy, i.e., defendant established as a matter of law that plaintiff 'made a material misrepresentation [such that defendant] . . . would not have issued the policy had it known the facts misrepresented' . . . 'To establish materiality of misrepresentations as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins or rules pertaining to similar risks, to establish that it would not have issued the same policy if the correct information had been disclosed in the application' . . .
Plaintiff did not argue that its loss history had not been misrepresented but rather contended that the insurer failed to establish a willful misrepresentation. Plaintiff also argued that Utica First was estopped from denying coverage because any misrepresentation in the application was the result of negligence on the part of the defendant's agents who prepared the application.
In support of its motion, Utica First submitted an affidavit from its president setting forth its minimum underwriting guidelines for prior losses and stating that the insurer, had it been aware of the plaintiff's true loss history, would not have issued the policy. The court emphasized that the insurer need not prove that the misrepresentations were willful in order to rescind the contract, stating:
Insurance Law § 3105(b ) does not specify that a misrepresentation must be willful, and '[w]hether or not plaintiff intended to provide inaccurate statements or misrepresentations at the time [it] filled out the application is irrelevant' (Curanovic, 307 A.D.2d at 437). Rather, a 'material misrepresentation, even if innocent or unintentional, is sufficient to warrant a rescission of the policy' . . .
In response to plaintiff's argument that the insurer was required to establish that the misrepresentations were willful, the court noted that "when an insurance policy is void ab anitio based on material misrepresentations in the application, it is as if the policy never came into existence, and an insured cannot create coverage by relying on the terms of a policy that never existed . . ."
The court also rejected plaintiff's estoppel argument based upon the alleged negligence of defendant's agents, noting the general rule that the signer of a contract is bound by it, whether she actually read it or not and an insured has a duty to review the entire application and to "correct any incorrect or incomplete answers." The court pointed out the important distinction between an insurance agent and broker in these circumstances. "Although the insurance agency that bound the coverage may have been an agent of defendant, the broker who completed the application was hired by plaintiff as its agent and was an independent contractor with no connection to defendant."
Plaintiff also asserted that the insurer waived its right to rescind the policy based upon the insurer's alleged acceptance of premiums after learning of the facts permitting rescission of the policy. Plaintiff's contention in this regard was based solely on speculative and inadmissible hearsay testimony of the plaintiff's insurance broker and was insufficient to defeat the motion for summary judgment. "Moreover, even assuming that defendant acquired knowledge of plaintiff's actual loss history before the fire, we conclude that such knowledge, by itself, is insufficient to constitute a waiver because plaintiff has failed to establish that it paid a premium to defendant after defendant allegedly acquired that knowledge.
Finally, the court rejected the plaintiff's contention that the insurer was estopped from disclaiming coverage because of an eight month delay in issuance of its notice of rescission. The court ruled that "[h]ere, even assuming, arguendo, that defendant's notice of disclaimer was untimely, we conclude that defendant is not estopped from rescinding the policy as void ab initio inasmuch as, contrary to plaintiff's contention, plaintiff failed to demonstrate any prejudice based on defendant's alleged delay in disclaiming coverage . . ."
The Precision Auto case presents an excellent example of the numerous issues faced by an insurance carrier attempting to rescind a policy for material misrepresentation in the application, and the correct procedure to meet those issues.
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