The importance of accurately completing an insurance application is often overlooked by business owners and risk managers. But inaccurate or incomplete responses are fraught with risk that may result in no coverage at all, based on rescission of coverage by an insurer.
Under New York and Connecticut law, an insurer must satisfy a significant burden when rescinding an insurance policy “ab initio” (“from the beginning”). Nevertheless, especially where New York law is applied, where there are misrepresentations in a policy application, insurers have significant, strategic options for seeking rescission that can create very serious problems for insureds.
In New York, legal issues surrounding rescission start with Section 3105 of the New York Civil Practice Law and Rules (“CPLR”), which states that “No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.”
New York courts generally interpret the above to mean that an insurer “may avoid an insurance contract if the insured made a false statement of fact as an inducement to making the contract and the misrepresentation was material.”
Two basic and important points relate to the above. The first is that an insured’s misrepresentations in an application for insurance can justify rescission under New York law even if made innocently, i.e., mistakenly. (This is not expressly provided in Section 3105 and is a court-made rule based on the intention and text of the rule.) The second is that an insurer can rescind a policy only if a false representation was an “inducement,” which means that an insurer must generally show that, if not for the misrepresentation, it would not have issued a policy or endorsement, had the correct information been disclosed.
Connecticut law follows similar logic, e.g., “Rescission of a contract is an appropriate remedy if there has been a material misrepresentation of fact upon which a party relied and which caused it to enter the contract…Rescission, simply stated, is the unmaking of a contract.” But Connecticut law differs from New York law, in important respects, including by allowing rescission only based upon an intentional (though not necessarily fraudulent) misrepresentation.
The question of whether to apply New York or another state rule can be especially important in the context of rescission. Fact issues surrounding materiality, intent, and inducement are very complex. Rescission creates procedural considerations, as well. For example, in both New York and Connecticut an insurer typically seeks a judgment from a court declaration that rescission is proper. Further, rescission in the context of certain lines of coverage such as life or health insurance can raise additional issues.
This content is provided as background and does not constitute legal advice. The attorneys at our firm have many years of experience with insurance issues. For more information or to schedule a free consultation, contact us at info@lalorattorneys.com / 646.818.9870.
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