insurance policy rescission: navigating the differing...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Insurance Policy Rescission:
Navigating the Differing Legal Standards
Underlying a Misrepresentation Claim or Defense Advocating the Policyholders Duty of Disclosure vs. the Insurer's Duty to Investigate
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, OCTOBER 13, 2016
William T. Barker, Partner, Dentons, Chicago
Carolyn M. Branthoover, Partner, K&L Gates, Pittsburgh
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Insurance Policy Rescission:
Navigating the Differing Standards
Underlying a Misrepresentation
Claim or Defense Strafford Publications webinar October 13, 2016 Carolyn M. Branthoover, K&L Gates LLP William T. Barker, Dentons US LLP
Functions of Misrepresentation Defense
• Encourage parties to provide accurate information in
application process
• Protect those misled to their detriment
• Penalize those who mislead
• "The efficient functioning of insurance markets requires that insurers receive
accurate information regarding potentially insured risks so that, among other
reasons, insurers can price their policies accurately. The possibility of a claim
denial or policy rescission can create incentives for the applicants to provide
accurate information during the policy application and renewal process …. In
addition, as a matter of fairness, policyholders who make intentional or reckless
misrepresentations on their insurance applications should not be permitted to
shift losses to insurance companies that have relied in good faith on the
policyholders’ answers." Restatement of the Law of Liability Insurance ("RLLI")
§ 66 (Tent. Dr. No. 1 April 11, 2016).
October 13, 2016 6
Legal Foundation of Misrepresentation Defense
•Common law foundation
•Statutory support in many states
•Contractual basis when application
incorporated into policy
October 13, 2016 7
Legal Standard
"(2) Subject to the rules governing defense obligations, an insurer
may deny a claim or rescind the applicable liability insurance policy on
the basis of an incorrect representation made by a policyholder in an
application for an insurance policy (hereinafter referred to as a
misrepresentation) only if the following requirements are met:
(a) The misrepresentation was material …; and
(b) the insurer reasonably relied on the
misrepresentation in issuing or renewing the policy
….
"(3) When the policy is rescinded under subsection (2), the insurer
must return all premiums paid for the policy." RLLI § 7.
October 13, 2016 8
Legal Standard
•RLLI states common law rules
also applicable to nonliability
polices.
•Statements not warranties
(except in marine insurance)
9 October 13, 2016
Answers Must Be Complete
• Applicant may not limit answers to facts it considers
material
• H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., No.
15-CV-00631 (W.D.Pa. 2016)
• Insured failed to disclose "silent recall" that it
believed immaterial because it would not have
been insured
• But application called for disclosure of all
withdrawals, recalls and stock recoveries "whether
or not insured or insurable"
10 October 13, 2016
Marine Insurance Is Different
•Silence as to matters not asked in application
is not a misrepresentation (except in marine
insurance)
•Fireman’s Fund Ins. Co. v. Great American
Ins. Co., Case No. 14-1346-cv(L) (May 20,
2016) (applying “utmost good faith”
standard under maritime law)
October 13, 2016 11
Misleading Statements Can Be Misrepresentations
•Even if none of the responses to application
questions is literally untrue, responses that
are incomplete in a way that is misleading
can be a basis for rescission
•Fireman’s Fund Ins. Co. v. Great American
Ins. Co., Case No. 14-1346-cv(L) (May 20,
2016) (applying Mississippi law)
October 13, 2016 12
Intent
• Common law typically does not require any intent to deceive
of the party making an inaccurate representation
• E.g., 128 Hester LLC v. New York Marin & Gen. Ins. Co.,5
N.Y.S.3d 69, 70 (N.Y. App. Div. 2015) (“even innocent
misrepresentations are sufficient to allow an insurer to
avoid the contract of insurance”)
• But see Medicus Ins. Co. v. Todd, 400 S.W.3d 670, 679
(Tex. App. 2013) (to void a policy on the basis of
misrepresentation, insurer must “prove[] the insured
intended to deceive the insurer”)
October 13, 2016 13
Intent
• Statutes in some states require an intent to deceive
• Arizona – Ariz. Rev. Stat. § 20-1109 – Requires showing of
a misrepresentation or omission that is fraudulent and
material and upon which the insurer relied. Greves v. Ohio
State Life Ins. Co., 821 P.2d 757, 763 (Ariz. Ct. App. 1991)
• Louisiana – La. Rev. Stat. §22:860(A) – Requires showing
that “the misrepresentation or warranty is made with the
intent to deceive.”
• Washington – Wash. Rev. Code § 48.18090(1) – Requires
proof that “misrepresentation or warranty is made with the
intent to deceive.”
October 13, 2016 14
Materiality
"A misrepresentation by or on behalf of an
insured during the application or renewal of an
insurance policy is material only if, in the
absence of the misrepresentation, a
reasonable insurer in this insurer's position
would not have issued the policy or would
have issued the policy only under substantially
different terms." RLLI § 8.
October 13, 2016 15
Materiality
• Objective standard regarding significance of misrepresentation
to assessment of risk posed by insured. RLLI § 8, cmt. a.
• Takes into account any special information insurer may have
regarding risk selection and classification. RLLI § 8, cmt. b.
• What insurer knew or should have known about insured affects
whether insurer relied and whether doing so was reasonable,
but not materiality. RLLI § 8, cmt. c.
• Material if insurer had reasonable basis to think that, even if
other insurers would not. RLLI § 8, cmt. d.
• Variation among states regarding effect of practices of other
insurers.
October 13, 2016 16
Reasonable Reliance
"The reliance requirement of § 7(2)(b) is met
only if:
(1) Absent the misrepresentation, the
insurer would not have issued the policy
or would have issued the policy only
under substantially different terms; and
(2) Such actions would have been
reasonable under the circumstances."
RLLI § 9.
October 13, 2016 17
Reasonable Reliance
• Subjective requirement: insurer must show what it would
have done. RLLI § 9, cmt. a.
• Insurer must not have known true facts. RLLI § 9, cmt. a.
• Knowledge of insurer's agents will be imputed to it. RLLI §
9, cmt. C.
• Policyholder may rely on agent assurance that fact is
immaterial if such reliance is reasonable. RLLI § 9, cmt. c.
October 13, 2016 18
Reasonable Reliance
• Some jurisdictions limit relief to cases in which the facts
misrepresented contributed to the loss.
• Nebraska – Neb. Rev. Stat. § 44-358 – To void a policy, a
misrepresentation “shall exist at the time of the loss and contribute to
the loss.”
• Wisconsin – Wis. Stat. § 631.11 – A misrepresentation will not void a
policy unless the misrepresentation “contributes to the loss.”
• Missouri – Mo. Rev. Stat. § 376.580 – In life insurance policies,
misrepresentations must “have actually contributed” to the loss to
warrant voiding the policy.
• Most jurisdictions and the Restatement reject this rule.
RLLI § 9, cmt. b.
October 13, 2016 19
Reasonable Reliance: Inquiry Notice
• To make the insurer's reliance reasonable, it must
"show that an objectively reasonable insurer in this
insurer's position would not have discovered the
misrepresentation in question before the claim
arose." RLLI § 9, cmt. d.
• "Thus, for example, if there is something suspicious
in an application that would cause an objectively
reasonable insurer to undertake further
investigation, the reasonable-reliance requirement
would impose such a duty on the insurer." RLLI § 9,
cmt. d. October 13, 2016 20
Reasonable Reliance: Readily Available Facts
•Acceptance of an applicant's representation
that the applicant has had no traffic tickets
may be unreasonable if the insurer could
have checked a readily available and
inexpensive reference source that would
have provided accurate information. See
Barrera v. State Farm Mut. Auto. Ins. Co., 71
Cal. 2d 659, 677-78 (1969).
October 13, 2016 21
Burden of Proof
• Misrepresentation is a defense to coverage
• Insurer bears the burden of proving all elements of its
defense: misrepresentation, materiality and reliance
• See, e.g., Thompson v. Occidental Life Ins. Co., 513 P.2d
353, 362-63 (Cal. 1973)
• Proof of materiality often requires evidence of underwriting
practices pertaining to similar risks
• See, e.g., Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 307
A.D.2d 435, 437 (N.Y. App. Div. 2003) (insurer must
“establish that it would not have issued the same policy if
the correct information had been disclosed in the
application”) October 13, 2016 22
Waiver
"A party to an insurance policy waives a right under
the policy if:
(1)that party with actual or constructive
knowledge of the facts giving rise to that right,
expressly relinquishes the right, or engages in
conduct that would be reasonably regarded by
the counterparty as an intentional
relinquishment of that right, and
(2)The relinquishment of conduct is
communicated to the counterparty." RLLI § 5.
October 13, 2016 23
Waiver
• Agency law determines who can waive on behalf of whom. RLLI § 5, cmt.
b.
• Unlike estoppel, no requirement of detrimental reliance. RLLI § 5, cmt. c.
• "[W]aiving party need not have detailed knowledge of the right being
waived. Rather, it is enough that the waiving party knows or reasonably
should know of the terms of the contract and of any acts or omissions of
the nonwaiving party that might implicate a right under the contract."
RLLI § 5, cmt. g.
• Once communicated, a waiver is binding unless retracted before the
counterparty has detrimentally relied. RLLI § 5, cmt. h.
• Nonwaiving party has burden of proof. RLLI § 5, cmt. k.
October 13, 2016 24
Waiver
• H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., No.
15-CV-00631 (W.D.Pa. 2016)
• Advisory jury found misrepresentation by insured but that
insurer had waived the right to assert rescission based on
proof that the insurer had sufficient knowledge of the
misrepresentation based on publicly available information.
• Losses disclosed in 10-K
• Newspaper articles reported on the losses
• Trial court entered judgment contrary to advisory jury’s
finding of waiver noting that “perfection” in underwriting is
not the standard.
October 13, 2016 25
Estoppel
"A party to a liability insurance policy who
makes a promise or representation that can
reasonably be expected to induce detrimental
reliance by another party to the policy is
estopped from denying the promise or
representation if the other party does in fact
reasonably and detrimentally rely on the
promise or representation." RLLI § 6.
October 13, 2016 26
Estoppel
•Agency law determines who may
make representations on behalf of
whom. RLLI § 6, cmt. f.
•Detrimental reliance must be
reasonable under the
circumstances. RLLI § 6, cmt. c.
October 13, 2016 27
Prior Knowledge Exclusions
• Related to misrepresentation: The same fact pattern may
support both a misrepresentation defense and application of
a prior knowledge exclusion.
• See Am. Special Risk Mgmt. Corp. v. Cahow, 192 P.3d 614, 621-
28 (Kan. 2008) (“[W]hether enforced through policy language or
through a rescission of the insurance policy, an insured cannot
obtain coverage for the risk of a known loss.”)
• Distinct from misrepresentation: Prior knowledge exclusion
may defeat coverage for individual claim while a successful
misrepresentation defense will void entire policy.
October 13, 2016 28
Prior Knowledge Exclusions
• Prior knowledge exclusion makes explicit the concept of
fortuity of loss.
• Appears frequently in “claims made” policies.
• Language of exclusion varies among insurance products and
insurers.
• Can be limited by responsible persons language.
• “Coverage does not apply . . . where, prior to the earlier of the
inception date of this Policy . . . the persons responsible for
receiving notice of employment practice Claims in the Insured’s
Law Department, Human Resources Department or Risk
Management Department had actual knowledge of such Claims
or the circumstances giving rise thereto.”
October 13, 2016 29
Prior Knowledge Exclusions - Examples
• The policy does not apply to any claim “arising out of any act, error, or
omission committed prior to the inception date of the policy which the
insured knew or should have known could result in a claim, but failed to
disclose to the Company at inception.” [From an excess professional
liability policy]
• Coverage is excluded for any claim “based on or directly or indirectly
arising from a ‘Legal Service’ rendered prior to the effective date of the
Policy if any insured knew or could have reasonably foreseen that the
‘Legal Service’ could give rise to a claim.” [From professional liability
policy]
October 13, 2016 30
Prior Knowledge Exclusions
• Severability Clauses in D&O Policies
• Example: “No knowledge or information possessed by any
Insured will be imputed to any other Insured. If any of the
particulars of statements in the Application is untrue, this
Policy will be void with respect to any Insured who knew of
such untruth.”
• XL Speciality Ins. Co. v. Agoglia, 2009 WL 513747
(S.D.N.Y. Mar. 2, 2009) (uniquely worded severability
clauses among excess policies applied such that imputed
knowledge caused innocent insureds to lose excess
coverage under certain policies but not others)
October 13, 2016 31
Pursuing or Protecting Against Policy Rescission
•Initial and renewal applications (Insurer) • Insurer should inquire about all facts it wishes to treat as
material.
• Insurer should not use subjective questions, as discussed below.
• Insurer should require agents to disclose all facts material to the
risk known to them.
October 13, 2016 32
Pursuing or Protecting Against Policy Rescission
•Initial and renewal applications (Insured) • Insured should consider incorporating by reference publicly
available documents (e.g., 10-K), previous applications, and
other claims-related submissions previously provided to the
insured.
• Insured should negotiate for limitations on those agents whose
knowledge is relevant, e.g., in prior knowledge exclusions.
October 13, 2016 33
Pursuing or Protecting Against Policy Rescission
•Underwriting
•Insurer should investigate any application
statements that raise questions in light of
other statements on application or other
facts known to insurer.
•Insurer should investigate any application
statements that can be readily and
cheaply verified.
October 13, 2016 34
Reasonable Reliance
•Insurers ought not to deny claims or
seek rescission without investigating to
be sure that reliance on any
misrepresentations was reasonable.
October 13, 2016 35
Does Insurer Have Duty To Investigate
Representations?
• Some commentators and courts suggest that failure to
investigate renders later attempt to rescind improper "post-
claim underwriting," which they consider a form of tortious
bad faith. E.g., Thomas M. Cady & Georgia Lee Gates, Post-
Claim Underwriting, 102 W. VA. L. REV. 809 (2000).
• Supposedly, the insurer "'issues policies after only superficial
[or no] underwriting to realize large amounts of premium
income, and then attempts to deny coverage on the grounds
of misrepresentation by engaging in aggressive investigation
of the risk after the insured makes a claim.'" Id. at 818
(footnote omitted).
October 13, 2016 36
Leading Cases
•Jury could find that insured made accurate
responses to questions posed by agent, who
completed application, which insured signed
without reading. Lewis v. Equity Nat'l Life Ins.
Co., 637 So. 2d 183, 184 (Miss. 1994).
•Court upholds rescission but attacks failure of
life insurers to investigate health of insured.
Huff v. United Ins. Co., 674 So. 2d 21, 23
(Ala. 1995).
October 13, 2016 37
Insurer Defense of Limited Pre-Issue Investigation
•Without underwriting, prices would need to be
much higher.
• Investigation is often not economic,
especially, for small policies or those with low
premiums; insurer needs to rely on honesty of
applicant.
•Prices would be higher and insurance less
available were investigation required.
October 13, 2016 38
Leading Authorities
• Wesley v. Union Nat'l Life, 919 F. Supp. 232 (S.D. Miss. 1995) (insured's
false answers bypassed insurer's underwriting);
• Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 138-39 (3rd Cir. 2005)
(PA law) (not bad faith to conduct thorough investigation of questionable
claim; insurer did underwrite policy based on insured's false answers);
• In insurer view, "[t]he insurer's obligation to follow up on that information
is triggered only when there is an indication of need, i.e., the
representations cannot be relied on or the statements raise reasonable
questions that require further inquiry." Gary Schuman, Post-Claim
Underwriting: A Life & Health Insurer's Right To Investigate or Bad
Faith?, 45 TORT & INS. L.J. 697, 757 (2010).
October 13, 2016 39
Special Issue: Subjective Questions
• Some applications ask only if applicant is in "good health" or "free from
any physical or mental disorder."
• These ask only for a layman's opinion, which is false only if the insured
did not believe it. Fid. & Deposit Co. v. Hudson United Bank, 653 F.2d
766 (3d Cir. 1981).
• Insurer bears burden of proving that; denial of a claim without evidence
to support falsity of insured's opinion can be bad faith and, in some
circumstances, support punitive damages. Walston v. Monumental Life
Ins. Co., 129 Idaho 211 (1996).
October 13, 2016 40
Thank You
Carolyn M. Branthoover
K&L Gates LLP
William T. Barker
Dentons US LLP
41 October 13, 2016