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Insurers: To Rescind Or Not to Rescind?

By Akos Swierkiewicz


Rescission of an insurance policy is serious business. Such action could result in serious financial difficulties to insureds, especially if it occurs after a major loss. Furthermore, costly and protracted litigation almost inevitably follows to contest the rescission.

Fortunately, insureds and their brokers can minimize the potential for rescission by simply exercising greater care to ascertain the accuracy of underwriting information, and by providing all material information to insurers. Also, rescission decisions are made by insurers only if they are convinced that they have adequate justification for them.

An insurer may rescind its policy in the event of material misrepresentation or concealment of a fact by the insured. Misrepresentation is false statement of a fact by the insured. Concealment is the neglect to reveal a fact that the insured knows and ought to communicate to the insurer.

Misrepresentation or concealment is material if it affects the underwriting decision of the insurer. For example, the premium would have been higher had the insurer been aware of the true and complete facts.

Property-casualty policies typically include conditions pertaining to the subject of rescission, such as:

• The policy is issued in reliance upon the truth of representations made by the insured.

• The policy is void if the insured intentionally conceals or misrepresents a material fact.

• The insured, by accepting the policy, agrees that the statements in the policy declarations are accurate and complete.

In most cases, rescission is based on materially misrepresented facts in the policy application, or in underwriting information provided by the insured or its broker. However, unless there is a satisfactory answer to each of the following questions, the rescission is not justifiable:

• Is the fact known only to the insured?

If the insurer possesses a fact that differs from what the insured had provided, then it must attempt to reconcile it before proceeding further with consideration of rescission.

• Is it false?

The insurer must have incontrovertible evidence to demonstrate that the fact obtained from the insured is false.

• Is the falsity material?

Materiality is determined within the context of probable and reasonable influence on the insurer by the false fact. Consequently, if the insurer’s underwriting decision is not affected, then the falsity cannot be deemed material.

• Is it reasonable to rely on it?

The insurer cannot reasonably rely on a fact received from the insured alone if it is aware of a conflicting fact.

• Did the insurer rely on it?

There must be clear evidence to demonstrate that the insurer did rely on materially false facts when making its underwriting decision.

State insurance codes and legal precedents also have an impact on the insurer’s decision-making process concerning rescission.

For example, the California Insurance Code allows policy rescission even in cases of unintentional misrepresentation or unintentional concealment, and it provides that materiality is to be determined solely by the probable and reasonable influence of the facts on the insurer.

Also, case law precedent prevents insurers from relying solely on representations contained in the policy application or underwriting information if an inspection of the insured’s property is conducted.

A policy may be rescinded even after a loss that would otherwise be covered by the policy. Since rescission could have severe negative financial impact on the insured, the insurer must be certain that the reasons for rescission are based on solid grounds and able to withstand potential legal challenge.

In a 2001 case, an insurer rescinded their policy following a major fire loss, alleging material misrepresentation and concealment by the insured, pertaining to several matters, including square footage of the premises.

The pre-trial discovery proceedings included examination of ambiguous questions contained in the insurer’s application form, and the accuracy of the inspection report provided by an independent inspection company retained by the insurer.

Major weaknesses emerged in the insurer’s justifications for its decision to rescind the policy, including:

• The insurer previously issued policies for a previous owner, covering the same premises, and therefore it had prior knowledge of the underwriting information, including square footage, which differed from what the insured had provided.

• Just because the square footage information provided by the insured differed from the prior information in the insurer’s underwriting files, it was not sufficient for the insurer to conclude that the insured’s statement is false, especially since its insurer failed to make any attempt to reconcile the difference.

• The square footage figures provided by the insured and its broker in the application was lower than the figure in the inspection report that was ordered by the insurer after it issued the policy. In asserting materiality, the insurer disregarded another inspection report subsequently ordered by the insured, which confirmed the original figures in the application for the policy.

Based on the above points, it was not reasonable for the insurer to rely on the square footage information provided by the insured, and the insurer’s contention that it did rely on the square footage data provided by the insured was questionable.

Although this case was resolved and the insured received payment for its claim, the pre-trial discovery process took over a year, with detrimental financial consequences to the insured.

The lesson from cases like this is that all parties should take thorough measures to ensure the accuracy and completeness of underwriting information, and that conflicts or ambiguities are promptly resolved before coverage is bound.
 
The above article was published in the 12/8/02 National Underwriter
 
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All should use greater care handling underwriting information

 

By Akos Swierkiewicz

 

 

One of the tenets of insurance law is that parties to an insurance policy are expected to deal with each other in utmost good faith. Applicants for insurance or their brokers must disclose all relevant underwriting information fully and accurately to prospective insurers. If the application contains any misrepresentation or omits information that could affect the underwriting decision of the insurer, the standard of utmost good faith is not met and the insurer may deny coverage for claims or rescind the policy. 

 

Allegations about misrepresentation or omission usually surface in the course claim investigations by insurers. In many instances the ensuing litigation may result in denial of the claim or rescission of the policy. Even if misrepresentation or omission is not proven, litigation inevitably causes significant delays in claims adjustment and direct and indirect expenses to the parties.

 

Misrepresentations or omissions primarily originate from negligence by the applicant or broker during the course of the obtaining underwriting information and completing the application.  

 

One of the major functions of brokers is to obtain accurate and complete underwriting information, which requires their active involvement in the process of gathering, preparing and communicating such information to the insurers, rather than just being the conduit to pass information from applicants to insurers. Brokers should also take the initiative and explain major provisions or conditions of the policy to applicants to minimize negative surprises when a claim occurs. 

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State insurance laws generally allow the insurer to deny claims or rescind the policy for misrepresentation or omission, including concealment fact or incorrect statement, if:

 

  • it was material either to the acceptance of the risk or to the hazard assumed by the insurer, or

     

  • a reasonable insurer would have acted differently had it known the true facts, e.g. would have charged higher premium, restricted coverage or declined to issue the policy.

 

While most misrepresentations or omissions are unintentional, the insurer’s right to deny claim payment or to rescind the policy is not limited to intentional or fraudulent misrepresentation under a number state laws, when either of the above two criteria applies.

 

The following are examples of alleged misrepresentations or omissions involving litigation:

 

  • the broker asked the applicant to sign a blank application form, completed and released it to the insurer without providing copy to the applicant;

 

  • the applicant did not review an application prepared by the broker, which contained a misrepresentation or omission;

 

  • the broker did not ask the applicant about past losses and provided the wrong answer in the application;

 

  • the applicant and broker did not communicate clearly about the scope of coverage and limits sought in the application;

 

  • an application question was ambiguous to the applicant and the answer was incorrect;

 

  • the insurer did not seek clarification of an ambiguous response to an application question. 

 

The need for greater care with handling of underwriting information is not limited to applicants and brokers. Insurers should ask all pertinent questions in the application form because, in many instances, the applicant may be aware of important underwriting information but does not disclose it simply because it was not asked.

 

Application questions should be limited to seeking factual information rather than eliciting the opinion or judgment of the applicant. For example, when the applicant answered “no” to a professional liability application question as to whether future claims were expected, based on the applicant’s opinion or judgment, the insurer concluded that the response was a misrepresentation or omission just because a claim did occur.

 

In some instances, there may be an appearance of misrepresentation or omission due to the failure by the insurer to clarify responses to application questions. When presented with ambiguous or conflicting information, it behooves insurers to seek clarification prior to binding coverage or issuing the policy. For example, when an applicant found an application question inapplicable to its business, he amended it in a good faith attempt to provide accurate and complete information, and the insurer issued the policy without seeking clarifications. When a claim occurred, the insurer denied it, citing the answer to the modified question as evidence of misrepresentation.

 

In certain circumstances only litigation can resolve allegations of misrepresentation or omission. However, the exercise of greater care in obtaining and preparing underwriting information by applicants or brokers, and clarification of ambiguous information by insurers can substantially reduce the number of cases requiring litigation and inevitable delays and costs.

 

The above article was published in the 1/19/04 Business Insurance.

 

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The World Trade Center Property Insurance Trial: Lessons Learned?

 

By Akos Swierkiewicz

 

     Had the tragic events on 9/11/01 not occurred, we would have never learned about negligence, mistakes, errors and omissions, inconsistencies, and confusion that plagued the placement and negotiation of the property insurance program for the WTC and brought to light during the WTC trial.

 

     The primary parties involved in the litigation were 13 WTC insurers, including Lloyd’s syndicates, counted as one, the broker Willis and their client, Silverstein Properties, the leaseholder. The insurers contended that they were bound by the WilProp 2000 form, which defines “occurrence” and would limit the WTC claim to $3.5 billion, while Silverstein’s position was that the Travelers’ form applied, which does not define occurrence and would respond to the each of the WTC towers separately, resulting in a $7.0 billion loss payment.

 

     After the brilliant work by lawyers on behalf of the parties to this litigation, determination of what form applied to the 9/11/01 claim was left to a jury, unfamiliar with insurance, which was so confused early in the trial that it sent a note to the judge asking, “what is this case about” and, during their deliberations, asking whether Munich Reinsurance and Swiss Reinsurance were a part of Lloyd’s.

 

     Although this was a complicated and large insurance placement that taxed the world market capacity and there was pressure to complete it to meet the 7/24/01 deadline for the closing of the WTC lease, there is no excuse for the failure of the parties to reach explicit agreement on which form applied when coverage was bound, let alone by 9/11/01, almost two months after binding. By no means was this a unique placement as there are many other large insurance programs just as large and complicated, which must be placed in a relatively short time frame. Undoubtedly, various issues and problems that led to litigation in this case exists in many other instances but will remain hidden absent of a claim and subsequent dispute about coverage.

 

     As this article is written, jurors rendered verdict in favor of ten, and against three of the 13 insurers. Regardless of the verdict, there are no winners in this case. The causes of this litigation could have been avoided and the fact remains that none of the parties to this case are blameless.

 

     However, it is not the purpose of this article to castigate anyone involved in the placement and negotiation process, rather, by highlighting key issues that were the subject of the litigation, it is to identify some of the lessons learned or should be learned and to prompt insurers, brokers and risk managers to reexamine their role and involvement in the insurance placement and negotiation process. 

 

     Based on trade press reports, the following are some of the key issues that emerged during the trial:

 

  • The broker’s intention to switch from the WilProp form, that was part of the underwriting submission, to the Travelers form was not communicated properly to the insurers
  • None of the insurers identified the applicable form in their binders                                                         
  • Several insurers waived their right to approve the form; 
  • On 9/11/01, the final policy form has not been agreed upon and the broker was still analyzing the Travelers form 
  • Silverstein’s risk manager authorized to bind on the basis of the Travelers form in July without obtaining and reviewing it and he did not have copy of it on 9/11/01
  • When the form was requested from Silverstein’s risk manager on 9/12/01, he released the WilProp form             
  • None of the parties adequately documented their negotiations                                          

     It is obvious, that clear agreement did not exist between the parties as to what form applied on 9/11/01, almost two months after binding. The most important lesson, applicable to each of the parties, simply boils down to the need for documentation of all substantive communications to ensure that there is a meeting of minds during the placement and negotiation process and, when coverage is bound, all parties have an explicit agreement regarding the form. Agreement to any subsequent form changes must also be fully documented.

 

     Furthermore, each of the parties, by adhering to the following rather elementary principles or procedures, can substantially reduce the potential for disputes and litigation:

 

Insurers should:

  • not bind coverage without obtaining and reviewing the proposed form
  • indicate the applicable form in their binders
  • not waive their right to approve form changes
  • affirm their agreement in writing to any form changes   

Brokers should:

  • indicate intent to switch or change forms in writing
  • not assume that lack of response from insurers means agreement to form changes and follow up to obtain written responses
  • ensure that risk managers are adequately engaged in coverage negotiations, understand the implications of form changes and provided copy of forms and changes thereto
  • work expeditiously to facilitate finalization of policy wording 

 Risk managers should:

  • actively participate in the negotiation process                  
  • be proactive and initiate corrective action, if needed 
  • review and approve the form and major form changes
  • ascertain that coverage bound by insurers is sufficiently clear and provides acceptable coverage

     Unfortunately, the clock cannot be turned back in this case but policyholders, brokers and insurers should examine their procedures and controls pertaining to insurance placement and negotiations and take corrective steps, if necessary, to prevent recurrence of similar disputes. 

 

The above article was published in the 6/21/04 Industy Focus supplement of Business Insurance.

 

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