Policy Rescission Granted for Material Misrepresentations in Application

COMMERCIAL PROPERTY – FIRE LOSS – MATERIAL MISREPRESENTATION IN APPLICATION – RESCISSION – WAIVER – ESTOPPEL – TIMELINESS OF DENIAL
Precision Auto Accessories, Inc. v. Utica First Ins. Co.
(4th Dept., decided 6/6/2008)

Plaintiff's business was destroyed by fire. After an investigation, Utica First notified plaintiff that it was denying coverage and rescinding the policy based on material misrepresentations made in plaintiff's insurance application with respect to plaintiff's prior loss and claims history. Plaintiff sued for coverage, and the parties moved and cross-moved for summary judgment. Supreme Court denied both motions.

The Fourth Department MODIFIED and granted summary judgment to Utica First, holding that it was entitled to rescind the policy because it established as a matter of law that plaintiff had made material misrepresentations such that Utica First would not have issued the policy had it known the true facts. "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[.]"

In support of its motion, Utica First submitted the affidavit of its president, who set forth Utica First's minimum underwriting guidelines for prior losses for a risk such as plaintiff's business. Attached to the affidavit was a copy of defendant's underwriting guidelines "for the relevant period," which corroborated the applicable minimum underwriting requirements set forth by Utica First's president concerning prior losses for risks such as plaintiff's business. Utica First's president further stated in his affidavit that, "if [defendant] had been aware of plaintiff's true loss history . . . [defendant] would not have issued a policy of insurance to plaintiff."

The Fourth Department agreed with Utica First that the misrepresentations did not need to be willful in order to rescind the contract.

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 AD2d at 437). Rather, a "material misrepresentation, even if innocent or unintentional, is sufficient to warrant a rescission of the policy" (citations omitted). Although plaintiff contends that, pursuant to the terms of the policy, defendant is required to establish that plaintiff's misrepresentations were willful, when an insurance policy is void ab initio 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[.]

Plaintiff argued that Utica First could not rely on any misrepresentations in the application because they were the result of the negligence of Utica First's alleged agents. In rejecting that argument, the appellate court noted:

Plaintiff is bound by the misrepresentations in the application, inasmuch as "[t]he signer of a contract is conclusively bound by it regardless of whether he or she actually read it" (citation omitted). Further, an insured "ha[s] a duty to review the entire application and to correct any incorrect or incomplete answers". Additionally, "an insurance broker is generally considered to be an agent of the insured" (citation omitted). "To establish that the broker was acting as the insurer's agent, [t]here must be evidence of some action on the insurer's part, or facts from which a general authority to represent the insurer may be inferred" (citation omitted). 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 next argued that Utica First waived its right to rescind the policy because it knew of plaintiff's misrepresentations concerning plaintiff's loss history before the fire. The court rejected that argument, finding deposition testimony of the plaintiff's insurance broker that she heard within two hours of the fire that Utica First was going to rescind the policy based on the plaintiff's prior losses to be both speculative and inadmissible hearsay. "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."

Plaintiff's final argument was that Utica First was estopped from disclaiming coverage because it took eight months to do so. In opposition to that argument, Utica First contended that its investigation into plaintiff's loss history was ongoing and was delayed based on the lack of cooperation by plaintiff in providing an adequate authorization for its previous insurer's records. In rejecting the plaintiff's untimely disclaimer argument, the Fourth Department held:

Here, 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 (citations omitted). Although plaintiff contends that it was prejudiced because, without the insurance proceeds, it was unable to pay its suppliers and otherwise to re-start its business, it failed to identify any triable issue of fact whether it was prejudiced by the delay with respect to the asserted ground for rescission, i.e., the purported misrepresentations made in the insurance application.

With respect to the plaintiff's untimely disclaimer argument, it is important to bear in mind that Insurance Law § 3420(d) applies only to liability coverage disclaimers and denials for bodily injury or death claims arising from accidents that occur in New York. It does not apply to first-party property coverage denials. Only the equitable doctrines of waiver or estoppel can apply to preclude an insurer from denying first-party property coverage.