Tuesday, February 10, 2009

Application Misrepresentations, Even If Innocently or Unintentionally Made, May Void Policy Ab Initio -- Trial Court's Charge Was Erroneous, Requiring New Trial

Rafi v. Rutgers Cas. Ins. Co.

(4th Dept., decided 2/6/2009)

At a recent meeting of insurance fraud investigators and claims representatives, I reminded the group that insurance fraud and misrepresentation can occur at three points of the fraud/misrep continuum:  before the loss, during the loss, and after the loss.  Before the loss fraud/misrep typically pertains to the application process, during which the insured, then as applicant, misstates facts on the application material to the insurer's acceptance of the application and underwriting of the risk.  I explained to the group that unlike during and after fraud/misrep, application misrepresentation need not be intentional under New York law to warrant a rescission of the policy ab initio, or from inception.

The Fourth Department, Appellate Division, also knows this.  In this case, Rutgers Casualty apparently defended a denial of coverage to the plaintiffs, its insureds, by arguing that plaintiffs' policy was void from inception by reason of the insureds' material application misrepresentations.  The trial judge charged the jury that Rutgers was required to prove that those alleged misrepresentations were intentional, and the jury apparently found in favor of the insureds, prompting this appeal. 

In unanimously REVERSING the judgment, the Fourth Department held:
We agree with defendant that Supreme Court committed reversible error in charging the jury that defendant was required to prove that the alleged misrepresentations made by plaintiffs on their insurance application were intentional in order to prevail on its affirmative defense, seeking to void the insurance policy. Rather, although misrepresentations made by an insured must be material, they may be innocently or unintentionally made (see Curanovic v New York Cent. Mut. Fire Ins. Co., 307 AD2d 435, 436-437; see generally Insurance Law § 3105 [a], [b]), in which event the insurance policy is void ab initio (see Precision Auto Accessories, Inc. v Utica First Ins. Co., 52 AD3d 1198, 1201, lv denied 11 NY3d 709; see also Taradena v Nationwide Mut. Ins. Co., 239 AD2d 876, 877). Thus, the court should have charged the jury that, in order to prevail on its affirmative defense, defendant was required to submit "proof concerning its underwriting practices with respect to applicants with similar circumstances" in order to meet its burden of establishing that it would not have issued the same policy had the correct information been included in the application (Campese v National Grange Mut. Ins. Co., 259 AD2d 957, 958; see Precision Auto Accessories, Inc., 52 AD3d at 1200; Curanovic, 307 AD2d at 437; see also § 3105 [c]). We cannot conclude that the error in the court's charge is harmless, and we therefore reverse the judgment and grant a new trial (see Wilson v Nationwide Mut. Ins. Co., 168 AD2d 912, lv dismissed 77 NY2d 940).
Bear in mind that the alleged misrepresentations at issue in this case were made on the insurance policy's application, not in the presentment of the claim.  This holding accords with New York appellate case law and New York Insurance Law § 3105, which provides, in pertinent part:
§ 3105. Representations by the insured. (a)  A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.

(b)  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.

(c)  In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible.
Also note that the salient question of materiality under New York law is not whether the insurer would have issued any policy at all to the insured had there been no application misrepresentations,but whether it would have refused to make "such contract", i.e., the very same policy for the same premium and under the same terms and conditions.


Anonymous said...

Roy, if the insurer would have issued the same policy but at a higher premium I do not believe they can void the policy ab initio, only prospectively. To void ab initio, the insurer has to prove that they would not have written the policy at all if they had known the true facts.

Roy A. Mura said...

Gotta disagree with you, Anon. If that were the case -- to void ab initio, the insurer must prove that it would not have written the policy at all -- the word "such" in subsections (b) and (c) of Insurance Law § 3105 would be superfluous, contrary to the rules of statutory construction. So, too, would the Third Department's use of the adjective "same" in Curanovic v New York Cent. Mut. Fire Ins. Co., 307 AD2d 435, and adjectival phrase "exact same" in McLaughlin v Nationwide Mut. Fire Ins. Co., 8 AD3d 739 in describing the policy issued have been unnecessary and superfluous. Can't be.

In Carpinone v. Mutual of Omaha Ins. Co., 265 AD2d 752, the Third Department said this:

The insurer's proof must establish that it would not have issued the same policies if the correct information had been disclosed in the applications (see, Insurance Law § 3105 [b], [c] [refer to "such contract" rather than to any contract]).

Seems pretty clear. Not any policy. Such policy or the same policy or exactly the same policy.

In contract law, the contract price is always a material term.

If contract price were not material, why do you think so many people rate evade on auto policies? Premium cost certainly is important and, therefore, material to them in purchasing insurance. So, too, is it and should it be for insurers seeking to rescind a policy based on application misrepresentation that negatively affected the proper premium being charged.

In another post, I'll put down my thoughts on the difference between rescinding a policy ab initio and voiding first-party coverages under a personal auto policy to one complicit in the application misrep ab initio. Can do.

Anonymous said...

I am refering strictly to auto liability.

"If contract price were not material, why do you think so many people rate evade on auto policies?"

Exactly. If an insurer were able to void ab initio simply because of rate evasion, they'd be doing it every day of the week, many times per day.

Take a look at the NYSID's opinion on the matter here:

"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. If the insurer would have issued the policy but at a higher premium rate, for example, the insurer may not void the policy retroactively."

Roy A. Mura said...

Ah yes, that OGC opinion. One of my favorites. Not really.

If the word "void" in the quoted statement was meant as "rescind" (which it probably was due to the use of the adverb "retroactively"), I don't disagree. But, if Associate Department Attorney Marsh meant it as disapproving of voiding first-party type coverages to persons complicit in the application fraud or misrepresentation, then both New York appellate courts and I, in that order, would disagree.

Although a personal auto policy may not be rescinded from inception due to the mandatory nature of 3rd-party liability insurance in New York, first-party coverages -- physical damage, PIP, UM and SUM -- should be "voidable" and deniable if the claimant participated in the application fraud/misrep.

Proven rate evasion should and does have negative consequences beyond merely re-rating the premium and offsetting physical damage payments to claimants who either themselves lied or misrepped or had others do so for them on a personal auto policy application. The fact that many New York assigned risk auto insurers may choose the offset rather than denial recourse doesn't mean that the latter is legally unavailable.

I am unaware of any reported case law in New York on just the higher premium issue, but the language of 3105(b) and (c), together with the legal principles found in existing case law, support declaring as void and denying first-party auto coverages for application fraud/misrep.

One more thing -- don't forget that under existing case law, an auto insurer that finds itself obligated to leave the entire policy in place and pay 3rd-party BI or PD claims in a rate evasion/policy application fraud/misrep situation may sue the insured to recover such 3rd-party payments. That's the redress the INA v. Kaplun court spoke of.

Anonymous said...

If coverage is denied to the named insured due to misrepresentations on the policy's application, can coverage be denied too to an additional insured?, assuming the ai has nothing to do with the mirepresentation. Of course we are talking about denying an specific claim not rescinding the policy.