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

COMMERCIAL PROPERTY – APPLICATION MISREPRESENTATION – REVERSIBLE TRIAL ERROR
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.