By Mary McCutcheon and Amanda Hairston, Attorneys, Farella Braun + Martel LLP
In their article appearing in the May/June 2011 issue of Coverage, "Revisiting the Three Rs: Risks, Rewards, and Rescission," Mary McCutcheon and Amanda Hairston observe that insurers' claims that they are entitled to rescind certain of the policies they have issued are increasing. The article sets forth the elements insurers must prove to succeed on a claim for rescission and identifies differences among the jurisdictions as to whether an insurer must also prove some form of intent by the policyholder to deceive the insurer.
The article discusses policyholders' various potential responses to an insurer's rescission claim. First, policyholders may assert that they were not under a duty to disclose the matter upon which rescission is sought. The article notes the decisive factors under this issue are what the insurer asked in the application for insurance and the exact wording of its questions.
Second, policyholders may rely on a severability of the application provision to prevent the policy from being rescinded as to all the policyholders. The article finds that the extent of severability of the application provision will often be dispositive of this issue. A full severability provision will protect innocent policyholders, but a partial severability may lead to rescission of insurance for both policyholders who had knowledge of the false or misleading statements and those to whom that knowledge can be imputed. For instance a CFO's statements can be imputed to her or his corporation.
Third, policyholders may assert that the insurer must keep advancing defense costs while the contested claim for rescission is pending.
The article examines pertinent and informative court decisions and finds, "For each of the responses, both carriers and policyholders can find their own comfort in the case law."
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Rescission, at least in California where I practice, is an expression of the covenant of good faith and fair dealing. The insurer relies on the good faith of the insured to provide the insurer with honest and complete information so that the insurer can make a well-informed decision on the risk it is asked to take.
If the insured misrepresents or conceals a material fact the insurer has been deceived and may put the two parties back where they were before the policy was agreed.
It is not nice to fool your insurer and if you are caught you may have no insurance at all.
As one of our courts said: "An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks." [Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.App.2d 581, 586]