Rescission of an Insurance Policy
Insurance is not a right. Insurance is a contract that requires that both parties exercise utmost good faith in negotiations for the contract.
Every insurance claims person, insurance coverage lawyer and insurance executive must have a working knowledge about the equitable remedy of rescission where, with sufficient evidence of mistake, misrepresentation or concealment of material fact can cause a policy of insurance to be rescinded from its inception with a return of the premium paid and return of the policy.
Some plaintiffs’ lawyers contend that rescission is “post loss underwriting” rather than the exercise of a legitimate equitable remedy as old as the common law. In California, one of the biggest proponents of the theory failed to overturn a legitimate rescission in Nieto v. Blue Shield of California Life & Health Insurance Co., No. B214669 (Cal.App. Dist.2 01/19/2010), proving that it is not only not nice to lie to your insurance company, it is fatal.
Under applicable New Jersey law, the designation of Great American's post-claim investigation as post-loss underwriting does not serve, either alone or in conjunction with the flawed underwriting on the 1999 and 2000 renewals, to defeat Great American's reasonable reliance on the insured's applications. [In re Tri-State Armored Services, Inc., 332 B.R. 690 (Bankr. N.J. 2005)
Rescission is an important equitable remedy hoary with age and should not be limited by claims of bad faith after an insurer legitimately exercises the rights provided to parties to an insurance contract by the California Insurance Code. If, after completing the thorough investigation required by law, the investigator finds that the application misrepresented what appears to be a material fact or material facts or concealed a material fact or material facts, the investigation is not complete.
An insured's material misrepresentation or omission of fact in the procurement of insurance can render the insured's coverage voidable at the insurance company's option because there can be no "meeting of the minds" as to the insured risk. [Foster v. Auto-Owners Ins., Co., 703 N.E.2d 657, 659 (Ind. 1998); see also Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664, 672 (Ind. 1997) Med. Protective Co. of Fort Wayne Ind. v. Am. Int'l Specialty Lines Ins. Co. (N.D. Ind., 2019)]
An insurer seeking to rescind a policy must fulfill the basic rule that a party seeking rescission must "first make a tender of the full amount of premiums paid under the policy." [Am. Std. Ins. Co. v. Durham, 403 N.E.2d 879, 881 (Ind. Ct. App. 1980)].
Governing law permits an insurer to rescind a policy when the insured has misrepresented or concealed material information in connection with obtaining insurance. (TIG Ins. Co. of Michigan v. Homestore, Inc. (2006) 137 Cal.App.4th 749, 755-756.) According to Mitchell v. United National Ins. Co. (2005) 127 Cal.App.4th 457, 468 (Mitchell), the Insurance Code provides a “statutory framework that imposes ‘heavy burdens of disclosure’ ‘upon both parties to a contract of insurance, and any material misrepresentation or the failure, whether intentional or unintentional, to provide requested information permits rescission of the policy by the injured party.’ [Citation.]”
Discussing the purpose of the statutory scheme, the Court stated:
“Requiring full disclosure at the inception of the insurance contract and granting a statutory right to rescind based on concealment or material misrepresentation at that time safeguard the parties’ freedom to contract.
‘[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.’
The thorough investigator must meet with the underwriter who made the decision to insure the insured to determine the effect a truthful answer would have had on the underwriting decision. The claims person should ask the underwriter, with regard to the misrepresented or concealed facts, the following questions:
If you had known the truth would you have agreed to the insurance?
If you had known the truth would you have agreed to the insurance at the same premium?
If you had known the truth would you have agreed to the insurance on the same terms and conditions?
A negative response to any one of the questions will be evidence of “materiality” which is defined by the California Insurance Code § 334 as:
Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.
Before making a decision to rescind, the claims investigator and the insurer should seek the advice of competent insurance coverage counsel for an opinion based upon the investigation and the law of the jurisdiction where the policy was made or where it was made to be performed, and, if counsel believes it necessary, the examination under oath of the insured.
Competent counsel can then advise whether rescission is the best remedy available to the insurer and how that remedy should be exercised.
“Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith.”[3] Each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured is required to answer all questions about the risk he, she or it are asking the insurer to take and about the person the insurer is asked to insure.
Rescission, since before the U. S. Constitution, became an important remedy for insurers. As a contract of utmost good faith insurers and the courts recognized that the parties to a contract of insurance were more vulnerable than other contracting parties to misrepresentation or concealment of material fact. The remedy is available to either party to the contract and when one determines it was deceived into entering into the contract it may declare the contract void from its inception, return the consideration and treat it as if it never existed.
When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission.
In most states the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or simply an innocent misrepresentation or concealment of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.
Equitable remedies, like the remedy of rescission, are expected to be fair. Some states, like California, follow the ancient equitable remedies and have codified the right to rescission of insurance contracts. The legislative right to rescission arose because legislatures considered it unfair to make a contracting party abide by a contract that was not obtained fairly. The ancient maxim that “No one can take advantage of his own wrong”[4] is applied when a court is faced with a request to confirm rescission. Other states have imposed limitations on insurers in their state and make the ability to rescind a contract of insurance more difficult than it was under the common law.”[5]