Even if an insurance policy’s terms expressly cover a loss, a claim can be contested. The reason often lies in the insurance application itself. In addition to challenges over the interpretation of policy terms, some policyholders have fought with their insurance company over whether the information disclosed at the point of sale was sufficient or accurate.
These claim challenges can be detrimental to policyholders, as the insurance company may try to void the entire coverage, rendering the insurance claim purportedly uncovered and the policy void from inception. Accordingly, policyholders must proceed cautiously when procuring their insurance policies to minimize the risk of insurance company evading paying an otherwise covered insurance claim.
The Duty of Utmost Good Faith
Historically, many fights over insurance applications and an insurance company’s attempts to rescind coverage unfolded over claims for directors and officers (D&O) coverage. Fights over alleged misstatements on the D&O insurance application and corresponding battles over rescission were so frequent that pushback around it prompted insurance companies to regularly include provisions making coverage non-rescindable.
Currently, many of the biggest coverage fights over rescission involve the oldest forms of insurance (marine insurance) and the newest form of insurance (cyber insurance). In those cases, policyholders may come to believe that the insurance company’s underwriting of the loss exposure occurs not during the actual underwriting phase of the relationship but rather at the claims phase. Anderson Kill founder Gene Anderson referred to this scenario as “post-loss underwriting.” In marine or maritime insurance, including marine cargo insurance and associated products, the marine insurance company may dispense with using an application and just argue that it is entitled to rely upon the policyholder to volunteer all information the underwriter deems important. The basis for this approach comes from archaic rules developed in the maritime world known as the “duty of utmost good faith.”
How to Safeguard Against Rescission Risk
Despite the perilous situation policyholders can find themselves in when an insurance company argues it can contest coverage, void a claim and rescind the insurance policy, policyholders have options. Policyholders can provide evidence that non-disclosure or inaccurate information was immaterial to the underwriting of the coverage or that the application and underwriting process was vague or defective. Additionally, they can show that information was furnished and accurate outside of the insurance application itself. If the policyholder supplied additional information at underwriting or loss control meetings, it could demonstrate that the insurance company had all the necessary information.
Further, even if a policyholder inaccurately supplied information to the insurance company, the insurer may still be unable to rescind coverage. For example, the court in Sumitomo Mar. & Fire Ins. Co. v. Cologne Reins. Co. found that an insurance company seeking to rescind a policy “must promptly disaffirm the contract upon learning of the misrepresentations.” Failure to assert a claim for rescission within a reasonable time waives that claim.
Additionally, an insurance company must recognize post-application underwriting information. For example, in Puritan Insurance Co. v. Eagle Steamship Co. S.A., an insurance company tried to use the duty of utmost faith doctrine to rescind a marine insurance policy based on allegedly undisclosed prior loss information involving two insured vessels. In that case, the marine insurance company’s agents were made aware of the losses post-application even though the losses were not listed on the application. Rejecting the insurance company’s attempts to rescind coverage, the Second Circuit held that “[a] minute disclosure of every material circumstance is not required. The assured complies with the [doctrine] if he discloses sufficient [information] to call the attention of the underwriter in such a way that, if the latter desires further information, he can ask for it.” Courts have decided similarly in other cases, such as St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda. Inc.
Policyholders should err on the side of providing too much information to their insurance companies at the point of purchase and renewal. Insurance applications can trap the unwary by asking broad questions and using vague language. Some insurance applications ask a series of yes or no questions, even when dealing with information that is often highly nuanced and almost never capable of being answered with a blanket response or absolute acknowledgment. As such, policyholders should use inter-departmental teams to respond to insurance applications since it is rare that one department or individual will have all the information needed to answer broad questions. Policyholders should not respond to all questions with a yes or a no, but instead supply additional responses that provide the nuanced or detailed answer that the question requires.
Invite the insurance company to inspect operations and send out loss control specialists. Policyholders should retain copies of those reports to further document their efforts to share and disclose pertinent information concerning operations, business practices and insured property. While these steps take extra time and resources, the effort will help preserve the policyholder’s legal and insurance rights.
