Presenting a live 90-minute webinar with interactive Q&A Insurance Policy Rescission: Navigating the Differing Legal Standards Underlying a Misrepresentation Claim or Defense Advocating the Policyholders Duty of Disclosure vs. the Insurer's Duty to Investigate THURSDAY, OCTOBER 13, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: William T . Barker, Partner, Dentons , Chicago Carolyn M. Branthoover, Partner, K&L Gates , Pittsburgh The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Insurance Policy Rescission: Navigating the Differing Standards Underlying a Misrepresentation Claim or Defense Strafford Publications webinar October 13, 2016 Carolyn M. Branthoover, K&L Gates LLP William T. Barker, Dentons US LLP
Functions of Misrepresentation Defense • Encourage parties to provide accurate information in application process • Protect those misled to their detriment • Penalize those who mislead • "The efficient functioning of insurance markets requires that insurers receive accurate information regarding potentially insured risks so that, among other reasons, insurers can price their policies accurately. The possibility of a claim denial or policy rescission can create incentives for the applicants to provide accurate information during the policy application and renewal process …. In addition, as a matter of fairness, policyholders who make intentional or reckless misrepresentations on their insurance applications should not be permitted to shift losses to insurance companies that have relied in good faith on the policyholders’ answers ." Restatement of the Law of Liability Insurance ("RLLI") § 66 (Tent. Dr. No. 1 April 11, 2016). October 13, 2016 6
Legal Foundation of Misrepresentation Defense • Common law foundation • Statutory support in many states • Contractual basis when application incorporated into policy October 13, 2016 7
Legal Standard "(2) Subject to the rules governing defense obligations, an insurer may deny a claim or rescind the applicable liability insurance policy on the basis of an incorrect representation made by a policyholder in an application for an insurance policy (hereinafter referred to as a misrepresentation) only if the following requirements are met: (a) The misrepresentation was material …; and (b) the insurer reasonably relied on the misrepresentation in issuing or renewing the policy …. "(3) When the policy is rescinded under subsection (2), the insurer must return all premiums paid for the policy." RLLI § 7. October 13, 2016 8
Legal Standard • RLLI states common law rules also applicable to nonliability polices. • Statements not warranties (except in marine insurance) October 13, 2016 9
Answers Must Be Complete • Applicant may not limit answers to facts it considers material • H.J. Heinz Co. v. Starr Surplus Lines Ins. Co. , No. 15-CV-00631 (W.D.Pa. 2016) • Insured failed to disclose "silent recall" that it believed immaterial because it would not have been insured • But application called for disclosure of all withdrawals, recalls and stock recoveries "whether or not insured or insurable" October 13, 2016 10
Marine Insurance Is Different • Silence as to matters not asked in application is not a misrepresentation (except in marine insurance) • Fireman’s Fund Ins. Co. v. Great American Ins. Co., Case No. 14-1346-cv(L) (May 20, 2016) (applying “utmost good faith” standard under maritime law) October 13, 2016 11
Misleading Statements Can Be Misrepresentations • Even if none of the responses to application questions is literally untrue, responses that are incomplete in a way that is misleading can be a basis for rescission • Fireman’s Fund Ins. Co. v. Great American Ins. Co., Case No. 14-1346-cv(L) (May 20, 2016) (applying Mississippi law) October 13, 2016 12
Intent • Common law typically does not require any intent to deceive of the party making an inaccurate representation • E.g., 128 Hester LLC v. New York Marin & Gen. Ins. Co.,5 N.Y.S.3d 69, 70 (N.Y. App. Div. 2015) (“even innocent misrepresentations are sufficient to allow an insurer to avoid the contract of insurance”) • But see Medicus Ins. Co. v. Todd , 400 S.W.3d 670, 679 (Tex. App. 2013) (to void a policy on the basis of misrepresentation, insurer must “prove[] the insured intended to deceive the insurer”) October 13, 2016 13
Intent • Statutes in some states require an intent to deceive • Arizona – Ariz. Rev. Stat. § 20-1109 – Requires showing of a misrepresentation or omission that is fraudulent and material and upon which the insurer relied. Greves v. Ohio State Life Ins. Co. , 821 P.2d 757, 763 (Ariz. Ct. App. 1991) • Louisiana – La. Rev. Stat. § 22:860(A) – Requires showing that “the misrepresentation or warranty is made with the intent to deceive.” • Washington – Wash. Rev. Code § 48.18090(1) – Requires proof that “misrepresentation or warranty is made with the intent to deceive.” October 13, 2016 14
Materiality "A misrepresentation by or on behalf of an insured during the application or renewal of an insurance policy is material only if, in the absence of the misrepresentation, a reasonable insurer in this insurer's position would not have issued the policy or would have issued the policy only under substantially different terms." RLLI § 8. October 13, 2016 15
Materiality • Objective standard regarding significance of misrepresentation to assessment of risk posed by insured. RLLI § 8, cmt. a. • Takes into account any special information insurer may have regarding risk selection and classification. RLLI § 8, cmt. b. • What insurer knew or should have known about insured affects whether insurer relied and whether doing so was reasonable, but not materiality. RLLI § 8, cmt. c. • Material if insurer had reasonable basis to think that, even if other insurers would not. RLLI § 8, cmt. d. • Variation among states regarding effect of practices of other insurers. October 13, 2016 16
Reasonable Reliance "The reliance requirement of § 7(2)(b) is met only if: (1) Absent the misrepresentation, the insurer would not have issued the policy or would have issued the policy only under substantially different terms; and (2) Such actions would have been reasonable under the circumstances." RLLI § 9. October 13, 2016 17
Reasonable Reliance • Subjective requirement: insurer must show what it would have done. RLLI § 9, cmt. a. • Insurer must not have known true facts. RLLI § 9, cmt. a. • Knowledge of insurer's agents will be imputed to it. RLLI § 9, cmt. C. • Policyholder may rely on agent assurance that fact is immaterial if such reliance is reasonable. RLLI § 9, cmt. c. October 13, 2016 18
Reasonable Reliance • Some jurisdictions limit relief to cases in which the facts misrepresented contributed to the loss. • Nebraska – Neb. Rev. Stat. § 44-358 – To void a policy, a misrepresentation “shall exist at the time of the loss and contribute to the loss.” • Wisconsin – Wis. Stat. § 631.11 – A misrepresentation will not void a policy unless the misrepresentation “contributes to the loss.” • Missouri – Mo. Rev. Stat. § 376.580 – In life insurance policies, misrepresentations must “have actually contributed” to the loss to warrant voiding the policy. • Most jurisdictions and the Restatement reject this rule. RLLI § 9, cmt. b. October 13, 2016 19
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