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Commercial Liability Policy Properly Rescinded Based on Material Misrepresentation in Insurance Application

On June 18, 2018, Justice Bannon of New York County Supreme Court issued a decision in Union Mut. Fire Ins. Co. v. 72nd Forest Hills Ass'n, 2018 NY Slip Op 31265(U), holding that an insurance carrier properly rescinded a commercial liability policy, under Insurance Law § 3105(a), based on material misrepresentations in the insurance application.  The Court also granted summary judgment for the carrier on the separate ground of “accord and satisfaction,” finding that the insured consented to the rescission by accepting and depositing a check from the insurance company returning the policy premium. 72nd Forest Hills Ass’n, involved a commercial liability policy purchased by the owner of a property in Queens, New York. 

The insured submitted a claim after a tenant at the building fell on an interior staircase and suffered injuries.  The insurer disclaimed coverage, claiming that the insurance application materially misrepresented the nature of the risk.  The underwriter testified that “after an applicant submits an on-line application, a computer program assigns a classification code . . . which represents the classification of the risk, or type of property, to be insured.”  Based on the insured’s description of the property as “three apartment units and a commercial unit,” the computer program designated the subject property as a three-family dwelling.”  In the course of investigating the claim, however, the insurer determined that the building had “four rooms for rent where tenants shared a common kitchen and bathroom,” and a commercial tenant occupied the ground floor.  The underwriter “likened such arrangements to student housing or boarding or rooming houses,” and stated that the insurer “would not have issued an insurance policy to the defendant if it had been aware of these facts, as the underwriting guidelines specifically excluded student housing.”

Justice Bannon granted summary judgment to the insurer on the claim for rescission, explaining:

"A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false." Insurance Law§ 3105(a). A misrepresentation is considered "material" if an insurer would not have issued the policy had it known of the misrepresented facts. Insurance Law § 3105(b) (1). The materiality of a misrepresentation is ordinarily a question of fact for a jury, but if there is clear and uncontradicted evidence concerning materiality, then the question becomes a matter of law for the court. Insurance Law § 3105 permits an insurer to rescind a policy where the application contains a material misrepresentation. Rescission may be based upon an intentional misrepresentation or an innocent misrepresentation. An insurer need only show that a misrepresentation substantially thwarts the purpose for which the information is demanded and induces action which the insurance company might otherwise not have taken.

. . .

Any ambiguity in the language of an insurance policy must be construed against the insurer and in favor of coverage. Thus, an answer to an ambiguous question on an insurance application cannot form the basis for a claim of misrepresentation. Here, however, the defendant has not demonstrated that the application question requesting information as to the total number of apartment units was ambiguous. Moreover, contrary to the defendant's assertion, the plaintiff was entitled to rely on [] sworn testimony [from the insured’s in-house counsel] that the subject premises consisted of four single rooms and a commercial unit.

. . .

In any event, the defendant did not submit an affidavit from [the insured] attesting to his understanding of the questions or asserting that he was misled by unclear language. The quote for the insurance premium and the policy itself reveal unequivocally that [the insured] represented on the application that there were three discrete apartment units in the building.

The Court also granted summary judgment to the insurer on the separate ground of accord and satisfaction, explaining:

An accord and satisfaction will only be found where there is a clear manifestation of intent by the parties that the payment was made, and accepted, in full satisfaction of the claim. The defendant does not deny having accepted and cashed the check tendered to it by plaintiff in full refund of its insurance premium. The letter accompanying the plaintiff's remittance of the check in this action clearly stated that cashing of the check was "an accord and satisfaction, meaning that you do not dispute [plaintiff's] rescission of the policy." Under no view of the facts is it reasonable to conclude that the defendant was unaware of the consequence of cashing the check. Thus, even if the policy were not deemed to be void ab initio, the policy must be deemed rescinded as of July 12, 2016, which is the date that the defendant cashed the refund check.

The insured here could definitely have benefited from the advice of coverage counsel early in the process.  This was not a case of fraud — which is not required to rescind a policy for material misrepresentation — but very likely an honest misinterpretation of the online insurance application (is a “habitable unit” a stand-alone apartment, or a room available for rent?). The acceptance of the premium refund check was also ill-advised, if the insured wanted to challenge the rescission of the policy.  Notably, New York law is evenhanded on this point:  an insurer can waive a rescission claim if it accepts premium payments from the insured after learning of facts that it believes entitles it to rescind the policy. See, e.g., Security Mutual Life Ins. Co. of N.Y. v. Rodriguez, 65 A.D.3d 1, 7, 880 N.Y.S.2d 619, 623 (1st Dep’t 2009).

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