Beware the Risks of Rescission of an Insurance Policy

Now, we all learned early in life that you tell the truth. Right?  And this is very true when it comes to an application for insurance. In this episode, Host, Jean Lawler–commercial + insurance mediator and arbitrator–discusses recission of an insurance policy and answers the following questions:

• When does rescission of insurance policies happen?
• What kind of situations can you get into with this?
• Who could potentially be dragged into these suits?

To read the full episode transcript please see the Podcast Website.

About the Host:
Based in Los Angeles, CA, Jean Lawler is an attorney and mediator, focusing on commercial, insurance and civil litigation matters pending at the trial and appellate levels - wherever filed. She regularly mediates a wide variety of insurance, business, and tort matters, as well as federal ADA accessibility lawsuits re architectural barriers and websites. CIPP/US (Certified Information Privacy Professional) certified, Jean also mediates matters involving data breaches, ransomware, and cyber losses. She has mediated hundreds upon hundreds - thousands - of cases over the years with a myriad of issues. For a more detailed sampling of the types of mediations that she has conducted and participated in, both when in practice and as a full-time mediator, please refer to her web page detailing Representative Matters.

Prior to becoming a full-time mediator in 2017, Jean was a Senior Partner in a Los Angeles based litigation firm, representing corporations, professionals, non-profits, individuals, and insurers in a broad range of matters, at trial and on appeal - mediating hundreds upon hundreds of cases over the years. Her legal experience has been diverse and international, and she has a deep knowledge of the insurance industry, insurance policies and the various risks they insure against (primary, excess, reinsurance, program, surplus lines, London Market, and international insurers). She also served as a Managing Partner of her former law firm, at times chairing the firm’s Insurance Law, Cyber & Privacy Law, International Law, and Business & Real Estate Transactions practice groups and, ultimately, served her many clients as counselor and trusted advisor.

As she would tell you if asked: “I absolutely love what I do! I would be honored to serve as your Mediator or Arbitrator.”

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Transcript

Thank you for reading this transcript of the ROADS TO Resolution ~Closure ~Certainty Podcast for the episode entitled, “Beware the Risks of Rescission of an Insurance Policy”. To improve readability, this clean verbatim transcript also includes additional headings (not part of the audio). The transcript is human generated, so there may be minor errors. Thanks for your time!

[intro music]

Hi, I’m Jean Lawler, I’m the host, your host of the ROADS TO Resolution ~Closure ~Certainty Podcast. It’s a pleasure to be here with you today. I wanted to talk this time about rescission, in particular, rescission of an insurance policy. 

When does rescission of insurance policies happen?

Rescission of insurance policies happen when there have been what would be considered “material misrepresentations” in the application for insurance. In plain English, that would be where the answers to the questions that were asked in the insurance policy are not honestly answered. Maybe there was a “yes” answer when it should have been a “no” answer. Maybe there’s not been full disclosure. Maybe there’s been misinformation.

Whatever it is, in a rescission action, an insurance company will be prepared to say that the question was material to its decision to issue the policy, and but for the incorrect answer that they would not have issued that insurance policy. That’s generally what it's going to be. Every case is unique, of course, but that’s the general gist of it.

And so what kind of situations can you get into with this?

And who could potentially be dragged into these suits?

Well first and foremost, of course, is the insured. The insured is responsible for the application for insurance and for signing it and attesting to the honesty of the answers that are provided. And there's usually some sort of notice that the insurance company is going to rely on those answers in deciding whether or not to insure the property or the risk, whatever the risk might be, and even as to what the premium might be, would be based on what the risk is, and the risk then, in turn is determined by, in large part, what the answers to the application questions are…

And so, that said, what kinds of situations? Well here are a few examples of cases that I have seen. If you, for example, and when I say” you”, it's the generic you, not you personally of course. I doubt anyone listening to this would be in this situation. But let’s just say, if an insured, I won’t say the word “you”--if an insured has not fully disclosed all the people living in the residence, maybe, when they’ve applied for auto insurance, and somebody else is driving the vehicle and then, you know, they get into an accident. Maybe something along those lines. 

There was just a recent decision in the federal court about a homeowner who had failed to disclose that the home was used on occasion for short term rentals. And yet there was a loss when a short term rental was in effect–a renter was in the place. 

There are examples of cases where the insured is saying, “I’ve never had any other claims before…”

No, that doesn’t work either.

So in these kinds of situations, the insurance company would probably deny coverage for whatever the claim is, but they may seek to rescind the policy and then if the policy is rescinded it’s void, as if it was never in effect. And so if there are other losses, then the policy is not available to apply to other losses.  

Honesty is the Best Policy…

Now, we all learned, early in life I’m sure, at our parents’ knees that you tell the truth. Right?  And it is very true in this case. Now, lots of times insureds might say, “well I didn’t understand” or “my broker filled it in”, or “my agent filled it in” you know, whatever it is. And then that in turn can bring in a possible malpractice action for broker malpractice, insurance agent malpractice, maybe a company representative is filling in the application. This then could get to be interesting, who at the company is filling it in? Did they ask to ascertain information or not? Maybe it isn’t an intentional oversight or error in what’s being answered.

So, every case is of course unique, but if you do get involved in a rescission action, depending on what your role was in the application for insurance being submitted to the insurance company, my point is that that can then lead to a malpractice action as well. So the reality is that even if you had to provide information about prior losses and you couldn’t get this insurance or you could only get a more expensive insurance policy, at least you get an insurance policy then. Right? Or if you have to pay a higher premium, whatever the things are….Honesty is the best policy and I really do see a number of rescission cases. It’s very interesting on that, and generally they’re probably going to be pretty well placed if an insurance company is going to the trouble to bring them. 

So answer those questions honestly, with clarity, and if you are representing an insured in some capacity or another, whether as the lawyer, the broker, the company representative, the agent, whatever it is, just make sure that you’re clear on what the answers are, and that you fully explain them to the person who is applying for the insurance so that then they, when they sign the application for insurance, there can never be anything coming back to haunt on you if there’s anything in that application that’s not completely accurate. 

So, those are my thoughts on rescission and you know, you see in Law360 case reports, court reports of cases, things like this, of these kinds of lawsuits, and nobody wants to be involved in one of those if you can help it, at least not as a party, or a potential party. 

So, take care, that’s my thought for today, and please feel free to follow me on LinkedIn. Follow my podcast on your favorite podcast channel. Follow my YouTube channel. Thank you so much. Goodbye.

[outro music]