Insurer May Not Rescind Policy that It First Sought to Cancel

An insurance company that first sought to cancel an insurance policy based on an alleged misrepresentation in an application for the policy waived its right to subsequently seek to have the policy declared void ab initio, a federal district court in Connecticut has ruled. Moreover, the court also decided, the insurer was equitably estopped from seeking to have the policy declared void ab initio by its delay in seeking that relief.  

The Case

In April 2005, Nathan Judson d/b/a Judson Construction applied for a Contractors Omnibus General Liability Policy from National Grange Mutual Insurance Company, Inc., submitting an application in which he answered “no” to the question, “Does the applicant do any roofing or re-roofing?” National Grange issued the policy and renewed it a couple of times.

On July 2, 2007, Judson Construction apparently was doing roofing work at a job site, and Crystal Slater fell off the roof and suffered a fatal injury.

On August 22, 2007, National Grange sent Judson Construction a written notice of policy cancellation effective September 14, 2007, that stated that the policy was being cancelled because: “Type of operations unacceptable to company. A material change in the nature or extent of the risk which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was last renewed.”

Slater’s estate subsequently sued Judson Construction and Nathan Judson, ultimately settling for $1 million and an assignment of their rights under the National Grange policy. National Grange defended the wrongful death action under a reservation of rights, filed a declaratory judgment action, and moved in that action for an order that the policy was rendered void ab initio by material misrepresentations in obtaining the original policy and subsequent renewals.

The Court’s Decision

The court first explained that, under New York law, where an insurer has knowledge of a misrepresentation that constitutes a basis for rescission of the policy but elects instead to cancel that policy, the insurer has waived its right to thereafter rescind the policy, at least to the extent rescission would be based on the same misrepresentation.

Accordingly, the court ruled that National Grange had waived its right to rescind because it chose to cancel the policy with full knowledge of the alleged material misrepresentation that would have allowed it to rescind the policy as void ab initio.

Then, the court decided that National Grange also was barred by the doctrine of equitable estoppel from rescinding the policy based on an alleged material misrepresentation.  It reasoned that under New York law, when an insurer seeks to rescind a contract ab initio based on misrepresentations by the insured, it must promptly disaffirm the contract upon learning of the misrepresentations. In this case, the court found, National Grange sent notice of cancellation on August 22, 2007, but first gave notice of its intention to rescind the policy in May 2010. “The delay by National Grange was unreasonable,” the court decided, and it also led to substantial prejudice to the Slater estate. Thus, the court concluded, National Grange was barred by equitable estoppel from rescinding the policy as void ab initio.

The case is National Grange Mutual Ins. Co., Inc. v. Judson Construction, Inc., No. 3:08CV981(AWT) (D. Conn. March 21, 2013).