Recissions Based on ‘Material Misrepresentations’ Can Help Combat Fraud

A number of years ago, a couple purchased a three-story house in Woodside, Queens, that contained three separate dwelling units, each with its own kitchen, bathroom, and separate entrance. Thereafter, the couple applied for and obtained a fire insurance policy from Otsego Mutual Fire Insurance Company, indicating on their application that the house was a two-family dwelling. After the house was damaged by fire, Otsego rescinded its policy on the ground that the couple had made a material misrepresentation of fact by stating on their insurance application that the house was a two-family dwelling.

The couple sued, but Supreme Court, Queens County, granted the insurer’s motion for judgment as a matter of law. The case reached the Appellate Division, Second Department.

The appellate court affirmed, finding that the insurer had the right to rescind the policy due to the policyholders’ material misrepresentation of fact in asserting that the house was a two-family dwelling when, in fact, it was a three-family home. Estate of Chu v. Otsego Mutual Fire Ins. Co., 148 A.D.3d 677 (2d Dep’t 2017).

One of the most powerful tools that insurance carriers have to challenge insurance fraud is to seek to rescind a policy based on a material misrepresentation in the application for the insurance. As in the Chu case, this situation can arise in connection with fire insurance policies. New York courts also have granted judgment for carriers on this basis in recent cases involving homeowners insurance policies (see, e.g., Thandi v. Otsego Mutual Fire Ins. Co., 199 A.D.3d 849 (2d Dep’t 2021)); life insurance policies (see, e.g., Neiditch v. William Penn Life Ins. Co. of N.Y., 177 A.D.3d 754 (2d Dep’t 2019)); and commercial general liability (CGL) insurance policies (see, e.g., Mt. Hawley Ins. Co. v. AKI Renovations Group Inc., 68 Misc. 3d 1205(A) (Sup. Ct. N.Y. Co. 2020)). Federal courts in New York also have issued recent decisions upholding rescission of insurance policies for material misrepresentations. See, e.g., Main Street America Assur. Co. v. Maven Business Solutions Group Inc., No. 21-CV-6327 (AMD) (RML) (E.D.N.Y. Jan. 5, 2023) (businessowners policy).

The ability of an insurance company to rescind an insurance policy based on a material misrepresentation in the insurance application is, of course, not limited to New York or even to the New York metropolitan area. See, e.g., Harford Mutual Ins. Co. v. Z&D Realty, LLC, Nos. 19-1583 (RMB/SAK), (RMB/SAK) (D.N.J. Dec. 29, 2022) (commercial general liability insurance). Indeed, courts across the country often reach the same result. See, e.g., Meier v. Pacific Life Ins. Co., 63 F.4th 595 (7th Cir. 2023) (life insurance); Bradley v. Viking Ins. Co. of Wisconsin, 56 F.4th 1011 (5th Cir. 2023) (automobile insurance); Peatross v. Liberty Mutual Personal Ins. Co., No. 22-1022 (6th Cir. Nov. 22, 2022) (homeowners insurance); Fahimipour v. United Property and Casualty Ins. Co., No. 21-2222 (E.D. La. Nov. 9, 2022) (homeowners insurance void ab initio); and Benitez v. Universal Property and Casualty Ins. Co., 350 So.3d 749 (Fla. Ct. App. 2022) (upholding denial of property insurance claim based on material misrepresentation).

After describing the standard New York courts typically rely on when considering whether to uphold an insurance company’s decision to rescind an insurance policy, this column will examine in some depth one court’s recent decision in such a case.

The Standard

Under New York law, an insurance policy is generally considered void ab initio if the policy was issued in reliance on a material misrepresentation. See, e.g., Fidelity and Guaranty Ins. Underwriters, Inc. v. Jasam Realty Corp., 540 F.3d 133 (2008); John Hancock Life Ins. Co. v. Perchikov, 553 F. Supp. 2d 229 (E.D.N.Y. 2008); see also Nabatov v. Union Mutual Fire Ins. Co., 203 A.D.3d 1052 (2d Dep’t 2022); Republic Ins. Co. v. Masters, Mates & Pilots Pension Plan, 77 F.3d 48 (2d Cir. 1996) (“[A]n insurance policy issued in reliance on material misrepresentations is void from its inception.”). New York Insurance law defines a misrepresentation as a false statement of fact “made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.” N.Y. Ins. Law § 3105(a). A misrepresentation is “material” if “knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.” Id. § 3105(b)(1).

In summary, as the Appellate Division, Second Department, recently explained, to establish its right to rescind an insurance policy, “an insurer must demonstrate that the insured made a material misrepresentation,” and to establish materiality as a matter of law, “the insurer must present documentation concerning its underwriting practice, such as underwriting manuals, bulletins, or rules pertaining to similar risks, which show that it would not have issued the same policy if the correct information had been disclosed in the application.” The Second Department added that although the question of materiality ordinarily “is a question of fact for the jury,” where the evidence concerning the materiality “is clear and substantially uncontradicted,” the matter is one “of law for the court to determine.” Neiditch, supra.

A CGL Case

In Mt. Hawley Ins. Co. v. AKI Renovations Group Inc., supra, Supreme Court Justice Gerald Lebovits recently was faced with an action brought by Mt. Hawley Insurance Co. seeking a declaration that it could rescind a CGL insurance policy that it had issued to AKI Renovations Group Inc., AKI Renovation Inc., and AKI Development Group Inc. (collectively, the AKI companies) for material misrepresentations and that it had no obligation to defend or indemnify the AKI companies in a personal injury action brought in Supreme Court, Queens County.

As Justice Lebovits found, in November 2016, the AKI companies submitted an application to Mt. Hawley for a CGL policy. The application included specific, yes-or-no questions regarding the nature of the companies’ business as general contractors and whether they engaged in demolition work.

The answers given by the AKI companies failed to disclose their demolition operations. Mt. Hawley issued the AKI companies a primary policy and an excess policy for the period December 29, 2016, to December 29, 2017. Mt. Hawley asserted that after issuing the policies, it learned for the first time that the AKI companies had been engaged, and had been acting as, a general contractor for demolition of a building over two stories in height from grade, and that they had subcontracted out the performance of the demolition work.

Mt. Hawley determined that the AKI companies had materially misrepresented the nature of their business. As a result, Mt. Hawley cancelled the CGL policy on July 3, 2017, and the excess policy on July 13, 2017. Mt. Hawley also indicated that it would not have issued the policies had the AKI companies disclosed their demolition operations.

On or about July 31, 2017, Mt. Hawley was notified of a negligence action that had been filed in Queens County; that the AKI companies were the general contractors for the project in that lawsuit; and that the plaintiff in that action alleged that he was working at the construction site and was injured by falling bricks and/or debris from the collapse of a building being demolished. According to the insurer, the AKI companies had applied for, and had received, a work permit as the general contractor for the full demolition of the three-story building involved in the Queens lawsuit, and that the AKI companies had retained a company as a subcontractor to perform the demolition work allegedly involved in that action.

Mt. Hawley subsequently advised the AKI companies that it was rescinding the policy ab initio, and it returned their premium. The insurer then filed a lawsuit seeking a declaration ratifying its rescission of the policy. In moving for summary judgment, it asserted that the AKI companies had made the following material misrepresentations:

• That they were a remodel-and-repair contractor;
• That their operations consisted of general contracting for interior renovations;
• That other than interior-only work, they did not perform any work over two stories in height from grade;
• That they did not perform any demolition work other than remodeling; and
• That they neither performed nor subcontracted exterior/building demolition work.

To support these assertions, Mt. Hawley offered the affidavit of its underwriter,
who averred that the insurer would not have insured risks associated with the AKI companies’ undisclosed demolition work, particularly where the building exceeded two stories in height. Mt. Hawley corroborated the underwriter’s statements by providing excerpts from its guidelines, including evidence of a standard exclusion that precluded recovery for bodily injury arising from demolition work in buildings exceeding two stories. The insurer also provided an underwriting worksheet that treated the AKI companies as a general contractor for interior renovation.

According to the underwriter, Mt. Hawley issued the policy in reliance on the documents submitted by the AKI companies. The underwriter further stated that Mt. Hawley did not generally offer CGL policies to demolition contractors, and that if the AKI companies had disclosed their demolition operations, he would not have issued a quotation to them and Mt. Hawley would not have issued the policy.

In support of its motion, Mt. Hawley also offered the affidavit of its claim director, who stated that her investigation revealed that at the time of the accident in the Queens lawsuit, the AKI companies had been acting as the general contractor for the demolition of a three-story building. She concluded that based on building and work permits for that project, coverage was not available to the AKI companies. (Likewise, her review of the policy’s Designated Ongoing Operations Exclusion (which excluded coverage for projects involving exterior work above one story) led her to determine that there was no coverage for the AKI companies in connection with the Queens action.)

The court ruled that the affidavits of the underwriter and claim director, the excerpts from Mt. Hawley’s underwriting guidelines, and the underwriting worksheet demonstrated that the AKI companies’ insurance application “contained material misrepresentations as a matter of law.”

Finding that the AKI companies failed to establish the existence of a triable issue of fact, the court granted Mt. Hawley’s motion. It declared that Mt. Hawley was entitled to rescind ab initio the policies that it had issued to the AKI companies and, further, that it had no obligation to defend or indemnify them in the Queens action.

Conclusion

Certainly not every effort by an insurance company to rescind an insurance policy for a material misrepresentation in an insurance application will be successful. See, e.g., Hiscox Dedicated Corp. Member, Ltd. v. Taylor, 53 F.4th 437 (8th Cir. 2022) (ambiguity in question in application). But where an insurance carrier can demonstrate that an applicant made a material misrepresentation in the application and that it would not have issued the policy if the correct information had been disclosed, it very well should be able to rescind the policy and avoid having to pay claims for risks that it would never have agreed to assume.

Reprinted with permission from the May 5, 2023, issue of the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.