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Don’t Miss The Boat On Rescission Claims

Insurance Law360
March 5, 2013

By Kristin Suga Heres
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As victims of Superstorm Sandy and their insurers continue to comb through their losses and their insurance policies, it is likely that the underwriting process that brought these parties together in the first place will be subject to intense scrutiny in certain cases. Suddenly, the information that the insured provided to the insurer in connection with its application for insurance coverage — once a distant memory — may take on renewed and critical significance.

For instance, what if it comes to light that the representations made by the insured in the application process were inaccurate? What if the risk that the insurer intended to insure and the risk that was actually insured under the policy as written are not the same? Does the insurer have any recourse?

Under New York law, the answer is: “It depends.” While insurers may seek rescission of an insurance contract under New York law when an insured has made a material misrepresentation in connection with the application for insurance, that right can be waived.

As recent case law applying New York law demonstrates, insurers have a limited time during which to bring a claim for rescission, and they will not be permitted to sit on their rights. Additionally, insurers should refrain from acting in a manner that undermines their rescission claims after learning of misrepresentations that may form the basis for such a claim.

Rescission can be an important remedy for insurers when there has been a mutual mistake between the parties or when the insured has made material misrepresentations to the insurer. Under New York law, “an insurer may avoid an insurance contract if the insured made a false statement of fact as an inducement to making the contract and the misrepresentation was material.”[1]

As long as the misrepresentation is material, it may provide a basis for rescission even if the misrepresentation was “innocently or unintentionally made.”[2] Rescission is not something that the courts take lightly, however, as it seeks to wholly unmake the parties’ agreement and render it void ab initio. Given the gravity of the remedy, it is not surprising that insurers seeking rescission have their work cut out for them.

Recent cases applying New York law make it clear that when a claim for rescission under New York law is premised on material misrepresentations, an insurer must move quickly to seek this remedy — or else, it risks waiver.

The potential for waiver was recently highlighted by the U.S. District Court for the District of New Jersey in Munich Reinsurance America Inc. v. American National Insurance Co., F. Supp. 2d (D.N.J. Sept. 28, 2012). While Munich Reinsurance involved a question of whether rights to rescind retrocessional contracts were waived, the waiver issues addressed in that case are equally applicable in standard insurance matters.

In Munich Reinsurance, a retrocedent brought suit against its retrocessionaire for breach of contract, and the retrocessionaire counterclaimed for rescission. The retrocessionaire claimed that the retrocedent withheld from a reinsurance agent information relating to the retrocedent’s internal calculations of its loss ratio and that the calculations would have materially altered the underwriting process undertaken by the agent on behalf of the retrocessionaire.[3]

The retrocedent argued that the retrocessionaire was precluded from seeking rescission because it had waited too long to assert its claim. While the retrocedent offered evidence that the retrocessionaire waited almost two years before attempting to rescind the retrocessional agreements at issue, there was conflicting evidence presented regarding precisely when the retrocessionaire became aware of the alleged misrepresentations on which its claim for rescission was based.

As the dispute on this point came down to a question of credibility, the court concluded that the retrocedent was not entitled to summary judgment on its claim that the retrocessionaire waived its rescission claim.[4]

While the court did not find that the retrocedent established its waiver claim as a matter of law, Munich Reinsurance serves as an important reminder that once an insurer learns of a material misrepresentation that could form the basis of a rescission claim, the clock is ticking on that potential claim.

In addition to promptly disaffirming an insurance policy, insurers who are contemplating rescission under New York law should refrain from engaging in conduct that affirms the policy after learning of misrepresentations that could give rise to a rescission claim.

For instance, an insurer should not accept premiums or other benefits of the contract if it intends to seek rescission. In GuideOne Specialty Mutual Insurance Co. v. Congregation Adas Yereim, 593 F. Supp. 2d 471, 485 (E.D.N.Y. 2009), an insurer was found to have forfeited its right to rescind a liability policy when it accepted premiums and sent a cancellation and nonrenewal notice to the insured months after learning of alleged misrepresentations by the insured.

The U.S. District Court for the Eastern District of New York concluded that the “acceptance of even one premium with knowledge of facts justifying rescission is sufficient to foreclose [the insurer’s] right to rescind, particularly when coupled with its subsequent election to cancel, rather than rescind.”[5]

It is worth noting that in GuideOne, the court concluded that the insurer’s seven-month delay in seeking rescission was unreasonable as a matter of law (“only Rip Van Winkle slept longer”); however, since the insured was unable to demonstrate prejudice resulting from the delay, the court did not find waiver on the grounds of delay.[6]

While it is important for Superstorm Sandy insurers seeking relief from misrepresentations made by insureds during the underwriting process to remember that rescission may be an appropriate remedy, these insurers must act quickly and in a manner that preserves their rescission rights under New York law. Insurers who wait too long after learning of material misrepresentations may just miss the boat.

--By Kristin Suga Heres, Zelle Hofmann Voelbel & Mason LLP

Kristin Suga Heres is a senior associate in the Boston office of Zelle Hofmann. Her practice focuses on the resolution of insurance and reinsurance coverage disputes.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Curanovic v. New York Cent. Mut. Fire Ins. Co., 307 A.D.2d 435, 436 (N.Y. App. Div. 2003).

[2] Id.

[3] Munich Reinsurance at *6.

[4] Id. at *10.

[5] Id. at 485-86.

[6] Id. at 484.

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