E&O - Insurer Granted Rescission of Accountants Professional Liability Policy
I have always maintained, and continue to do so, that rescission is a drastic remedy and not one that is sought often and undertaken lightly by insurers. A recent decision in which an insurer successfully rescinded only illustrates why few situations are egregious enough to warrant rescission and the pitfall for the insured when it has its policy rescinded. Chicago Ins. Co. v. James A. Capwill, 2011 U.S. Dist. LEXIS 147086 (N.D. Ohio, No. 1:01-cv-2588, December 21, 2011).
Capwill involved applications for accountants professional liability insurance submitted in 1997, 1998 and 1999. In each successive application, the principal in the accounting firm made and reaffirmed certain representations as to the nature of his business.
The Court found that the insured had indisputably made intentional misrepresentations on the applications for insurance*, including statements with regard to his investment activities and fee income (fees for servicing fraudulent viatical insurance policies for individuals afflicted with AIDS) and prior license revocation. The insurer successfully rebutted arguments that it was barred by laches because it waited too long to assert its rescission defense. The Court found that the insurer diligently proceeded to develop evidence of material misrepresentation and that the insured was not prejudiced when the insurer timely asserted rescission after developing the supporting evidence.
The Court also held that the determination of materiality is made from the perspective of the insurer, not the insured applicant, and its conclusion is strikingly blunt.
[The insured] lied when he applied for insurance with the [insurer]. He persisted in his falsehoods when he applied for renewal. His motive and intent when he did so are manifest. The questions he fraudulently answered were material to the [insurer’s]decision to issue and then renew the policies, and the pricing thereof. There can be no question that, had [the insurer] been told the truth, it would not have accepted the applications. Its entitlement to rescission is clear.
Neither laches nor doctrines of estoppels, acquiescence or waiver bar the right to rescind.
The cautionary tale here is that, despite the high hurdle of having to prove both a material and intentional misrepresentation, an insurer can still prevail on a rescission claim under the egregious circumstances presented in this case.
*Under applicable Ohio law, it is necessary to establish that the misrepresentations must be material and made with intent to mislead the insurer. In many other jurisdictions, there is no intent requirement in addition to the requirement of materiality.