Failure to Answer Question on Application for Insurance Truthfully Held to be Grounds for Rescission

Policyholders have an affirmative duty to read the questions asked on an insurance application carefully and will be bound by the answers provided. So stated the United States District Court of the District of Connecticut when it held that a policyholder’s answer of “no” to a question asking whether any of its officers was the subject of a governmental investigation was knowingly false and material to the insurer’s decisions to issue the liability insurance policy. Zurich Am. Ins. Co. v. Expedient Title, Inc., 2015 U.S. Dist. LEXIS 167998 (D. Conn. Dec. 16, 2015). The court therefore granted the insurer’s motion for summary judgment and rescinded the policy leaving the insured without coverage.

When seeking a renewal of its E&O policy, the policyholder, a title agency, answered “no” to a question on the insurer’s application asking whether any of the policyholder’s officers were under investigation even though it knew one of its officers – an attorney – was being investigated by a grievance committee. The question plainly asked whether the policyholder or any of its officers had been involved in or had knowledge of any inquiry, investigation, complaint or notice from any State or Federal authority regarding the activities, procedures or practices of the applicant in the past year. The title agency claimed that it answered “no” because the investigation concerned the officer’s acts as an attorney, and did not relate to its business of acting as a title agent, which was the business to be covered by the E&O policy. The court held that the policyholder’s interpretation of the question was unreasonable given that the application asked about any investigations involving the policyholder’s officers.

In general, to rescind a policy an insurer must demonstrate that the policyholder made a material misrepresentation or omission of fact in its application. Materiality turns on whether the insurer would have issued the policy, or issued it on different terms, had it know the facts misrepresented or omitted. Rescission cases can be challenging for insurers, especially in some jurisdictions. Pennsylvania, for example, requires an insurer to demonstrate through clear and convincing evidence that the policyholder knew that its representation was false when it was made or that the representation was made in bad faith. Under New York law, if an insurer attempts to rescind due to a policyholder’s omission of material facts, the insurer must prove that the omission was intentional through clear and convincing evidence.

Connecticut law, which applied to Zurich’s rescission claim, can be more favorable to insurers. Pursuant to Connecticut law, there is a presumption of materiality for information that is expressly requested in an application. If the information was requested in the application, it is presumed to be important to the insurer’s decision of whether to issue the policy and on what terms. Applying these standards, the court held that Zurich met the requirements for rescission. The court rejected the policyholder’s argument that the application question did not encompass investigation of attorney conduct unrelated to the business of the title agency. The court stated that a reasonable lay person reading the application would not interpret the question to be limited to the operation of the policyholder’s business as a title agent. Therefore, the court concluded that the policyholder’s answer knowingly misrepresented the truth.

With respect to materiality, the court applied the presumption of materiality test and held that because the insurer asked about investigations involving the policyholder’s officers, the existence of such an investigation was material to the insurer’s underwriting decision. In addition to this presumption, the court also applied the traditional materiality test, which states that a misrepresentation is material when, “in the judgment of reasonably careful and intelligent persons, it would increase the degree or character of the risk of the insurance as to substantially influence its insurance, or substantially affect the rate of premium.” The court found that based on testimony of the insurer’s underwriter, who stated that had the policyholder been truthful and answered “yes” on the application, the insurer would not have issued the E&O policy in the form that it was issued.

The court’s ruling signals that policyholders have a duty to provide truthful answers to questions on an insurance application . Furthermore, applicants have an affirmative duty to read the questions on an application diligently and to make sure they understand what is being asked before providing answers. If an applicant fails to do so, he or she risks being bound by the representations made on the application and may be left without coverage.