A recent case decided by the Second District Court of Appeal underscored a point which must always be considered when insurers are evaluating a potential rescission issue.
This issue commonly arises when the investigation of a claim reveals that the policy may not have been validly issued. In cases of suspected fraud, there is often a direct connection between fraud in the claim and fraud in procuring the policy. The fraudulent procurement of a policy may have been just the first step in a larger scheme to defraud. However, Florida law provides for the rescission of a policy based upon factors other than fraud, as well. An insured that has provided incorrect information on the policy application, even inadvertently, may provide legal grounds for declaring the policy void ab initio and rescinding the policy. Florida Statute Section 627.409 provides that a policy may be rescinded where there has been fraud in the application or where the information is simply “incorrect” and caused the insurer to issue a policy it would not have issued otherwise. The test is whether the incorrect information will be deemed material to the acceptance of the risk or the hazard assumed by the insurer, such that it would not have issued the policy, would not have issued it at the same premium rate, would not have issued it with the same coverage limits or would not have issued it covering the hazard which ultimately resulted in the loss. The Florida standard for rescission is liberal and will generally allow an insurer to rescind a policy even if the incorrect information or misstatement on the application was the result of inadvertence, oversight or a simple “mistake” on the part of the applicant. Continental Assurance Co. v. Carroll, 485 So. 2d 406 (Fla. 1986); Marrone v. State Farm, 664 So. 2d 972 (Fla. 4th DCA 1995). However, there is case law in the First District Court of Appeal which holds that when an insurer sets a higher standard for voiding a policy (such as the language found in the misrepresentation/fraud clause of many policies, voiding the policy for fraud “before or after” a loss), they may be required to prove actual fraud before seeking rescission. Strickland Imports v. Underwriters at Lloyd’s, London 668 So. 2d 251 (Fla. 1st DCA 1996); Carter v. United of Omaha Life Ins. Co. 685 So. 2d 2 (Fla. 1st DCA 1996).
But whenever an insurer is considering rescission of a policy while a claim remains under investigation, it must proceed cautiously to avoid waiving any rights under the policy, including the enforcement of the duties after loss owed by the insured. Once a policy has been declared void ab initio by an insurer, it has taken the position that the policy never lawfully came into existence. An insurer cannot enforce compliance with the terms and conditions of a policy which it simultaneously asserts to have never existed. If the policy is declared void ab initio, the insurer cannot enforce its rights under the policy requiring the documentation of the loss, the production of records related to the loss, the appearance of the insured's for Examination Under Oath, or any of the other rights under the policy which are typically used to determine coverage issues in connection with the loss.
The case of Towers v. Clarendon National Ins. Co., case number 2D-052620 (decided January 8, 2006) was a decision of the Second District Court of Appeal which underscored this point. In that case, Clarendon considered a claim by Towers under a health insurance policy and learned that the application apparently contained a misstatement relating to a pre-existing condition which resulted in the claim under consideration. After learning of this issue, Clarendon concluded that the policy should be declared void ab initio and rescinded the policy, sending a full premium refund to the insured (a step which must always be taken when rescinding a policy). Towers subsequently filed suit against Clarendon and the producing agency. In response to the suit, Clarendon moved to compel arbitration of the claim dispute as provided by the terms of the policy. The appellate court ruled that Clarendon could not compel arbitration under the terms of the policy which it had already declared void. The Court noted that in doing so, Clarendon had left “nothing to arbitrate.” In declaring the policy void ab initio and returning the insured’s premium, Clarendon voided the policy and rendered all of the contractual provisions, including the arbitration clause, legally unenforceable.
This case underscores the importance of carefully approaching a potential rescission of the policy when a claim is under investigation. Unless the evidence supporting rescission is virtually conclusive, insurers should continue with the investigation of the claim while analyzing the rescission issue at the same time. A Reservation of Rights letter to the insured is appropriate in order to advise of the potential rescission issue. However, the decision to rescind should not be made until the investigation has been completed and it is known that the facts will fully support rescission of the policy. In most cases, this can only be determined after the claim has been fully investigated, including a recorded interview or sworn statement (Examination Under Oath) of the insured. The investigation should include an interview of the agent and a review of the agency records, as well as the underwriting records with confirmation from an underwriting manager that the incorrect information would be considered “material” to the underwriting decision.
If the coverage decision is approached in this way, insurers have the potential of asserting both the rescission defense and, in the alternative, any coverage defenses appropriate to the claim. However, those defenses must be asserted “in the alternative” when the claim is denied, by alleging that the policy is void ab initio, but that there are still coverage defenses which preclude recovery by the insured in any event.
Should you have any questions about the handling of these claims, please feel free to contact us for any information or assistance we may offer.