Rescission of an insurance contract is a drastic remedy. It generally requires a showing of fraud or material misrepresentation in the policy application and underwriting process. Once an insurance company obtains the requisite knowledge of the policyholder’s fraud, it must seek rescission in a timely fashion. If, after obtaining that requisite knowledge, the insurance company commits an act that ratifies or affirms the insurance policy, the insurance company can no longer seek rescission of the policy. In a recent case, the Second Circuit Court of Appeals explored the ratification issue in a case seeking rescission of an insurance policy.
In Continental Cas. Co. v. Marshall Granger & Co., LLP, No. 16-2384 (2d Cir. Jun. 5, 2017) (Summary Order), an insurance company sought to rescind an accountants professional liability insurance policy issued to its policyholder because of alleged material misrepresentations in the application. Intervenors, who purchased the accounting firm’s rights under the professional liability policy, opposed rescission claiming that the insurance company had ratified the policy and unreasonably delayed in seeing rescission. The district court granted summary judgment to the insurance company on the ratification issue. The intervenors appealed.
In affirming the district court’s rescission judgment, the Second Circuit, in a summary order, reviewed the alleged acts of ratification and rejected each of them. The first act of ratification rejected was the claim that the insurance company sent a denial letter to the policyholder based on a policy provision. The appellate court did not consider this ratification ground because it held that the intervenors had not made this argument to the district court and, therefore, it could not be considered on appeal. The appellate court did not hint at whether a disclaimer letter invoking a policy provision was considered a ratification of the policy.
The second ground for ratification was based on a policy amendment merely changing the insured’s name and address. The court held that ministerial changes cannot serve to ratify an insurance policy. The court also rejected the carrier’s agreement to pay investigation costs (there were SEC and other investigations) as a basis for ratification because, under New York law, the insurance company was legally compelled to make the payments once it promises to pay defense costs and must continue to perform until a court enters a judgment granting rescission.
Finally, the court rejected the insurance company’s offer for extended reporting period or “tail” coverage after it decided not to renew the policy as a basis to claim ratification. The court found that under New York law, the insurance company was required to offer tail coverage upon termination of the policy. The court distinguished a decision not to renew from this insurance carrier’s decision not to enter into a new insurance policy upon expiration of the old policy. The court held that the insurance carrier’s non-renewal did not affirm the policy’s validity.
Having rejected all the claims of ratification, the court affirmed the rescission judgment in favor of the insurance carrier.
The challenge every insurance carrier has when presented with a claim is determining as quickly as possible whether there are legitimate grounds to disclaim coverage or whether there is a legal basis to rescind the policy. Careful affirmative actions coupled with a speedy investigation and internal coordination is necessary to avoid claims of ratification.