OCTOBER 2018 BAD FAITH CASES: POLICY CAN ONLY BE RESCINDED OR VOIDED ON BASIS OF FRAUDULENT OMISSION BY CLEAR AND CONVINCING EVIDENCE OF (1) INTENT AND (2) PROOF THAT DISCLOSURE WOULD HAVE MADE A MATERIAL DIFFERENCE IN ISSUING POLICY (Western District)

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The insurer sought a declaration that it had no duties under an attorney professional liability policy on the basis of an outside business exclusion, and further sought to rescind and avoid the policy. While successful on the coverage issue, the court would not grant summary judgment to void or rescind the policy, as issues of disputed fact remained.

“There are two distinct but similar grounds for rescission and voidance of an insurance policy under Pennsylvania law. First, an insurance policy is void ab initio for misrepresentation when the insurer can establish that (1) the representation was false, (2) the insured knew it to be false when made or acted in bad faith, and (3) the representation was material to the risk being insured.”

“Second, rescission is also available where an insurer can show clear and convincing evidence that the insured knowingly failed to disclose information which was material to the risk to be insured. … To rescind a policy on this ground, the insurer must prove a fraudulent intent to deliberately deceive.”

The insurer must make its case by clear and convincing evidence, which requires presenting evidence “so clear, direct, weighty, and convincing as to enable the jury to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue.” The court observed these cases are typically fact intensive.

“[T]he failure to furnish all details asked for [on an insurance application], where it appears there is no intention of concealing the truth, does not work a forfeiture, and a forfeiture does not follow where there has been no deliberate intent to deceive, and the known falsity of the answer is not affirmatively shown.” … [F]raud . . is never proclaimed from the housetops nor is it done otherwise than surreptitiously with every effort to conceal the truth of what is being done. So fraud can rarely if ever be shown by direct proof. It must necessarily be largely inferred from the surrounding circumstances.”

This was a case of alleged omission of material facts in the application. On the facts of record, the court found a material dispute over whether the insured knowingly and intentionally misled the carrier in applying for insurance.

The court also found a dispute over whether the nondisclosure was material.

It stated that a “misrepresentation on an insurance application is material if the ‘information would influence the decision of an issuer in the issuance of a policy, assessing the nature of the risk, or setting premium rates.’” For purposes of summary judgment, the record did not clearly establish that the omission would have influenced its decision to issue the policy, its risk assessment, or its premium rates.

The court stated although the insurer provided an affidavit that it “may have assessed the risk differently, it appears [the insurer] would have issued a substantially similar policy” even with the disclosure; and there was no allegation disclosure would have resulted in higher premiums.

Date of Decision: October 1, 2018

Westport Insurance Corp. v. Hippo Fleming & Pertile Law Offices, U.S. District Court Western District of Pennsylvania CIVIL ACTION NO. 3:15-cv-251, 2018 U.S. Dist. LEXIS 168756 (W.D. Pa. Oct. 1, 2018) (Gibson, J.)

In prior opinions, the court had refused to abstain from hearing the insurer’s claims in federal court, and had issued a discovery decision on underwriting materials and personnel files.  

 

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