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Three months after one its contractors or employees was involved in a child’s death, a nursing agency applied for insurance.  It sought insurance that would apply retroactively for a number of years.

The application requested information multiple times, as to whether the insured was aware of any acts or omissions that might lead to claims.  The insured’s CEO denied knowledge of any such acts or omissions with potential liability, signing a declaration to that effect.  The applications did not disclose the child’s death just a few months earlier.

The insured informed the carrier about the incident two months after the application process. After investigation, the insurer reserved its right to rescind based on intentional misrepresentation.  After learning suit was filed against the nursing agency, the carrier filed an action seeking rescission and a declaration no coverage was due. The insured never responded and the insurer ultimately moved for a default judgment, which the court granted.

Among other things, the court reviewed the rescission claim in addressing whether the insurer raised a legitimate cause of action and the existence of a litigable defense.

The insurer sought rescission on the basis of equitable fraud and material misrepresentation.  Judge Shipp states:

[1.] To establish equitable fraud, a party must show: “(1) a material misrepresentation of a presently existing or past fact; (2) the maker’s intent that the other party rely on it; and (3) detrimental reliance by the other party.”

[2.]  For an equitable fraud claim, New Jersey law requires that for “subjective information” on an insurance application, such as questions regarding whether a potential insured is “aware of any circumstances which may result in a claim being made,” an additional inquiry is required—“whether the insured knew that the information was false when completing the application.”

In reviewing the complaint, the insurer alleges the nursing agency made materially false statements in the application, when the CEO answered no to the following questions, just a few months after the child’s death:

Are you aware of any act, error, omission, or other matter which is likely to lead to a claim against you or other loss of the type that could be covered by [the Professional Liability or General Liability] coverage part?

Does any person proposed to be insured have knowledge or information of any act, error or omission which might reasonably be expected to give rise to a claim?

The CEO also represented his answers were accurate and complete, and made after investigation.  He said material updates would also be provided.  Contrary to these representations, the complaint alleges the CEO was fully aware of the child’s death at the time he filled out the application, and the potential claim that could arise out of that incident. “For example, Nursing Agency’s timing for applying for liability insurance and the significance of the incident create an inference that Nursing Agency was attempting to deceive Underwriters into issuing a policy after-the-fact.” Rescission was proper even under the subjective measure of the insured’s state of mind and good faith, as “no reasonable fact-finder could conclude that [its] answer truly reflected [its] actual opinion….”

The court further found reliance.  The insurer pleaded the “representations in its application (or lack thereof) influenced how Underwriters viewed the risk in issuing the Policy.” “Similarly, Underwriters meet their burden of demonstrating that the omissions were material to the Policy terms and Nursing Agency’s assessed premiums.”

Date of Decision:  April 18, 2022

Certain Underwriters at Lloyd’s, London v. Good Night Nursing Agency, LLC, U.S. District Court District of New Jersey No. CV2107666MASLHG, 2022 WL 1137302 (D.N.J. Apr. 18, 2022) (Shipp, J.)