For decades, insurance companies have resorted to narrow views of insuring clauses and expansive interpretations of exclusions to limit or void coverage. In the last 5-7 years, there has been an explosion in rescission claims by insurers. Now, more and more insurers are asserting rescission as an additional reason for denial of coverage.
Rescission is an old contract law concept, where, due to fraud and even innocent mistakes, a court treats a contract as non-existent. The remedy is to put the parties in the position they were in prior to contracting. In the insurance context, the court treats the insurance policy as if it never existed (void ab initio), and the remedy is for the insurer to refund all premiums paid, leaving the policyholder without insurance. The basis for rescission is most always a material misrepresentation in the underwriting/application of the policy.
The rapid rise in the number of rescission claims is reason for alarm. Ten years ago, only 1-2 rescission claims per year were asserted against our corporate clients. Today, we see insurers asserting or threatening to assert rescission in the majority of claims. This is no accident. Insurers, over time, crafted insurance application language that can be virtually impossible to answer correctly. Then, when a claim is submitted, insurance company lawyers scour insurance applications and financial filings to find any possible mistake or misrepresentation, whether intentional or simply inadvertent.
In this episode of our Top Ten Insurance Issues for Non-Insurance Lawyers, Brian Friel discusses the marked increase in rescission claims, and what policyholders can do to protect themselves against rescission.
Rescission claims are best fought using a two-prong strategy. First, insurance application issues need to be addressed prior to a claim being made. Here, we proactively protect our clients against rescission by working with them and their brokers in the application process. As Brian points out in today’s video, it’s not just important to answer the questions as precisely as possible, but it is also critical to create a written record correcting, or at a minimum pointing out, ambiguous or overly broad application questions. Where possible, egregious application language needs to be stricken, and unfair questions need to be noted.
Second, a thorough knowledge of rescission law, including its origins and development, can be used to counter an insurer’s attempt to rescind. In reality, rescission is a drastic remedy that has no real place in insurance law.
To learn more about rescission, please watch the video, and feel free to contact us with any questions you may have.
To see the whole series, check out Top Ten Insurance Recovery Issues For Non-Insurance Lawyers.