A. The Context
In last month's article, I gave you a peek into my world. (That hopefully you avoid being part of.) The world of what it looks like when you are actually in E&O litigation. How the courts and law do not understand the past and past decisions on insurance and thus are not in sync with the reality of the 21st century. I want to continue that this month on (i) an all too common topic and (ii) with a possible way to push back and avoid an E&O claim in this scenario. But first some context.
The “Riddle" quote is from Winston Churchill discussing the Soviet Union in a radio Broadcast in 1939. Many authors, philosophers and great thinkers have made statements that life is a riddle. One notable quote by Ralph Waldo Emerson suggests, "All is riddle, and the key to a riddle is another riddle". There are great examples of riddles in history and our collective experience with no seeming answer. Three of my favorite are:
1. “If a tree falls in the woods does it make a sound if there is no one there to hear it?"…..AND…
2. “Which came first the Chicken or the Egg?" ….AND my favorite….
3. “Is the glass half empty or half full".
In a way those questions represent the status quo….stale thinking and unquestioning acceptance of what was and an application of the past to present without question. I reject that. For those of you who me, as your attorney I will never concede a Plaintiff's version of the universe in which it wants to litigate as that puts my client at a disadvantage before we step foot in court. Thus, I respond to these 3 riddles as follows:
1. It depends on how you define “sound". If it is defined as the transmission of sound waves…Yes it makes a sound. If you define "sound" as having someone hear the soundwaves, then no it does not.
2. The domestic creature that we think of as a “Chicken" is a mutation of a different animal. So the first chicken as we know it did not come from an EGG of its Chicken mother. So the Chicken came first.
3. I see a glass Twice as Big as it Has to Be.
B. The Issue – Recission for Material Misrepresentation in the Application
Recission for material misrepresentation works the same way. My response to the carriers' position is patterned after my default of not accepting the status quo and their incorrect factual and legal position. BUT….you can push back on a claim denial based on this even before litigation.
I am currently fighting this issue in two separate E&O actions against my broker clients. Know that when the carrier asserts a material misrepresentation in the application and files a Declaratory judgment action against the Insured it seeks to (1) have the policy voided from the beginning as if it never existed and wants (2) to terminate the defense and (3) get its legal fees back. When that happens you will be sued.
C. The Law – As to the Broker
As to your defense as the Broker, if the application is signed, absent a bad judge or some additional facts, we should get a Pre-Answer dismissal. In Sung v. Hong, 678 N.Y.S.2d 116 (2nd Dept. 1998), the court said “the application was dispositive of the plaintiff's claim" against the broker that the wrong limits of uninsured/underinsured coverage were procured in contravention to what the broker promised to procure. In Motor Parkway Enters., Inc. v. Loyd Keith Friedlander Partners, Ltd., 89 A.D.3d 1069 (2nd Dept., 2011) the court said ““The documentary evidence submitted by the defendants, including the application for insurance signed by the plaintiff's president and the resulting policy of insurance furnished by the defendants to the plaintiff, conclusively disposed of the plaintiff's claims that the defendants procured insurance coverage in an amount other than that requested by the plaintiff."
D. The Law – The Recission – Equitable Action
But what of the recission action? It would be best to have your insured win that case. Or, better yet, get the carrier to back off from the Material Misrepresentation position in the first place. Here is the how, the why and the reason I do not accept the conventional wisdom…the “riddle" of a carrier's position on recission. (Bear with me as I get on my soapbox)
First, there is a difference between a Court of Law and a Court of Equity. The easiest way to understand the difference is that the former can ONLY award money as the relief. Equity can craft any remedy that fits the situation other than money. If the wrecking ball is about to demolish your house to make way for a highway, money damages after it is destroyed is not going to help. STOPPING the ball from swinging will. That INJUNCTION to stop the ball, can only be issued by a Court of Equity. Recissions, a non-money relief, can only be awarded by a Court of Equity.
Courts of Equity were always separate from Court of Law going back to England in 1606 when the very first courts of “Equity" were established via statute. They were called the “Court of Requests" and introduced the doctrine of “equity and good conscience" for the first time in history. The commissioners of the Courts of Request required it to make such orders “as they shall find to stand with Equity and Good Conscience. See “Equity and Conscience", Mike Macnair, The Oxford Journal of Legal Studies, Vol. 27, No. 4 (Winter, 2007). The takeaway is that because the goal is “justice".... the court can take into consideration any fact that would help it fashion a remedy and weigh the harm / prejudice to both parties to determine what equity should do on a case-by-case basis.
The New York State Constitution of 1846 in conjunction with the Judiciary Act of 1847 did away with separate courts of law and equity and combined them into the Unified Court System and the creation of the Supreme Courts of New York, which despite the name, are the low level trial courts. If you actually look at the title of someone sitting on the bench in a Supreme Court that are not “Judges"… but “Justices" since a judge can only award money but a “Justice" can also award equity.
So, under 400 years of law, Equity has to do “Justice" to all parties. The United States Supreme Court in Willard v. Tayloe, 75 U.S. 557, 567 (1886), summed up exactly why UM could never win its equitable causes of action in its discussions of the use of the courts:
“In general it may be said that the specific relief will be granted when it is apparent, from a view of all the circumstances of the particular case, that it will sub-serve the ends of justice; and that it will be withheld when, from a like view, it appears that it will produce hardship or injustice to either of the parties. It is not sufficient, as shown by the cases cited, to call forth the equitable interposition of the court, that the legal obligation under the contract to do the specific thing desired may be perfect. It must also appear that the specific enforcement will work no hardship or injustice, for if that result would follow, the court will leave the parties to their remedies at law, unless the granting of the specific relief can be accompanied with conditions which will obviate that result."
The practical application of all of this is as follows. To Rescind a policy for material misrepresentation an insurer has to show many prima facie (fundamental) elements or it cannot win. A representation of a material fact where the carrier proves, by documentary evidence, it should not have issued the policy had it known the truth. But that cause of action has another element called “Justifiable Reliance". That is defined as “Did the carrier justifiably RELY on the misrepresentation in the application."
The “justifiable" part is the key. The law says that a party CANNOT Justifiably Rely on if the party could have discovered the truth. Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959), New York's highest court ruled: “If the facts represented are not matters peculiarly within the party's knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations." New York courts are particularly disinclined to entertain claims of justifiable reliance where parties enjoy access to critical information but fail to take advantage of that access. Grumman, 748 F.2d at 737. See also Berger-Vespa v. Rondack Building Inspectors Inc., 293 A.D.2d 838 (3rd Dept. 2002); Slaughter v. Gerson, 80 U.S. 379, 383 (1871); Chrysler v. Canaday, 90 N.Y. 272 (1882).
E. The Problem in the Courts
There was a time when underwriters were in their cubicles with green tinted visors and garters on their sleeves doing underwriting manually. That had NO way of vetting information in an application. So the Courts watered down the “Justifiable Reliance" element ruling that an Insurance Company has a right to rely on the application WITHOUT INVESTIGATION. But that is not now…. not the 2020s!
In one of my cases the carrier denied coverage and sought decisions based on the ANSWER “NO" to a question on the application about “ARE THERE ANY NYC BLDG VIOLATIONS". There was 1 Class C violation. The first thing the claims adjuster did when he got the slip and fall claim was search the NYC database for this building. He found the violation and they used that to deny coverage and sue for rescission. I did the same search and it took me 5 second and 3 screens to find that information.
In my other case the misrepresentation was that the Residential Condo did not have a commercial space at the street level when it did. The Claims Adjuster simply used Google Street View.
There is simply no reason the Underwriter could not have done what the Claims person did when the application came in. This is the game carrier's play. I have no doubt internal documents direct Claims Persons to do these kinds of searches with the goal of looking for such minor incorrect information to support denial and decisions.
Conclusion - Going Forward
1. Make sure you ALWAYS have a signed application with proof of signing.
2. Make sure you have documentary proof that you told the signor to read and verify the information on the application to make sure it is correct before signing.
3. When a Claims Adjuster denies a claim and asserts Material Misrepresentation in the application, do your best to get them to answer and state, (in an email if possible), what they did to find that out, why they did that investigation, and why the Underwriter did not check.
4. Contact me ASAP so that we can do what we can to preserve all the carriers documents at this early stage…and…to make this argument that in 2025 the carrier cannot rely on law from the 1930s that ignored justifiable reliance because Google, AI and the Internet had not been invented and would not for about a century more.
Simply, and to conclude, the industry has to push back on this outdated and improper practice and with your help, we will do our best to get the law on this issue to reflect the reality of the times we are living in.
Submitted by:
Howard S. Kronberg, Esq.
Kaufman Dolowich, LLP