Insureds, Prior Knowledge and Insurance Coverage
Permalink | One of the more ambiguous and gray areas in insurance coverage law is the question of when an insured is or should be aware that a claim is on its way. The law recognizes that this can certainly occur at some point before the insured actually is handed suit papers by a process server, but the law is certainly not crystal clear as to when that is. This is a question of particular importance for insureds because various contractual policy terms in a policy and various common law principles read into the insurance relationship can all preclude coverage if that date is deemed to be before the effective date of the insurance in force when the insured actually is served with the suit papers. For instance, many policies contain terms precluding coverage if the insured knew or should have known of the potential claim before a policy took effect and, for that matter as well, failure to disclose an expected claim in applying for a policy can result in the policy being voided for misrepresentation in many jurisdictions.
Of interest on this topic is this article here at Law.com concerning whether attorneys, covered under professional liability policies, are on notice in this manner whenever an unhappy client complains about a case or, if not whenever the client complains, how much complaining is necessary for the insured to be aware that a claim is likely and to lose coverage as a result if and when that client does file suit. A new declaratory judgment action filed in New Jersey seeks to answer that particular question. Of particular interest to me, however, is the fact context in which the complaining arose. It concerned a client unhappy with the terms of a settlement negotiated by the insured attorney. It’s a cliche of mediation, uttered by every mediator trying to push two unhappy parties to reach agreement on a resolution, that “a good settlement is one where both sides are unhappy.” Well, if that’s the case, then does the complaining after the fact mean that the lawyers involved are always thereafter on notice of a potential claim that they have to report to their malpractice insurers? It would be kind of silly to have a legal rule holding that the usual griping that often accompanies settlement has to be reported to the lawyers’ insurers to protect their rights to coverage in those one out of a million times that the complaining eventually morphs into a malpractice suit. Admittedly, this is something of a deliberately far fetched example, but it does point out the practical considerations that have to be factored into the question of how far in advance of the filing of suit the insured’s obligations can attach. Too far in advance, and the legal rule creates an unworkable, burdensome scenario for all involved, including insurers who would have to process multiple and unnecessary notices concerning many events that will never lead to suit; not far enough in advance and insurers lose the protections those policy terms and common law doctrines were intended to provide.
Misrepresentations and Voiding Insurance Policies: What is the Effect of Silence?
Permalink | Interesting case out of the Massachusetts Appeals Court at the end of last month on one of the more difficult questions in insurance coverage law, which is when does an insured commit a misrepresentation in providing information to its insurer such that the policy should be deemed void. Lots of tricks and ins and outs on that one.
In the latest wrinkle, the insurer of a commercial auto policy sought to avoid coverage because the insured had never notified it, upon renewals of the policy, that the company for which the policy had originally been written had in fact been dissolved, and that, while the auto remained in use and listed under that policy, the company to whom the policy was issued was no longer in existence. The Appeals Court found that, absent actual inquiry from the insurer upon renewal into the question and a misrepresentation by the insured in response, the policy could not be voided for misrepresentation; the insured’s silence alone, without more, did not rise to actionable misrepresentation.
The court summed up the law in Massachusetts on misrepresentations and insurance policies, and extended it to the scenario presented by the case, as follows:
Peter [the insured] does not dispute that he was required to provide accurate information in the original application for insurance and inform Quincy [the insurer] of any material changes that occurred between the time of the application and the inception of the policy. See Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (2003) (applicant has duty to inform insurer of changes prior to inception of policy that render initial representations untrue). He also does not dispute that Quincy could have insisted on updated information at each yearly renewal of the policy, and that upon inquiry as to changes, he would have been obliged to answer honestly and accurately. However, he contends that where the policy did not impose such an obligation, and where neither Quincy nor Fair & Yeager [the insurance agent] requested such information nor conditioned renewal upon completion of an application or questionnaire, he was under no obligation to identify the matters that the insurer might deem material and notify it of such changes. Contrast Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 60 (1995) (insured's failure to disclose in renewal application that location of insured vehicle had changed concerned the calculation of risk at the time the renewal application was submitted).
Whether Peter's silence amounts to a misrepresentation turns on whether the obligation is one of inquiry by the insurer or sua sponte disclosure by the insured when neither a policy provision nor a renewal application or questionnaire requires such information of an insured. Does an insurer have a duty to identify and ask its insured for information that it deems material (relevant to the risks being underwritten during the period of insurance or renewal)? Or does the insured have a duty to identify what is material and notify the insurer of such changes from prior policy periods?
We conclude that, when neither a policy provision nor a renewal application requires the insured to provide updated information to the insurer, the insured's failure to do so is not a misrepresentation within the meaning of G. L. c. 175, § 186. In such circumstances, the onus is on the insurer to identify the information that it considers material and request from the insured updated information concerning any changes. Absent such obligation or request, the insured's silence is not a misrepresentation within the meaning of the statute.
I am not sure I disagree with the court at all; it seems easy enough for an insurer to always ask at renewal even a broadly phrased question such as whether any facts at all stated on the initial application for coverage have changed, which should thereby place the onus instead on the insured to fess up facts such as those at issue in this case and allow the policy to be voided if the insured doesn’t do so. On the other hand, if the insured actually had any reason to know that the information in question would be relevant to the insurance company, but didn’t disclose it, I am hard pressed to understand why that type of active and knowing decision not to disclose should not void the policy. Perhaps the tipping point on this issue is in the fact that this case involved an auto policy, and not some other form of coverage. There is an extent to which auto policies really exist for the benefit of the public at large placed at risk by the automobile, rather than for the benefit of the insured himself, who can protect his assets through umbrella policies and other avenues; the mandatory nature of auto coverage is there to make sure that those injured have recourse to insurance benefits of the tortfeasor, and perhaps making it easier, rather than harder, to void such policies would run opposite of that public interest.
In any event, the case is Quincy Mutual Fire Insurance Co. Vs. Quisset.
The Duty to Disclose Possible Exposures When Applying for Insurance Policies
Why do we have insurance coverage lawyers, and why, as Mark Mayerson has written, has “insurance-coverage law . . . developed over the last 20 years into a rarefied specialty practice”? Because when lawyers who don’t know their way around the subject get involved with insurance coverage, problems just pile up. A case out of the New Jersey Supreme Court reflects this dynamic. In that case, as this article describes it, a law firm retained to represent a business in a dispute won a judgment that was then overturned because the lawyers had blown the statute of limitations. But that wasn’t the worst part for the attorneys who lost that case; they then turned out to not have coverage for the resulting legal malpractice claim, because they had failed to disclose the potential error and potential claim on their application for professional liability insurance. Now even if they had disclosed it, they may well not have been covered for it, as the insurer may have refused to issue a policy without excluding any claims that might arise out of the disclosed events. However, one will never know, because what we do know for sure is that a failure to disclose on an application a potential claim is a quick way to lose coverage. Indeed, as the article sums up:
[T]he ruling sends a clear signal to attorneys: Be forthcoming, and err on the side of discretion, when applying for malpractice insurance. "Law firms have to disclose in the application any potential error they've committed," [one of the lawyers involved] says. "Here, they knew there was a likelihood a complaint was going to be filed. If there is any basis to believe you have breached a duty, there is a good chance you're going to be sued." The insured's lawyer . . . does not disagree in principle. "It is in an attorney's best interest to disclose to its carrier any possible mistake because then the carrier is responsible," he says. "You're putting the carrier on notice."
Voiding Policies for Misrepresentations
I like this case. Lobsters, boats, New England in the summer, insurance coverage - what's not to like? Beyond that, this decision this month from the First Circuit is a nice textbook example of when a misrepresentation in an insurance application will void a policy. We all know that obtaining insurance requires applying for insurance, and this means filling out an insurance policy application. Misrepresentations by an insured in such an application can justify an insurer's denial of coverage for a claim made after the policy was issued, but in many jurisdictions the fact that the insured made a misrepresentation isn't enough to bring this about; instead, the insured has to have made a material misrepresentation, meaning that the misstatement by the insured must have truly affected the insurer and its decision to sell the insurance to the insured or the pricing of that insurance.
In Commercial Union Insurance Company v. Pesante, the insured applied for coverage for a gill net fishing boat, warranting that it (the boat, not the guy who filled out the application) was instead used for lobstering. The very fact that this scenario ended up before the First Circuit telegraphs what is coming next, that the boat was used for gill net fishing, not lobstering, and was damaged during its use for that type of fishing. Reflecting a general sense against voiding policies that one can gather from much of the case law concerning whether a policy can be voided for these types of misrepresentations, the United States District Court found that there was an insufficient causal relationship between the accident that the boat was involved in and the type of fishing being done, and that the misrepresentation did not preclude coverage as a result. The trial court "based its decision on a finding that there was no causal relationship between [the insured's] breaches and the losses suffered. The court reasoned that, since [the insured boat] was steaming home when the accident occurred, [the insured] technically was not gill netting and therefore was not in breach of the warranty at the time of the loss."
Seems kind of silly, if the insured can misrepresent in an insurance application the very nature of the risk being insured yet avoid any consequences by the sheer good fortune - if you can call it that - of having the loss occur on the way home rather than while out to sea fishing. It appears that the First Circuit saw it the same way, finding that the misstatement of the character of the boat justified a loss of coverage for the accident. The First Circuit noted that under Rhode Island law, a material misrepresentation voids coverage regardless of whether or not the misrepresentation was deliberate, and that a misrepresentation is material if it affected the insurer's decision to insure the risk. The First Circuit found that under this standard the policy was void and the insured was not entitled to coverage for the accident because:
had the underwriter known that the Oceana was used for gill netting and not lobstering, [the insured] would have been charged a premium twenty-five percent higher than the $1,550 that was quoted. It is therefore clear that [the insurer] would not have insured [the boat] at the quoted price had it known the true nature of the vessel's use. We therefore find that the misrepresentation was material.
Perhaps the only unanswered question from this decision is why lobster costs more than fish at the market, given that the fixed costs of insurance are lower for the lobsterman than for the fisherman.
What if Both the Insurer and the Insured Cause a Misrepresentation in an Insurance Application?
This is fun - what happens if insurance coverage is based on misrepresentations in an application, but the misrepresentations were due to both mistakes by the insurer and oversights by the insured? The general rule, with variations among jurisdictions as to certain specifics, is that coverage is void if obtained based on misrepresentations in an application for an insurance policy. The general rule though, can only be understood intellectually as being based on the assumption that the insured is accountable for the misrepresentations or other errors in the application. The Massachusetts Appeals Court has just found that the misrepresentations do not void coverage after a claim is made under the policy where it was an agent of the insurer who made the mistake, and the insured's only role was, in essence, justifiably relying on the agent. In Guerrier v. Commerce Insurance Company, No. 05-P-606. (May 25, 2006), the insured simply signed the application in blank, relying on the insurance agent, whom the court found was an agent of the insurer, thus making her actions those of the insurer, to fill out the actual application. The court placed the risk of errors in the application under that circumstance on the insurer, not on the insured. Obviously, the court could have imposed a rule that placed the burden on an insured to make certain that documents submitted in the insured's name are correct, and it may well turn out that a different set of facts presented to the court in the future might support and result in such a ruling. For instance, it appears that in the case before the court, the facts added up to justifiable reliance by the insured on the agent, thus arguably justifying the insured's acts of omission. The rule in a future case, might, however, be different if the facts allowed for the persuasive argument that the insured's reliance on the agent was not justifiable.
Beyond that, the key factual finding here in my view was that the insurance agent was an actual agent of the insurer; it seems to me the ruling would have to be different if the facts showed that the agent was acting on behalf of and as the actual agent of the insured in soliciting quotes from insurers and seeking policies from various carriers.
The case can be found at http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/coa/1111106.htm.