Underwriters must do their homework and take a close look at legal and business requirements before deciding to rescind an insurance policy, executives attending the Professional Liability Underwriting Society (PLUS) 18th Annual International Conference were told.
“Rescission requirements vary from state to state. In the first instance, one must figure out which state law applies to the particular situation and study that state’s unique law,” explained Harvey Weiner, partner at Peabody & Arnold LLP. “Usually the state in which the policy was delivered governs the law of rescission, and that’s often the state in which the insured is headquartered, not the insurer,” he said.
Weiner noted that to prevail in an effort to rescind coverage, an insurer must demonstrate the following: There must be a representation; the representation must be false; and the representation must be material. “In most jurisdictions, the insurer must have relied on the misrepresentation. In some jurisdictions, there must have been intent to deceive on the part of the insured,” he said.
The PLUS panel discussion, “The Four Horsemen of Rescission,” was moderated by Joseph Monteleone, partner at Duane Morris LLP. Monteleone noted that rescission is an issue that can come up in any insurance policy, not just directors and officers (D&O).
“Even though most of the major rescission cases over the last few years have arisen in the D&O context, particularly with the large corporate meltdowns, rescission is an issue that can come up in any professional liability policy — indeed, any policy at all, including policies in the life, health and accident area,” he said. “A lot of the principles are common to all.”
Beware of consequences
Panelists stressed that the exposure for wrongful rescission can be enormous and have adverse consequences for insurers.
Janice Rizzo, director of professional errors and omissions (E&O) claims at St. Paul Travelers, noted that insurers must take steps to protect themselves when considering whether to rescind a policy. A wrongful rescission can open up a company to a bad faith claim and extra-contractual damages.
Rizzo observed: “To successfully pursue rescission, we need to know the requirements of a successful rescission action before it is filed. All parties — claims, underwriting and counsel — need to work together and be diligent in identifying the issues, investigating in a timely manner, reserving all rights, and exploring the availability of alternative remedies.”
“Before we start down the road to policy rescission, we need to do our homework,” she added.
Kieran Murray, a manager at Lexington Insurance, said that from the underwriter’s perspective, full disclosure in the underwriting process is key. “It is important to submit as complete a submission as possible. You don’t want to leave anything out or wait until the last minute to submit anything,” he noted.
Murray advised clients to be as clear and precise as possible when submitting an application for insurance, to minimize surprises for the underwriter. Also, put everything in writing, he said. “Underwriters never want to receive any last minute surprises because that’s when misrepresentation can happen, and land mines can cause something like rescission,” he said.
Speaking from the broker’s perspective, Damian Brew, a managing director for Marsh FINPRO, agreed that one of the challenging issues for the industry is late-breaking information. That comes up more often in the context of a renewal, he noted.
Brew observed: “When you have gone through the process and there is no obligation to provide additional information, but the client has come to the realization that they will be undergoing a significant business transaction, what do you do?”
While a client may not be in a position to disclose information to anyone, including its insurers, he noted that in certain cases, failure to disclose that information could set the stage for a rescission issue.
“We always encourage our clients to be as open as possible with all of you because I think when that type of information comes out two weeks after the renewal date, underwriters are going to be upset. That is not going to lay the groundwork for a positive future relationship,” Brew said.
Pain-relievers
Panelists went on to discuss what new products might exist in the marketplace to alleviate the pain when and if there is an actual rescission of a policy.
There are various new products that might provide a solution for clients, according to Brew. In the D&O area, he cited the example of independent directors liability policies that are dedicated to providing coverage for outside board members only.
“You see this utilized where a director says, ‘I’ll be willing to come on board, but I want my own policy,'” he said. However, he noted that those new policies and forms have yet to be tested on the rescission issue.
Monteleone indicated that the new coverages would not have worked in the case of WorldCom and Enron, where outside directors had to dip into their own pockets to contribute to a settlement. “If regulators insist that there must be an uninsured contribution or else no settlement, it is going to be difficult to tap into the insurance,” he said.
“New products are not always going to be available in all situations. Where you do have a situation with strong overriding public policy concerns, you may not be able to do that,” Monteleone added.
PLUS is an international, nonprofit association that provides information and educational opportunities on professional. For more information, visit www. plusweb.org. Phone: (800)845-0778 or (952) 746-2580.
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