Policy Rescinded And Voided Ab Initio For Failure to Disclose Professional Responsibility Grievance Investigation of Insured Officer

Applying Connecticut law, a Connecticut federal court held that an insured’s E&O policy must be rescinded and voided ab initio after finding that the insured knowingly made misrepresentations regarding an investigation of one of its officers, which were material to the insurer’s decision to insure the applicant. Zurich Am. Ins. Co. v. Expedient Title, Inc., 2015 WL 9165875 (D. Conn. Dec. 16, 2015). In so holding, the court rejected the insured’s argument that the question at issue in the renewal application was limited only to investigations concerning the operation of the insured’s business. The court also ordered the insured to reimburse defense costs paid by the insurer.

The insured, a title agent company for title insurance companies, renewed its “Title Agents, Abstractors and Escrow Agents Error and Omissions Liability Insurance Policy,” from its insurer for the policy period of May 27, 2008 to May 27, 2009. In October 2008, the insured tendered a complaint against it and a title insurance company concerning the alleged failure to record the deed of conveyance of a particular property. The insurer provided a defense to the insured subject to a reservation of all of its rights and defenses under the E&O policy, including the right to recover expenses incurred in connection with the defense of the matter if it was determined that coverage was inapplicable.

In 2011, the insurer filed a declaratory judgment action against its insured seeking rescission and a determination that the E&O Policy was void ab initio because of the insured’s alleged misrepresentations on its insurance renewal application. The insurer explained that in the insured’s renewal application, the insured answered “no” to the question that asked “[h]as the Applicant or any prospective Insured been involved in or have knowledge of any inquiry, investigation, complaint or notice from any State or Federal Authority regarding the activities, procedures, or practices of the Applicant or any proposed insured in the past (1) year?”

The insurer argued that the answer “no” was a material misrepresentation that voided the policy in light of the fact that the insured was aware that for several years one of the insured’s officers, an insured under the policy, was being investigated by the Grievance Committee for the 9th Judicial District of New York for multiple alleged violations of the Code of Professional Responsibility related to his activities as an attorney and with work for a company connected to the named insured.

Ruling on the insurer’s motion for summary judgment as to rescission, the court explained that the insurer must prove (1) a misrepresentation (or untrue statement) (2) that was knowingly made, and (3) material to its decision whether to insure.

As to the first two prongs, the court found that there was a false statement in light of the insured’s “no” answer to the question at issue and that there was no basis, as argued by the insured, to limit the scope of the question to investigations related to the title insurance business. The court then found that the insured’s false response to the question was made knowingly as the officer who was subject to the grievance investigation was aware of the grievance since 2004, as was the President who signed the application. In doing so, the court rejected the argument that the insurer should not be awarded the drastic remedy of recision based upon the officer and the insured’s ignorance, mistake, or neglect in reporting matters that they did not believe that they were obligated to report. According to the court, “where, as here, the question on the application is written in clear terms, allowing an insured to stave off rescission by asserting that he or she was laboring under an erroneous interpretation of the question would be tantamount to excusing the insured for not reading the application at all – something that Connecticut courts have refused to do.”

As to the final element in its analysis, the court found that the answer to the question at issue was material under Connecticut law and under the E&O Policy for three reasons. First, according to the court, Connecticut case law strongly suggests that an answer to an insurance application is presumptively material. Second, the court provided that an insured’s answer to a question on an insurance application is also considered material where, as was the case here, the application itself states that it “shall become the basis of any coverage and a party of any policy that may be issued by the [insurance] Company.” Finally, after review of the underwriter’s affidavit, the court concluded that the insured’s “no” answer satisfied the traditional test of finding a misrepresentation material where “in the judgment of reasonably careful and intelligent persons, it would so increase the degree or character of the risk of insurance as to substantially influence its issuance, or substantially affect the rate of premium.”

Because the E&O policy was found to be void at inception and because the insurer expressly reserved its right to reimbursement for the costs of defending the underlying action, the court also granted the insurer’s request for reimbursement of defense costs.