Chapter Twenty-One

• Jurisdiction: New York

Chapter Twenty-one

Insurer’s Avoidance of Policy Obligations for Material Misrepresentations

Paul J. Callahan, Esq.*

* The author acknowledges the contribution of David O. Teach, Esq., who wrote the original chapter in the first edition of Insurance Law Practice.

I. Fraud In The Inducement

A. A Carrier’s Right to Rescind Based on Material Misrepresentations

As a general rule in New York, a material misrepresentation in an application for insurance warrants rescission of the policy issued in reliance on such application.²⁶⁰⁹ New York Insurance Law § 3105 governs an insurance carrier’s right to void an insurance policy ab initio if an insured’s false representation is deemed material.²⁶¹⁰ To determine the materiality of such misrepresentation in an application for insurance, the burden is on the insurer to prove that (1) the applicant made a misrepresentation, and (2) the insurer would not have issued that exact same policy had it known the truth.²⁶¹¹ An insurer’s remedy is complete avoidance of its contractual obligations, not merely reformation of the policy to include a higher premium.²⁶¹²

1. Determining Materiality

Insurance Law § 3105(b) provides that in order to relieve an insurer from liability under a policy, an untrue representation must be material to the risk.²⁶¹³ The statutory definition of “material misrepresentation” contained in § 3105(b)(1) applies to all insurance policies. A misrepresentation is defined as a false representation; “representation” is defined as a “statement as to past or present fact, made to the insurer . . . at or before the making of the insurance contract as an inducement to the making thereof.”²⁶¹⁴ A representation is “material” if “knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.”²⁶¹⁵ It may be stated, therefore, that no misrepresentation by an insured voids a policy unless such representation was material. No misrepresentation is material unless knowledge of it by the insurer would have led to the insurer’s refusal to issue the policy.²⁶¹⁶ Courts examine whether an applicant’s failure to disclose information deprived the insurer of its freedom of choice in determining whether to accept or reject the risk based on facts that might reasonably affect that choice.²⁶¹⁷ When making this determination a court must consider whether the misrepresentation was material at the time the contract was entered into.²⁶¹⁸ The inquiry, therefore, is whether the insurer would have rejected the application or issued the policy at a higher premium had the truth been revealed.²⁶¹⁹

a. Reasonableness of an Insurer’s Judgment

A fact asserted by an insurance applicant is material if it naturally influences the judgment of the insurer in issuing the contract, estimating the character of the risk or fixing the premium. The reasonableness of an insurer’s rejection of a policy application cannot be questioned.²⁶²⁰ In recognizing the prima facie importance of questions in an insurance application, the court in Fernandez v. Windsor Life Insurance Co.²⁶²¹ explained that

[t]he questionnaire in the application is for the purpose of informing the insurance company on matters which it regards as material in passing upon the risk. The insurance company is entitled to form and follow its own judgment as to risks and to know all the facts which may reasonably affect its judgment. . . . The court should protect the insured against arbitrary cancellation of the policy, but it must also protect the insurance company against a deprivation of the right to exercise its own judgment. The rights of the parties are reconciled by the court considering and determining whether the facts not disclosed might reasonably affect the insurance company’s judgment. ²⁶²²

A fact that could influence an insurer in accepting a risk, therefore, is material. Failure to disclose the fact in response to a particular question is as much a misrepresentation as a disclosure that is a mistruth or a half-truth.²⁶²³

b. Misrepresentations Made in Good Faith, Mistakenly or Negligently

An innocent misrepresentation is sufficient to warrant rescission of an insurance policy.²⁶²⁴ The fact that a misrepresentation was made in good faith or as a result of inadvertence, mistake, negligence or ignorance, will not preclude it from being considered material. However, where a carrier wishes to rescind a health or disability policy and the policy has been in existence for at least two years, the carrier must establish that the misstatements made by the applicant in the application were fraudulently made.²⁶²⁵ Moreover, with respect to hospital, medical, surgical and prescription drug expense policies, Ins. Law § 3105(b)(2)²⁶²⁶ provides that the misrepresentation must be intentional.²⁶²⁷ Generally, a misrepresentation of facts by an applicant in response to a specific inquiry made by the insurer will void the policy. It is, however, still necessary to analyze whether the fact is material and would have led to refusal by an insurer to make such a contract.²⁶²⁸ If the misrepresentation would not have changed the insurer’s assessment of the risk it is not material. The insurer may not void the contract on that basis.²⁶²⁹

Failure to read an application is not an excuse for material misrepresentations made in its preparation, such as when an application is completed by an agent and signed by the insured without the insured having read it.²⁶³⁰ An applicant has an affirmative duty to ensure that the application is accurate.²⁶³¹ Moreover, an insured’s inability to understand English is not a valid excuse.²⁶³² But an insurer may not avoid coverage where its agent had knowledge of the truth behind any misrepresentations. Whether the rule applies is determined by the agent’s authority with respect to the insurer.²⁶³³

2. Evidence of Materiality

Generally, the materiality of representations or facts concealed in an application for insurance is deemed a question of fact for a jury to determine.²⁶³⁴ It is based on the circumstances of each case.²⁶³⁵ If evidence of materiality is “clear and substantially uncontradicted,” the question is a matter of law for the court to decide.²⁶³⁶ Furthermore, a misrepresentation may be material as a matter of law if the facts misrepresented are so serious that one would know them to be of substantial concern to the insurer.²⁶³⁷ An intentional misrepresentation may be immaterial as a matter of law when it is clearly minor and inconsequential to an insurer’s decision to accept or reject the risk.²⁶³⁸

a. Burden of Establishing a Misrepresentation

To meet its burden of proving materiality, an insurer must adduce proof as to its practices with respect to the acceptance or rejection of applicants with similar risks.²⁶³⁹ The insurer “need only show that the misrepresentation ‘substantially thwarts the purpose for which the information is demanded and induces action which the insurance company might otherwise not have taken.’”²⁶⁴⁰ Evidence of action generally taken by an insurer on an application, had the truth been told, is admissible in proving materiality.

To properly establish materiality, an insurer will be required to (1) submit documentation (such as the insurance company’s rating guidelines, underwriting manuals, rules or bulletins) that pertains to insuring similar risks and; (2) provide testimony of a qualified employee that the insurer would not have issued the particular contract had certain facts been disclosed.²⁶⁴¹ “When the undisputed evidence establishes the practice of the insurer to refuse as standard risk what it has accepted because of misrepresentation, it has the absolute right to rescind the policy.”²⁶⁴² Evidence that included testimony by the insurer’s chief underwriter that, had the carrier known the details of the applicant’s medical history it would not have issued the policy, and reference to the carrier’s underwriting manual, which corroborated these conclusions, has been held in all respects to be sufficient in establishing materiality.²⁶⁴³ Alternatively, an insurer may introduce evidence of prior dealings with the insured, showing that the insurer had previously refused to assume the same risk under a prior policy issued to the insured.²⁶⁴⁴

In Puccia v. Farmers & Traders Life Insurance Co.,²⁶⁴⁵ an insurance carrier’s vice president testified that, based upon past practices of the company, when an applicant for life insurance reveals a medical history, the carrier reviews the application and determines the risk by obtaining statements from attending physicians. It also employs guidelines contained in its underwriting manual. The court held that the carrier had sufficiently proved materiality by showing that the misrepresentation in the application deprived it of the freedom to determine whether to accept or reject the risk.²⁶⁴⁶

b. Conclusory Statements

Courts have consistently held that a conclusory statement by an insurance company employee that it would not have insured the applicant if it had known the truth is, in and of itself, insufficient to establish that a misrepresentation was material.²⁶⁴⁷ For example, in Wittner, a carrier offered affidavits from two underwriting officers with respect to applicants for life insurance with histories similar to the plaintiff’s. Statements contained in the affidavits explained that (1) the plaintiff’s failure to disclose his medical history prevented the carrier from properly evaluating the risk involved and; (2) the omitted information was material to its acceptance of that risk. In addition, had the carrier known the truth it would have been prohibited from writing a life insurance policy according to its underwriting standards. Wittner held that the carrier’s affidavits were insufficient to establish materiality.²⁶⁴⁸

3. Insurer’s Duty to Inquire

a. Insurer Entitled to Rely on Applicant’s Representations

An insurer is entitled to rely on representations made by an applicant. In fact, a...