AuthorZalma, Barry

An insurance policy is nothing more than a contract. It is a special type of contract because--by law--it contains an implied covenant of good faith and fair dealing. What that means is that neither party to the contract must do nothing to prevent the other from obtaining the benefits of the contract.

When a prospective insured violates the covenant of good faith and fair dealing by misrepresenting or concealing a material fact that deceives an insurer to take on a risk that would not have been taken had the truth been known the law allows the insurer--upon a presentation of sufficient admissible evidence--to rescind the policy and treat it as if it never came into existence.

Developing the evidence is not easy. It requires the effort of an insurance professional to collect the evidence--whether documentary or by oral testimony--to convince a judge or jury that the insurer acted properly, that the insured deceived the insurer and that the court should order that the policy was void ab initio (from its inception).


In many states, following ancient British precedent that predated the formation of the United States, an insurer that discovers a factual basis establishing that an insured obtained a policy by deceiving the insurer about the risk applied for by the insured the insurer may declare the policy void from its inception and treat it as if it never existed. In simple language, if the insurer discovers, either before or after a loss, that the policy was acquired as a result of a misrepresentation or concealment of a material fact, it may rescind the policy. In most states the ancient Marine Rule (first stated in 1766 in the British House of Lords in a case called Carrter v. Boehn) is followed and rescission is available regardless of whether the insured fraudulently or innocently misrepresented or concealed a material fact.

It is axiomatic in the United States that an insurance company is entitled to determine for itself what risks it will accept, and therefore to know all facts relative to the risk the insured seeks to transfer to the insurer. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. To effectively rescind a policy of insurance in a state that applies the Marine Rule the insurer must be able to prove by a preponderance of the evidence that it entered into the contract of insurance because it was deceived about a fact material to its decision to insure or not insure.

To prove it is entitled to rescind the investigation conducted by the insurer must establish:

*That the insured submitted an application for insurance seeking an offer of insurance from the insurer.

*That the insurer reasonably relied upon the facts represented by the application when it made its decision to offer to insure.

*That the application contained one or more misrepresentations of material fact or that the insured concealed one or more material facts.

*That but for the misrepresentation the insurer would not have issued the policy on the same terms and conditions as it did had it known the true facts.

*That but for the concealment of material facts the insurer would not have issued the policy on the same terms and conditions as it did had it known the true facts.

*That it established materiality by contact with the underwriter who made the decision to insure who is willing and able to testify that had he or she known the true facts he or she would not have agreed to insure on the same terms and conditions.

* That the insured was advised, in writing, that the policy was rescinded and that the insurer either returned the premium or offered to return the premium.

In states like Louisiana that do not apply the Marine Rule the facts established must, in addition to the seven elements above, prove that the insured intended to deceive the insurer.

In all states the evidence needed to establish a ground, or multiple grounds, for rescission investigation needed can be obtained by the adjuster or SIU investigator interviewing, at least, the following:

*The insured(s);

*The insurance broker;

*The insurance agent;

*The underwriter who made the decision to insure; and

*Independent witnesses.

In addition, the investigation must be supported and enhanced by retaining competent, local, insurance coverage counsel to conduct an examination under oath of the insured(s) and collect relevant documents from the insured(s), the insurance agent or...

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