Question. Did an insurer waive its right under New York law to rescind a contractors omnibus general liability insurance policy when it chose to cancel the policy with full knowledge of an alleged material misrepresentation that would have allowed it to rescind the policy as void from the beginning?
Answer. YES. Insurance Company issued a Contractors Omnibus General Liability Policy (the "2005 Policy") to Contractor. The 2005 Policy had liability limits of $1,000,000 for each occurrence and a policy term of one year, from April, 2005 to April, 2006.
For purposes of the policy, Contractor was classified as Carpentry NOC, which stands for "Carpentry not otherwise classified ." The classification "Carpentry NOC" includes carpentry of a commercial or industrial nature as well as carpentry on structures greater than three stories in height and incidental roofing work. Insurance Company's underwriting guidelines provide illustrations of what might be considered "incidental" roofing work. In a section entitled "Roofing Exposure," the guidelines state:
It is not unusual for our typical carpentry contractor to be involved with incidental roofing work over a period of time. This is most likely to occur as part of a remodeling or small addition job but may be a re-roofing job not associated with other work for that customer ... We do not want to write insureds that do roofing as described above if it is more than incidental to their operation. Incidental is defined as 1-2 roofs per year for a one or two-man operation and 3-5 roofs per year for a three to five-man operation. It is referred to in number of roofs per year since that is the easiest way to quantify the amount of work, but [this] could also equate to approximately 5-10% of annual receipts.... Risks that do more roofing than this must be classed and rated as roofers.
In 2006, the policy was renewed (the "2006 Policy") with a policy term of April, 2006 to April, 2007. The policy was renewed again (the "2007 Policy"), with a policy term extending from April, 2007 to April, 2008.The 2007 Policy contained the following provision in the section, "Business owners Common Policy Conditions":
C. Concealment, Misrepresentation or Fraud This policy is void in any case of fraud by you as it relates to this policy at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:
- This policy;
- The Covered Property;
- Your interest in the Covered Property; or
- A claim under this policy.
The above provision of the 2007 Policy was amended by the following endorsement, entitled "New York Changes-Fraud":
The CONCEALMENT, MISREPRESENTATION OR FRAUD Condition is replaced by the following: FRAUD
We do not provide coverage for any insured ("insured") who has made fraudulent statements or engaged in fraudulent conduct in connection with any loss ("loss") or damage for which coverage is sought under this policy.
Part of the Commercial Insurance Application Contractor submitted in April 2005 included a form called a Contractor Supplement. The Contractor Supplement contained various questions related to, among other things, Contractor's general exposure to liability. Contractor was asked, "Does the applicant do any roofing or re-roofing? If yes, how many in the past year?" Contractor answered the first question, "no" and thus did not provide a number of roofing jobs Contractor had performed in the prior year.
In July, 2007, Worker suffered a fatal injury while working for Contractor at a job site. In August, 2007, an employee in Insurance Company's Claim Department prepared a Report on Risk Characteristics regarding the incident, which recited that Worker was a 17 year-old female summer employee who fell off a three-story roof and died nine days later. It also stated that the insured was doing roofing work at the time. The report concluded that the incident entailed a risk by the insured that appeared to be misclassified, that the insured engaged in unsafe practices and that the insured employed minors.
In late August, 2007, Insurance Company mailed a written notice of policy cancellation, effective September, 2007. This cancellation notice stated that the policy was being cancelled because: "Type of operations unacceptable to company. A material change in the nature or extent of the risk which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was last renewed." This letter reflects that in August 2007, Insurance Company elected to cancel rather than rescind the 2007 Policy.
Insurance Company asserts that it is not obligated to perform under the subject insurance contract as it was rendered void ab initio [meaning from the beginning] as a result of the defendants' material misrepresentation(s) in obtaining the original policy and subsequent renewals.
Insurance Company waived its right to rescind the 2007 Policy as void ab initio because it elected to cancel rather than rescind the policy in September 2007. The cancellation of an insurance policy should be distinguished from the concept of rescission by the insurer. A rescission avoids the contract ab initio, while cancellation merely terminates the policy prospectively, as of the time the cancellation became effective.
Under New York law, where an insurer has knowledge of a misrepresentation that constitutes a basis for rescission of the policy but elects instead to cancel that policy, the insurer has waived its right to thereafter rescind the policy, at least to the extent rescission would be based on the same misrepresentation. Conversely, where an insurer cancels a policy and has not learned of facts that give it the right to rescind the policy, the insurer has not waived its right to rescind the policy. There are situations that these two principles do not address, but these principles are sufficient to address the circumstances presented in the instant case.
Here, Contractor submitted a Contractor Supplement form with the Commercial Insurance Application in April 2005. This form indicated that Contractor did not do roofing jobs. Worker's accident in July 2007 involved her falling off the roof of a home on which Contractor was performing a roofing job. Insurance Company was in possession of evidence reflecting the alleged material misrepresentation and was at least part of the basis for the decision to cancel the policy. There is no genuine issue as to the fact that Insurance Company was aware of the alleged material misrepresentation at the time it made the decision to cancel the policy.
Insurance Company waived its right to rescind because it chose to cancel the policy with full knowledge of the alleged material misrepresentation that would have allowed it to rescind the policy as void ab initio.