The process of obtaining FPL coverage generally starts with the completion of an “Application for Claims Made Fiduciary Professional Liability Insurance,” which is usually provided to the applicant fiduciary by his or her FPL insurance broker. The broker, in turn, forwards the application to the insurer who makes a determination of whether the proposed Insured is an economically sound “risk.”
Most fiduciaries are unaware of the significance insurers place on the fiduciary’s responses to the questions on the application. However, an Insured has a duty to exercise good faith and to answer questions posed by the insurer honestly. See for example New York’s Insurance Law §3105. Generally included as a condition under the issued policy is the Insured’s acknowledgement/representation that the statements in the application are personal representations which are being relied upon by the insurer and shall be deemed “material.” With this assumption in mind, professional liability underwriters use the application to predict the potential risk associated with insuring the fiduciary. Two of many factors taken into consideration include: (1) the fiduciary’s history of prior claims; and (2) potential claims. (Usually, this information is specifically requested on the Application.(1)) Once a determination is made by the insurer to insure the fiduciary, the fiduciary generally signs the policy, pays the required premium and is considered insured for the term of the policy, generally one year.
In the event of a “material” misrepresentation on the Application, an insurer is generally entitled to rescind the policy (cancel as if it never existed). See Schirmer v. Penkert, 41 A.D.3d 688, 690, 840 N.Y.S.2d 796 (2d Dept. 2007). The misrepresentation must be “material” and renders the policy void from its inception. See N.Y. Ins. Law § 3105.
Insurance Law defines “misrepresentation” as a false “statement as to past or present fact, made to the insurer by or by the authority of, the applicant for insurance or the prospective Insured, at or before the making of the insurance contract as an inducement to the making thereof.”(2) A misrepresentation may be a false affirmative statement or a failure to disclose where a duty to disclose otherwise exists. See Philadelphia Indemnity Ins. Co., 2005 WL 1660961.
Where there is evidence concerning materiality that is “clear and substantially uncontradicted,” the matter is one of law within the meaning of Insurance Law §3015(b), and thus, may be determined by the Court.(3) If the insurer can establish that the policy was issued when it might otherwise not have been, it will be entitled to rescind the policy. See Schirmer v. Penkert, supra.(4) Courts have held that even an innocent misrepresentation, if material, will support rescission.(5) The insurer must submit evidence of its underwriting practices with respect to similar applicants.(6)
(1) The Application generally requires that the fiduciary affirmatively list knowledge of any circumstance, act, error or omission that would result in a professional liability claim. The fiduciary is also required to declare after diligent inquiry that the statements contained in the application are true and do not reflect any misrepresentations. The fiduciary must also acknowledge that the insurer has relied upon the facts contained in the Application to reach its determination.