Filling out an application for a commercial insurance policy is a drag, and the temptation is to rush through the process. After all, you have more important things to do, right? But the Appellate Decision recently reinforced the serious consequences of material misrepresentations or omissions in insurance applications. The case, Schibell Mennie & Kentos, LLC v. Allied World Insurance Company, highlights critical issues for law firms and businesses alike when applying for professional liability insurance.

Background
A law firm and its attorneys sought to enforce coverage under their malpractice policy for claims related to alleged misappropriation of funds. Unfortunately, their initial policy application and renewals omitted a key piece of information: There were ongoing disciplinary proceedings against a partner at the firm. Yet the firm answered “No” to questions asking about whether there were any bar complaints, investigations, or disciplinary actions within the past five years. When the insurance company found out, it disclaimed coverage and rescinded the policy.

Court’s Analysis
The Court upheld the insurance company’s rescission of the policy, finding that the firm had omitted material information from the policy application. As a policyholder-side lawyer, what’s a little disturbing to me is how the Court got there. Under New Jersey law, the insurance company is supposed to prove that the omitted information materially affected its acceptance of the risk. When I’ve had rescission cases brought against my clients, my first line of defense has usually been to show that the insurance company would’ve sold the policy irrespective of whether it knew about the omitted information. (Here, that admittedly might have been difficult, since the Court’s decision indicates that trust funds were improperly handled, which is never a good thing.) But the Court basically said that if information was requested in the policy application, then it was obviously material to the acceptance of the risk.

That’s not necessarily so. If an insurance company asks for information and then disregards the response, for example, how can the omitted information be deemed “material”? This is why, if you get involved in coverage litigation on a rescission case, you should always ask for the insurance company’s underwriting file in discovery and examine it carefully. The file might contain evidence that the insurance company was more interested in collecting premiums than reviewing information provided by the policyholder, which may help prove that the omitted information was not, in fact, material to the acceptance of the risk.

Takeaway

Patience is a virtue. I know that filling out policy applications is no fun, but take your time and ensure that your application is complete and accurate. Otherwise you could be in for heartache…or legal fees that you could have avoided.