Federal Court Declines to Exercise Jurisdiction Over Rescission Action

Wiley Rein LLP

The United States District Court for the Western District of Wisconsin has declined to decide whether an insurer properly rescinded an errors and omissions policy after learning of potential claims arising from events that were not disclosed on the policy application because the insurer did not face a threat of concrete harm.  Republic-Franklin Ins. Co. v. Donat Ins. Services, LLC, 2021 WL 3403801 (W.D. Wis. Aug. 4, 2021).  Although the court was not prepared to conclude that the insurer lacked standing on the basis of no actual case or controversy, it nevertheless dismissed the case as a matter of efficiency.

The insured, an insurance agent, was in the business of procuring insurance for haunted attractions.  In its application for its errors and omissions insurance policy, the insured failed to disclose a number of incidents arising from haunted events with ill-suited insurance coverage, such as a haunted barge that sank on Halloween and “Shocktoberfest,” a festival featuring a hayride that crashed into a barn.  After the inception of the policy period, the insured provided notice of the events to the insurer, who promptly returned all premiums, declared the policy void ab initio, and filed a lawsuit seeking a declaration that rescission of the policy was proper based on the alleged material omissions in the application.

The insured moved to dismiss the case for lack of standing because the insurer did not allege a true “case or controversy.”  According to the insured, the suit was premature because none of the incidents had matured into demands or allegations of wrongdoing or a claim for coverage under the policy, aside from the Shocktoberfest incident, for which the insured did not seek coverage.

The court noted that “tension is to be expected between insurance companies” and the standing doctrine given that “speculative, hypothetical harms are their bread and butter.”  Nevertheless, the court declined to conclude that no case or controversy existed where the insurer alleged that, but for the material omission, it would not have issued the policy.  The court exercised its discretion, though, to dismiss the case for “prudential reasons” – namely, because issuing a declaration under the circumstances would provide “no concrete benefit to either party” and so “is not an efficient way to proceed.”  The court invited the insurer to refile the case “should the underlying facts advance to a point where plaintiff is threatened with a more concrete harm.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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