New Jersey Court Allows Rescission of Policy and Awards Damages to Insurer

by Traub Lieberman Straus & Shrewsberry LLP

In its recent decision in Colony Ins. Co. v. Kwasnik, Kanowitz & Assocs., P.C., 2014 U.S. Dist. LEXIS 87659 (D.N.J. June 27, 2014), the United States District Court for the District of New Jersey had occasion to consider the grounds upon which an insurer is entitled to rescission of an insurance policy.

Colony insured the law firm of Kwasnik, Kanowitz & Associates (“KKA”) under a legal professional liability policy. In applying for the policy, KKA was required to answer the following questions in the policy application:

13(a): “[I]n the last seven (7) years, has any professional liability claim or suit ever been made against the Firm or any predecessor firm or any current or former member of the Firm or predecessor firm?”

13(b): “[D]o you know of any circumstances, acts, errors or omissions that could result in a Professional Liability claim?”

13(c): “[H]as an attorney for who [sic] coverage is sought ever been refused admission to practice . . . by any court, administrative agency or regulatory body or been [the] subject of a disciplinary complaint made to any of the aforementioned entities?

The KKA principal completing the application answered each of the questions in the negative. In reality, however, four professional liability claims had been made against the firm during the relevant period, including and the firm was aware of another set of circumstances likely to give rise to a claim. Additionally, the principal of the firm who completed the application had been the subject of a disciplinary proceeding before the Supreme Court of New Jersey’s Ethics Committee less than two years prior to signing the application. Upon learning of these various misrepresentations in the application, Colony moved to have the policy rescinded on the theory of equitable fraud.

On Colony’s motion for summary judgment, the court noted the applicable standard for rescission under a theory of equitable fraud is that the insured: (1) makes a false statement that is (2) material to the particular risk assumed by the insurer, and (3) the insurer actually and reasonably relies on the statement in issuing the policy. A misrepresentation is material for the purposes of this analysis if, at the time it was made, “a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.”

The court found clear and convincing evidence that the insured made false statements in answering the three questions in the application, leaving it to consider the the materiality and reliance elements required for rescission. With respect to the materiality, the court agreed that as a matter of “common sense,” the questions on the application went to the heart of claims to be insured under the policy, and thus were necessarily material to the risk assumed by Colony. Moreover, the court found compelling the affidavit of the policy underwriter who testified as to the essential nature of the questions and the certainty that the application would have been rejected had the insured answered truthfully.   The latter piece of testimony, reasoned the court, demonstrated Colony’s reliance on the false statements, thus satisfying the last element necessary for rescission.

In addition to ruling that Colony was entitled to summary judgment in its favor, the court also held that the insurer was entitled to damages in the form of investigation costs and legal fees under New Jersey’s Insurance Fraud Protection Act, applicable where one “knowingly make a false or misleading statement concerning any fact that is ‘material to an insurance application or contract.’” The court found the requisite elements for such a claim based on the insured’s demonstrably fraudulent conduct in answering the application:

The uncontested facts, discussed supra, show that [the principal who completed the application] made several false statements on KKA’s application regarding past and possible future claims for malpractice and ethical violations. Given the evidence of [his] personal participation in many of the relevant events, a reasonable jury could only conclude that he made the false statements knowingly. Finally, those statements were unquestionably material to the application given their importance to the underwriter’s decision to offer KKA a policy.


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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