Alert

Rescission Applicable to Coverage for “Innocent Insured”

February 11, 2013

A New York court has denied a policyholder’s motion to dismiss a rescission suit, holding that the “innocent insureds” provision in the policy did not preserve coverage for an insured person uninvolved with material misrepresentations in the policy application. Continental Casualty Company v. Marshall Granger & Company, LLP, No. 11-cv-3979, 2013 WL 372162 (S.D.N.Y. Jan. 31, 2013).  Wiley Rein LLP represented the carrier in this matter.

The policyholder accounting firm purchased a professional liability policy but did not disclose on the application any knowledge of circumstances that might give rise to a claim.  Shortly after the policy issued, the SEC filed an emergency enforcement action against the principle officers of the accounting firm, alleging that they had sold over $2 million worth of fictitious stock and promissory notes, some to clients of the accounting firm.  The policyholder later sought coverage for claims by clients who had lost money in connection with the investments.  The carrier denied coverage and filed suit seeking rescission of the policy.

An individual insured who had not signed the application moved to dismiss the rescission suit as to himself on the basis of an “innocent insureds” provision in the policy.  The “innocent insureds” provision stated that “if coverage under this Policy would be excluded as a result of any criminal, dishonest, illegal, fraudulent or malicious acts of any of you, we agree that the insurance coverage that would otherwise be afforded under this Policy will continue to apply to any of you who did not personally commit, have knowledge of, or participate in such criminal, dishonest, illegal, fraudulent or malicious acts or in the concealment thereof from us.”

In denying the motion, the court distinguished cases relied upon by the insured by noting that those cases interpreted policies that specifically provided that misstatements in the policy application would not be attributed to other insured persons.  The policy at issue did not contain such severability language, the court noted, and the sophisticated policyholder could have bargained for the inclusion of a severability clause.  The court further observed that the “innocent insureds” language “mirrors that of the Policy’s ‘bad acts’ exclusion,” and “kicks in only where coverage would otherwise be disclaimed under the bad acts exclusion.”  The court also rejected the policyholder’s argument that the innocent insureds provision’s reference to concealment “from us” referred to concealment on the policy application, noting that the policy required written notice in connection with claims and potential claims and cooperation with the carrier, situations in which an insured person’s concealment of information could jeopardize coverage.

The court observed that its reasoning was in harmony with courts in other jurisdictions that considered similar arguments, citing, among others, Fourth and Eleventh Circuit cases in which Wiley Rein represented carriers in similar rescission actions.

The opinion is available here.

Read Time: 2 min
Jump to top of page

Wiley Rein LLP Cookie Preference Center

Your Privacy

When you visit our website, we use cookies on your browser to collect information. The information collected might relate to you, your preferences, or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. For more information about how we use Cookies, please see our Privacy Policy.

Strictly Necessary Cookies

Always Active

Necessary cookies enable core functionality such as security, network management, and accessibility. These cookies may only be disabled by changing your browser settings, but this may affect how the website functions.

Functional Cookies

Always Active

Some functions of the site require remembering user choices, for example your cookie preference, or keyword search highlighting. These do not store any personal information.

Form Submissions

Always Active

When submitting your data, for example on a contact form or event registration, a cookie might be used to monitor the state of your submission across pages.

Performance Cookies

Performance cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.

Powered by Firmseek