Applying Iowa law, the United States Court of Appeals for the Eighth Circuit has held that an insurer can rescind an E&O policy because the insured failed to disclose the existence of a claim made after the submission of the application but before the insured agreed to purchase coverage. Capson Physicians Ins. Co. v. MMIC Ins. Inc., 2016 WL 3902654 (8th Cir. July 19, 2016). The court also held that the insurer’s failure to attach a copy of the application to the policy did not prevent the insurer from rescinding the policy.
A physician accepted a position at an Iowa hospital in 2012, and the insured hospital agreed to purchase insurance coverage for the physician. On October 29, 2012, the physician submitted an application stating that he was not aware of any potential claims or circumstances that might reasonably lead to a claim or lawsuit being brought against him. At that time, the hospital was unsure whether it wanted to purchase prior acts coverage for the physician, so it asked the insurer to bind coverage for the physician with no prior acts coverage, which the insurer did.
In November 2012, the physician was served with a complaint alleging medical negligence for the delivery of a stillborn child in 2011. The physician submitted the complaint to the hospital’s CEO. After receipt of the complaint, the CEO requested that the insurer extend prior acts coverage to the physician dating back to 2007 but failed to disclose the lawsuit. The insurer endorsed the policy to provide prior acts coverage for the physician. The hospital’s CEO sent the endorsement to the physician and suggested that they “meet to talk about the case current[ly] in process and how to go about reporting it.” After the insureds tendered that lawsuit and an additional claim for acts performed by the physician in 2010, the insurer denied coverage and sought to rescind the policy based on material misrepresentations. The district court held that the insurer was entitled to equitable rescission of the policy.
The appellate court affirmed that the insurer was entitled to equitable rescission of the policy based on material misrepresentations. The court held that, under Iowa law, an insured has an ongoing obligation to disclose material information after submission of an application but before coverage is bound even if “the application did not instruct the applicant to update material information.” It held that the failure to supplement the physician’s application upon learning of the lawsuit was a false assertion rendering part of the application untrue, the information about the lawsuit was material, and the insurer would not have provided prior acts coverage if it was aware of the new lawsuit.
In addition, the court held that the insurer could rescind the policy even though it did not comply with an Iowa statute requiring an insurer to attach the application to the policy in order to rescind the policy based on misrepresentations in the application. The court held that the statute was inapplicable because the non-disclosure of facts occurred after the submission of the application.