Insurer’s Motion to Dismiss Denied Where Complaint Plausibly Alleged Rescission of Policies Was Untimely Under Wisconsin Statute  

The United States Bankruptcy Court for the Eastern District of Wisconsin, applying Wisconsin law, denied an insurer’s motion to dismiss on the grounds that the insured dentist’s complaint plausibly alleged that the insurer’s rescission of the dentist’s professional liability policies was untimely because the insurer had knowledge of sufficient facts to constitute grounds to rescind the policies more than 60 days before it did so. In re Charmoli, 2023 WL 3185264 (Bankr. E.D. Wis. Apr. 28, 2023).

In December 2020, a dentist was indicted for health care fraud and false statements related to procedures performed in 2016 and afterward. Beginning in 2021, former patients brought numerous civil cases against the dentist, alleging harm due to unnecessary dental work. On March 10, 2022, the jury in the criminal proceeding found the dentist guilty on several counts, and judgment against him was entered on July 18, 2022. 

On August 26, 2022, the dentist’s professional liability insurer notified him that it was rescinding three policies issued from March 2018 to March 2021 pursuant to Wis. Stat. § 631.11. Specifically, the insurer advised that the dentist’s statements in his application that he was not aware of “[a]ny [unreported] situation that could lead to a malpractice claim against [him]” was shown to be false in light of his criminal conviction, specifically the jury’s finding that the dentist knowingly and willfully performed an unnecessary procedure on November 14, 2017.

In a bankruptcy proceeding, the dentist brought an adversary proceeding against the insurer, seeking a declaration that the insurer’s rescission of the policies was invalid because the Wisconsin statute requires an insurer to provide notice of its intent to rescind a policy within 60 days after it “acquires knowledge of sufficient facts to constitute grounds for rescission of the policy.” The dentist argued that the insurer had knowledge of sufficient facts more than 60 days before August 26, 2022, including because the insurer was a party to the civil actions against him beginning in May 2021. The insurer moved to dismiss the adversary proceeding, contending that, before the dentist was convicted and a final, non-appealable judgment was entered against him, it only had knowledge of allegations that, if shown to be true, would constitute grounds for rescission. 

The Court denied the insurer’s motion to dismiss, holding that the statute’s 60-day clock begins running as soon as the insurer has knowledge of allegations, which, if proven, may constitute grounds for rescission. The court held that the complaint adequately alleged the insurer had such knowledge more than 60 days before it rescinded the policies.