Court Holds That Policy’s Misrepresentation Clause Set Higher Standard for Rescission

A Florida federal district court has ruled that the standard for rescission set forth by state statute had been displaced by a misrepresentation clause in a professional liability policy, which imposed a heightened standard for rescission.  Travelers Cas. & Sur. Co. of Am. v. Mader Law Grp., LLC, No. 8:13-cv-2577-T-26TGW (M.D. Fla. Oct. 20, 2014).

An insurer filed suit against a law firm and individual attorney to rescind a professional liability policy based on purportedly material misstatements in the firm’s application for coverage.  The insured opposed the claim for rescission, arguing that the circumstances did not support the heightened standard for rescission required by the policy’s misrepresentation clause.  Under this clause, the policy could “be considered void if, after the Inception Date…, any Principal Insured … intentionally concealed or misrepresented any material fact or circumstance….”  The insurer argued that the misrepresentation clause did not apply to representations in the application for coverage or to any actions before the inception date of the policy, and therefore rescission was available to it regardless of whether the insured’s responses were made “intentionally” as provided for in the misrepresentation clause.

On cross motions for summary judgment, the court ruled that the parties had contracted out of the statutory standard for rescission by their inclusion of the misrepresentation clause in the policy.  In so ruling, the court relied on prior case law, and it rejected the insurer’s attempt to distinguish the provision in its policy based on the phrase “after the Inception Date of the Policy Period….”  The court opined that, reading the policy as a whole and resolving any ambiguities in favor of coverage, the added language could be read simply as emphasizing that a policy must exist before it can be void.  The court also noted that the policy contained a merger clause but that it never incorporated the application, the application’s standard, or the statutory standard.  Thus, the court reasoned that the parties had contracted out of the statutory standard, which would have permitted the insurer to rescind the policy even if the insured’s inaccurate statements were not made “intentionally.”