Insurer Entitled to Rescission Based on Insured’s Failure to Disclose Known Lawsuits
The United States District Court for the Western District of Missouri, applying Missouri law, has held that, as a matter of law, an insurer is entitled to rescind insurance policies where the insureds failed to disclose two known lawsuits in response to questions in the applications for those policies and warranted that their responses to the questions were correct. North American Capacity Ins. Co. v. KM TEH Realty 5, LLC, 2023 WL 26011220 (Mar. 22, 2023).
A class action lawsuit was filed against the former owner of an apartment building, alleging that the apartments were uninhabitable. The plaintiffs prevailed and filed a second lawsuit to collect the judgment from the former owner and related entities. After it was served with the complaint in the initial class action, the property owner signed an application for an insurance policy, which required the disclosure of known claims or losses that may give rise to claims. The property owner did not disclose the lawsuit but nonetheless warranted that its responses to the application questions were true and correct. The property owner also filed three renewal applications after the judgment collection action was filed and similarly failed to disclose the existence of that lawsuit.
The property owner’s insurer sought a declaratory judgment that it was entitled to rescind all four insurance policies issued after the first class action was filed. The court granted summary judgment in favor of the insurer, holding that the property owner and its related entities waived any substantive arguments by failing to respond to the insurer’s motion for summary judgment. Regardless, the court held that the insurer was entitled to rescind the policies as a matter of law because the insured was aware of the underlying actions when it submitted the applications, which expressly required disclosure of such litigation, but nonetheless failed to disclose the lawsuits and warranted that its responses to the application questions were true and correct. As such, the property owner’s representations in the application regarding known claims were false and material as a matter of law, and the insurer issued the policies in reliance on those false representations.