Insurer Entitled to Rescission for Insured’s Misrepresentations on Renewal Application

The United States District Court for the Central District of California, applying California law, has held that an insurer was entitled to rescind a professional liability policy issued to a healthcare facility because the facility made material misrepresentations on its renewal application when it failed to disclose disciplinary proceedings against one of its doctors and prior lawsuits against the facility and its doctors. Nat’l Fire & Marine Ins. Co. v. California Minimally Invasive Surgical Ctr., Inc., 2022 WL 17218071 (C.D. Cal. Nov. 4, 2022).

A healthcare facility submitted an initial insurance application to a professional liability insurer for a policy period from September 28, 2018 to September 28, 2019.  Around September 2019, the facility submitted a renewal application in which it disclosed the existence of only one prior suit. Based on this information, the insurer renewed the policy for the 2019-2020 policy year. After the renewal, the insurer learned that three state disciplinary actions were filed in 2008, 2012, and 2015 against a doctor employed by the facility, and that another action was filed in January 2019. The insurer also learned that the doctor was a named defendant in thirty prior lawsuits that arose out of the rendering or failure to render professional services, and the facility and two other doctors were named defendants in some of those lawsuits. The insurer filed an action for rescission and declaratory judgment against the facility, the doctor, and the plaintiffs in an underlying litigation arising from a procedure the doctor performed in February 2020.

The court held that the insurer was entitled to rescission for material misrepresentations relating both to the disciplinary proceedings and the lawsuits. 

First, the court concluded that the facility made misrepresentations regarding the disciplinary proceedings. The renewal application asked, “Has the license of any physician . . . providing services at the center been restricted, revoked or suspended in the last five years?” The facility answered “no.” The court found that this was a misrepresentation because as a result of the 2015 disciplinary action, the medical board had placed a restriction on the doctor’s license requiring him to enroll in a recordkeeping course within six months.  The renewal application also asked, “Have any current or former employees or contractors . . . ever been the subject of disciplinary or investigation proceedings, or reprimand by a governmental license board[?]” The facility again answered “no.” The court concluded that the disciplinary actions were “reprimand[s] by a governmental license board,” noting that “these questions seem to have been aimed at discerning the existence of the exact proceedings and orders levied against [the doctor].” 

Second, the court concluded that the facility made misrepresentations regarding the lawsuits. The renewal application asked, “Has the applicant (independently or through a named insured) been involved now or in the past, directly or independently, in a claim, potential claim, or suit arising out of the rendering or failing to render professional services involving former or present partners, members of the corporation, or any former or present employee or independent contractor of the corporation, partnership, or organization?” It also asked applicants to “provide a recently valued claims exhibit for all claims arising during the last ten full years, but only for those claims which are not being handled directly by [the insurer].” The court determined that the renewal application thus requested the disclosure of all lawsuits involving the facility.

Third, the court concluded that the misrepresentations in both cases were material. The insurer’s procedures defined a “non-standard risk” to mean a facility having a high number of claims or suits, lacking accreditation, subject to license restrictions, or investigations by the governmental licensing board that may result in revocations or suspense as to the facility or the doctors. The court reasoned that if the insurer had known of the undisclosed disciplinary proceedings and lawsuits, the insurer would have determined that the facility presented a non-standard risk, and it would have rejected the renewal application.

Wiley Executive Summary

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