Rescission Proper Due to Failure to Disclose Known Losses in Application

Applying Connecticut law, a federal district court has held that an insurer properly rescinded multiple crime policies issued to an insured based on the insured’s failure to disclose known losses in its applications for coverage. Known Litigation Holdings, LLC v. Navigators Ins. Co., 2016 WL 3566653 (D. Conn June 24, 2016).

Beginning in 2007, the insurer issued successive, one-year armored car operator’s insurance policies to an ATM company. For each of those policies, the ATM company completed an application, signed by its CEO, that included the question:

In the last 6 years, have you or your predecessor company suffered a loss or losses, whether covered by insurance or not, and if insured, whether a claim was paid or not?

The insured responded each time: “No.” The CEO, however, knew as of 2005 that the insured had in fact sustained significant losses due to its employees stealing money from one of its bank customers. When the bank ultimately discovered the theft in 2010, and demanded immediate reimbursement, the insured sought coverage from its insurer. The insurer, in turn, disclaimed coverage based on certain exclusions in the policies and issued notices of rescission based on the insured’s material misrepresentations in its applications for the policies.

In the coverage litigation that followed, which was pursued by the bank as the assignee of the ATM company, the bank disputed that the insured had made any misrepresentations by its negative responses to the known loss question on the application. In this regard, the bank contended that the insured had not suffered any loss prior to 2010, because until the bank had made its demand for reimbursement, coverage was not triggered by the employee’s theft of its money. The court rejected this argument, pointing out that the application question unambiguously called for the disclosure any losses, “whether covered by insurance or not.”

The court also rejected the bank’s reliance on the doctrine of promissory estoppel to negate the applicability of an exclusion in the policies that the insurer had raised as an alternative ground for a declination of coverage. That exclusion barred coverage for losses directly resulting from acts or omissions of an officer or director of the insured. According to the court, although the insurer had represented to the bank that the policies covered a theft of the bank’s money by an employee of the ATM company, that statement had to be considered in conjunction with the express terms of the policies, and the bank could not use estoppel to expand insurance coverage beyond those terms.