An insurance company that provided professional liability insurance to a certified public accountant was entitled to rescission of the insurance contract based upon the insured’s intentional misrepresentations and/or falsehoods on his application for insurance coverage, according to a U.S. District Court Judge in Ohio. Chicago Insurance Company v. Capwill, 2011 U.S. Dist. LEXIS 147086 (N.D. Ohio Dec. 21, 2011)
James A. Capwill (“Capwill”), a Certified Public Accountant, ran his own accounting firm, as well as two other companies, CWN Group and Viatical Escrow Services (“VES”). VES serviced viatical insurance policies that were held for investors by Liberte and Alpha (“L&A”). In 1997 Capwill applied for professional liability insurance with Chicago Insurance Company (“CIC”). CIC issued three annual professional liability policies covering Capwill, CWN and VES. The original and renewal applications completed by Capwill included questions that were intended to enable CIC to assess the risk, decide whether to provide coverage and appropriately price premiums. The questions related to: (1) Capwill’s investment activities; (2) professional disciplinary actions; (3) lawsuits and claims; (4) potential claims; and (5) number of professionals performing accountancy for a covered entity.
Some time prior to 1998, Capwill and the principal of L&A jointly defrauded L&A’s investors of millions of dollars by issuing fraudulent life insurance policies. Capwill had exclusive control over the funds that were to be used to pay the policy premiums. He used these funds to make investments, and in 1998, as the policies lapsed for nonpayment of premiums, L&A sued Capwill. L&A went into receivership, and the receiver sought to recover on the 1999 CIC policy for losses during that policy period.
Capwill sought coverage for the receiver’s claim under the malpractice policy issued by CIC. CIC denied the claim and argued that Capwill gave false answers on his insurance application(s) in order to defraud CIC into providing coverage, which it otherwise would not have covered or would have priced differently. Accordingly, CIC sought rescission of the policies. The receiver argued that CIC was not entitled to rescission, and that the defenses of laches and estoppel/acquiescence/waiver barred the insurer’s action.
In considering the party’s arguments and the evidence presented, the court concluded that Capwill provided false answers on his insurance application with respect to three categories: (1) investment activities (he had made investments with stolen monies as the owner of VES); (2) disciplinary actions taken against him (his CPA license was suspended for nonpayment of a triennial premium); and (3) past claims (at the time of his initial application there were at least 10 lawsuits pending against him). The court concluded that Capwill’s false responses entitled CIC to rescission.
The court reasoned that when issuing an insurance policy, the insurer must assess the risk of loss under the policy. Miscalculation of the risk can lead to: (1) pricing the policy too high and losing the sale; or (2) pricing the policy too low and potentially enhancing the risk of excessive and possibly unsustainable payments on the policy. Proper assessment of the risk depends on the accuracy of answers provided on the policy application. The insured’s knowing failure to provide accurate answers renders the policy voidable at the insurer’s option.
The court stated that the elements which an insurer must establish to succeed on a claim for rescission are: (1) that there were actual and implied representations of material matters of fact; (2) that such representations were false; (3) that such representations were made by the insured with knowledge of their falsity; (4) that they were made with intent to mislead; and (5) that the insurer relied on such representations. Simple inaccuracy – which could reflect nothing more than oversight or unawareness – is not enough. The falsity must relate to a material fact. A fact is “material” where it would either induce the insurer to decline insurance altogether, or not to accept it unless at a higher premium. The perspective of the insurer, not the insured, determines the materiality of an answer to a question on the application. The court pointed out that the head of underwriting for CIC testified that, had Capwill provided truthful answers on the application, CIC would not have issued the policies. The receiver failed to refute this testimony. Therefore, the court concluded that the false information provided by Capwill related to a material fact which the insurer relied upon in issuing the policies.
The court then stated that even where the insurer shows falsity as to a material fact, it must also show the insured intended to mislead the insurer into issuing a policy that it otherwise would not have issued had it known the true facts. A trier of facts discerns such intent from the totality of the circumstances. The court concluded that CIC had shown by clear and convincing evidence Capwill lied in his answers to questions on the application; those questions were material by their very nature and the circumstances; and Capwill intended to mislead the company into issuing a policy that it otherwise would not have issued but for the false answers. The court held that a rational fact finder could only conclude Capwill acted with the intent to defraud.
In response to CIC’s claim of rescission, the receiver argued that the claim was precluded on the basis of equitable estoppel, acquiescence and waiver, as well as laches. The court rejected these defenses, held that CIC was entitled to rescission of the policy, and found that there was no coverage for the receiver’s claim under the CIC policy.
Tressler Comments: The Capwill decision illustrates that while an intentional falsehood regarding a material fact on an insurance application may operate to void the policy, a simple inaccuracy is not sufficient under Ohio law. Other jurisdictions, like Illinois, allow rescission even in the case of inadvertent material falsehoods. It is therefore critical to have analyzed and understand which state’s law applies in deciding whether to rescind based on inadvertent misstatements or omissions in the policy application.