(Article from Insurance Law Alert, April 2019)
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The Second Circuit ruled that an insurer can pursue a rescission claim based on a policyholder’s misrepresentations in the policy application, notwithstanding that the insurer’s declaratory judgment claim as to coverage was dismissed as non-justiciable. U.S. Underwriters Ins. Co. v. Orion Plumbing & Heating Corp., 2019 WL 1253325 (2d Cir. Mar. 18, 2019).
Underwriters cancelled a policy issued to Orion based on the non-payment of premiums. Prior to cancellation, a property owner named as a defendant in a personal injury suit filed a third party complaint against Orion, a construction company. The claims against the property owner were dismissed.
Underwriters sued Orion seeking a declaration of no coverage for the underlying claims and rescission ab initio of the policy based on misrepresentations in the application relating to the nature of Orion’s construction work. A New York district court ruled that Underwriters failed to present a case or controversy, finding that “an attenuated chain of contingencies” would have to occur before Orion could seek coverage from Underwriters. Underwriters did not appeal the dismissal of the declaratory judgment claim, but objected to dismissal of the rescission claim.
The Second Circuit reversed, finding that Underwriters alleged a justiciable claim for rescission, even absent a pending coverage claim. The Second Circuit reasoned that Underwriters alleged a “reasonable likelihood that it will face liability to Orion, based, at minimum, on its duty to defend Orion” against any claims by the property owner or other litigation arising out of the underlying injury. Further, the court noted that Underwriters alleged that Orion misrepresented the nature of its work when it applied for coverage and that it would have charged a higher premium, issued a different policy, or declined to issue coverage altogether had it known the true nature of Orion’s construction work. The court concluded that these collective allegations were sufficient to establish a case or controversy as to rescission.