The Office of General Counsel issued the following opinion on August 18, 2004, representing the position of the New York State Insurance Department.
Re: Material Misrepresentation, Cancellation and Recission N.Y. Ins. Law §§ 3425 and 3426 (McKinney Supp. 2004)
When an insurer cancels a policy of homeowners insurance within the first 60 days it is in effect, and a property loss occurs after the cancellation notice is issued but prior to the effective date of the cancellation, may the insurer subsequently deny payment on the insured's claim based upon material misrepresentation in the inception of the policy, when the insurer was aware of such facts at the time it chose to prospectively cancel coverage?
The insurer would have had the right to either cancel or rescind the policy based upon the material misrepresentation made by the insured in obtaining the policy. There is no provision of the Insurance Law which governs whether the insurer, having elected to cancel the coverage prospectively pursuant to N.Y. Ins. Law § 3425 (McKinney 2000), may subsequently decide instead to rescind coverage pursuant to N.Y. Ins. Law § 3105 (McKinney 2000), thereby declining coverage on a loss occurring during the period coverage remained in effect under the prospective cancellation. A court of competent jurisdiction, not the Department, would be the proper body to rule on this.
The company issued a homeowners policy, but it is not clear from the inquiry whether the insured made material misrepresentations regarding prior loss claims on the subject property at the time that the policy was issued. Through a prior loss service the company found out that the insured had made multiple prior claims for a particular location. Based upon this information, the company issued a cancellation notice in accordance with N.Y. Ins. Law 3425(b). Two days prior to the effective date of the cancellation, the premises burned and the company suspects this was arson fire. The company is now asking whether it can void the policy back to the inception date.
N.Y. Ins. Law § 3425 (McKinney Supp. 2004) establishes requirements concerning the cancellation of certain property/casualty insurance policies, including personal lines property insurance policies. Section 3425 (b) states as follows:
During the first sixty days a covered policy is in effect, no notice of cancellation shall be issued or be effective unless it states or is accompanied by a statement of the specific reason or reasons for such cancellation.
N.Y. Ins. Law § 3426 (McKinney Supp. 2004) establishes standards for cancellation and non-renewal of certain commercial lines insurance policies. Section 3426(b) provides:
During the first sixty days a covered policy is initially in effect, except for the bases for cancellation set forth in paragraph one, two or three of subsection (c) of this section, no cancellation shall become effective until fifteen days after written notice is mailed or delivered to the first-named insured and to such insureds authorized agent or broker, and such cancellation is based on one or more of the following: . . . .
Lawful rescission is governed by N.Y. Ins. Law § 3105 (McKinney 2000), which, in relevant part, provides:
(a) A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.
(b) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.
(c) In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible.
A cancellation under Section 3425 or Section 3426 would terminate the contract on a specific date prospectively, whereas a rescission under Section 3105 would nullify the contract as if it had never existed. These are distinct and separate remedies that the insurer may elect. No minimum notice for rescission is mandated.
Neither Section 3425 nor Section 3426 expressly precludes the use of rescission by an insurer. Although courts have stated that, with respect to mandatory policies of automobile liability coverage, the requirements of N.Y. Veh. & Traf. Law § 313 (McKinney 2003) supplant the insurers common law right to cancel a contract of insurance retroactively, the same public policy considerations may not apply in the instant matter, which involves homeowners coverage not required by statute. Furthermore, the claim here is for a first party property coverage, and there is no liability to a third party.1
Assuming that the insurer could have rescinded the policy because of the material misrepresentation, the question of whether the prior cancellation notice, which set a prospective date for cancellation of coverage, would now preclude such action is a matter that is not governed by the Insurance Law and is best adjudicated by a court of competent jurisdiction. The court will make a determination concerning any disputed issues of fact and law and weigh the competing equities. It is not within the Department's jurisdiction to make such findings or to enforce any determinations made.
For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.
1 Matter of Insurance Company of North America v, Kaplun, 274 A.D.2d 293, 713 N.Y.S.2d 214 (2d Dept. 2000).