OGC Op. No. 06-12-11
The Office of General Counsel issued the following opinion on December 18, 2006, representing the position of the New York State Insurance Department.
Re: Material Misrepresentation: Voiding/Rescission of Motor Vehicle Policy
1. Does the Superintendent approve application forms for motor vehicle insurance?
2. May an insurer void a motor vehicle policy covering both liability and physical damage in a situation where the insured makes false, misleading statements or material misrepresentations?
1. While most property/casualty policy forms are subject to prior approval by the Superintendent pursuant to N.Y. Ins. Law § 2307 (McKinney 2006), the Insurance Law does not require that property/casualty application forms be filed with, or be subject to prior approval by the Department, except where the application is made part of the policy.
2. Pursuant to N.Y. Ins. Law § 3105 (McKinney 2006), an insurer may not void an insurance policy unless the misrepresentation in question is material. Section 3105 provides that a misrepresentation shall be deemed material only if knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract. However, if the policy provides liability insurance coverage in satisfaction of the financial responsibility requirements of the New York Vehicle and Traffic Law, the courts, relying on N.Y. Veh. & Traff. Law § 313, have held that an insurer may cancel or non-renew the policy prospectively, but may not void it retroactively. Where there is a policy with both liability and physical damage coverage, some New York courts have also prohibited an insurer from voiding the entire policy ab initio.
This inquiry involves voluntarily issued non-commercial motor vehicle insurance policies. The inquirer states that several members of his organization have asked about the permissibility of an insurance company requiring applicants for insurance to initial and sign what the inquirer terms as an "automobile applicant disclosure statement" certifying that:
- Answers to all questions on the application are true and correct
- All persons age 15 years or older who live with the applicant and all other persons who have regular access to the vehicles have been reported to the company
- The principal garaging location given for the vehicles is correct
- The applicant has reported any business or commercial use of the vehicles
- The applicant understands that s/he has a "continuing duty" to notify the company of any changes in: (1) the applicants address or garaging location of any vehicles; (2) members of the household age 15 or older; (3) regular operators of any of the insured vehicles; or (4) business or commercial use of any of the vehicles.
The inquirer states that at the end, in large, bold and capitalized letters, the form says:
"I understand the company may declare this policy null and void if said answers on the application and/or this disclosure statement are false, misleading, or materially affect the risk which the company assumes by issuing the policy. I understand the company may declare this policy null and void if I do not comply with my continuing duty of advising the company of any change as noted above which materially affect the risk the company assumes by issuing this policy."
The inquirer asked whether the Department approved the application form in question. In general,insurers are required to file and obtain approval of their property/casualty policy forms prior to delivery or issuance in New York. Specifically, N.Y. Ins. Law § 2307(b) (McKinney 2006) provides in pertinent part, as follows:
(b) Except as otherwise provided herein, no policy form shall be delivered or issued for delivery unless it has been filed with the superintendent and either he has approved it, or thirty days have elapsed and he has not disapproved it as misleading or violative of public policy.
There is no requirement in the Insurance Law that a property/casualty application form be filed with the Department unless the application is made part of the policy. However, insurers must ensure that their application forms are in compliance with the Insurance Law and the regulations thereunder. As such, an application form may not contain questions or statements that violate the Insurance Law or the rights of insureds, or that are misleading or incorrect.
The inquirer specifically inquire about the voiding of a policy that includes both liability and physical damage coverage upon discovery by the insurer of a response that is false or misleading, or that materially affects the risk that the company assumes when issuing the policy. Voiding of a policy is governed by N.Y. Ins. Law § 3105 (McKinney 2006), 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.
As seen above, Section 3105 provides that an insurer may not void a motor vehicle policy unless the misrepresentation in question is 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. If the insurer would have issued the policy but at a higher premium rate, for example, the insurer may not void the policy retroactively.
N.Y. Ins. Law § 3425 (McKinney Supp. 2004) also establishes requirements concerning the cancellation of certain property/casualty insurance policies, including non-commercial automobile insurance policies.1 Specifically, Section 3425 (c)(2)(1)(C) and (2)(C) states as follows:
(c) After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective unless required pursuant to a program approved by the superintendent as necessary because a continuation of the present premium volume would be hazardous to the interests of policyholders of the insurer, its creditors or the public, or unless it is based on one or more of the following:
With respect to automobile insurance policies:
(C) discovery of fraud or material misrepresentation in obtaining the policy or in the presentation of the claim thereunder.
A cancellation under Section 3425 would terminate the contract on a specific date prospectively, whereas a rescission under Section 3105 would void the contract ab initio as if it had never existed. Section 3425 does not expressly preclude the rescission of policies and we are unaware of any cases that say otherwise. These are distinct and separate remedies that an insurer may elect depending on the circumstances. No minimum notice for rescission is mandated.
However, where a motor vehicle policy covers liability (third-party statutory coverage) insurance that satisfies the financial responsibility requirements of the New York Vehicle and Traffic Law, an insurer may not void the policy because of the overwhelming public policy need, evidenced in N.Y. Veh. & Traf. Law § 313,2 to protect the rights of innocent third party claimants. The courts have held that, with respect to mandatory policies of motor vehicle liability coverage, the requirements of N.Y. Veh. & Traf. Law § 313 (McKinney 2003) supersede the insurers common law right to void a contract of insurance retroactively. In the case of Teeter v. Allstate Ins. Co., 9 A.D.2d 176, 180, 192 N.Y.S.2d 610, 615 (4th Dept 1959), affd, 9 N.Y.2d 655, 212 N.Y.S.2d 71 (1961), for example, the court held that Section 313 provides for prospective cancellation only, and supplants the common law right of insurers to void the policy from its inception. Teeter found that cancellation of the policy ab initio is also prevented even where the policy was procured through material misrepresentation or fraud. See also Matter of Insurance Company of North America v. Kaplun, 274 A.D.2d 293, 713 N.Y.S.2d 214, (2d Dept 2000) (stating that the Vehicle and Traffic Law § 313 places the burden on the insurer to discover any fraud before issuing the policy, or as soon as possible thereafter, and protects innocent third parties who may be injured due to the insureds negligence); Olivio v. Government Employees Insurance Company of Washington D.C., 46 A.D.2d 437, 362 N.Y. 2d 873, 879-880, (2d Dept 1975).
According to the Matter of Insurance Company of North America v. Kaplun, 274 A.D.2d 293, 713 N.Y.S.2d 214, (2d Dept 2000), although an insurer is precluded from voiding a liability policy based on material misrepresentation, the insurer "is not without means of redress." The court opined that if an insurer paid benefits to a third party, it may choose to bring an action for damages against the insured. In addition, if the insured who has made the material misrepresentation seeks benefits pursuant to the policy, the insurer may assert an affirmative defense that the material misrepresentation precludes any recovery by the insured. Id. at 298. Further, the Kaplun court explained that where a third party is involved in the fraud, the insurers denial of benefits to that third party would not "subvert the statutory proscription against retroactive cancellation and would comport with elementary fairness" because a third party who participated in the fraud was not the "innocent third" party that Section 313 sought to protect. Id. at 299.
As is the case here, physical damage coverage is often included in a policy that provides liability coverage. Certificates of insurance are not required to be filed, pursuant to Section 313 of the Vehicle and Traffic Law, with the Commissioner of Motor Vehicles upon issuance of policies covering physical damage and the same public policy considerations do not apply for physical damage coverage as it does for liability coverage.
When the policy covers both liability and physical damage, the prohibition against retroactive rescission of a liability policy is similarly applied to the whole policy. The case of Mooney v. Nationwide Mutual Insurance Company, 172 A.D.2d 144, 148 (3d Dept 1991), involved an insured who sought to recover for property damage under the collision provision of a motor vehicle insurance policy. In response to the insurers argument that the insured should not recover for property damage, the court stated, in pertinent part, as follows:
"Moreover, we are concerned here with a single comprehensive insurance policy, not separate policies for liability and collision. There is no dispute that because the policy contained liability coverage a certificate of insurance had to and indeed was filed for that single comprehensive policy. The extensive litigation which would undoubtedly ensue if insurers were permitted to dissever the provisions of such a policy so as to allow for the termination of some provisions ab initio while leaving others in effect until proper notice is given, leads us to refrain from reaching any such conclusion absent a clear legislative directive to the contrary. Defendant could have properly elected to terminate future coverage based upon confirmation of plaintiffs lack of an insurable interest in the vehicle or because of the purportedly misleading representation of his and his brothers driving records; however, it cannot escape liability for claims arising during the precancellation period. National Superlease Inc., v. Reliance Ins. Co., 123 A.D.2d 608, 609 [2d Dept. 1986]."3
Therefore, an insurer may not void an entire motor vehicle policy retroactively for material misrepresentation if it includes statutory coverage for liability. The insurer may prospectively cancel the policy, pursuant to Section 3425 of the Insurance Law and Section 313 of the Vehicle and Traffic Law.
In addition, in relation to the insurers statement on the application threatening to declare the policy null and void if the insured does not comply with its duty to advise the company of any change in circumstances, please note that the failure of an insured, after a policy is in effect, to advise an insurer of changes does not void the policy or constitute ground for midterm cancellation.
This matter will be referred to our Consumer Services Bureau for further investigation into the statements on the application forms, which appear to be contrary to law and misleading.
For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.
1 See similar provision relating to commercial insurance in N.Y. Ins. Law §3426.
2 N.Y. Veh. & Traf. Law § 313(1)(a) provides, in pertinent part, that [n]o contract of insurance for which a certificate of insurance has been filed with the commissioner shall be terminated by cancellation by the insurer until at least twenty days after mailing to the named insured at the address shown on the policy a notice of termination by regular mail .
3 See also DiDonna v. State Farm Mut. Auto. Ins. Co., 259 A.D.2d 727, 687 N.Y.S.2d 175 (2d Dept. 1999).