Avoiding Common Pitfalls And Preserving Defenses In The Event Of Application Misrepresentation

Mary Alice Jasperse | Drew Eckl & Farnham

When faced with evidence that an insured misrepresented material facts on an application for insurance, the stakes are high: taking the position that a policy is void ab initio and provides no coverage for a loss usually results in litigation. Insurance carriers are wise to ensure that the case is strong before proceeding down the path of rescission. This article provides guidance on which ducks to align, attractive pitfalls to avoid when building a case for rescission, and recent decisions discussing these topics.

Under Georgia law, a statement made in an insurance application must be one of the following to prevent recovery under a policy:

(1) Fraudulent;

(2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or

(3) The insurer in good faith would either not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the premium rate as applied or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been known to the insurer as required either by the application for the policy or contract or otherwise.

O.C.G.A. § 33-24-7(b). A mere incorrect statement does not prevent recovery unless it falls within one of the above categories. Subparagraph (3) outlined above contains the broadest language and can encompass omissions as well as fraudulent statements. Indeed, a carrier need not prove that an omission was purposefully made under O.C.G.A. § 33-24-7(b)(3). See Perkins v. American Intern. Specialty Lines Ins. Co., 486 B.R. 212 (2012).


While the misrepresentation does not have to affect the loss itself, the misrepresentation must have a material affect on the risk. Globe Indem. Co. v. Hall, 94 Ga. App. 628, 95 S.E.2d 759 (1956). In order to prove that an insured’s omission or misrepresentation had a material effect on the risk, it is necessary (but not necessarily sufficient) for an insurance carrier to prove through testimony from an underwriter that a truthful statement would have influenced the carrier in determining whether or not to accept the risk, or in setting the amount of premium relating to the risk. McLeod v. United Presidential Life Ins. Co., 136 F.Supp.2d 1313 (N.D. Ga. 2000).

Wise insurers will consult all applicable underwriting guidelines and confirm that written policies support the testimony of any underwriters. In a recent decision regarding a life insurance policy decided by the Northern District of Georgia, the court denied the carrier’s motion for summary judgment and found that a jury question existed regarding the materiality of a purported omission of a medical diagnosis. Glushchak v. Transamerica Life Ins. Co., 2022 WL 1670777 (N.D. Ga. March 31, 2022). In that case, carrier’s underwriter testified that an unreported medical condition would be material to the issuance of coverage. However, the court focused on underwriting guidelines which stated that if the particular medical diagnosis was “treated, resolved or eradicated,” then life insurance coverage could be issued at the standard rate. Because the insured was taking antibiotics that could commonly be treated in two weeks, Judge Totenberg found that a reasonable jury could find that the insured’s medical condition was “treated” at the time he submitted his application. Since the medical condition could be found to be “treated”, the underwriting guidelines contradicted the employee’s testimony that the diagnosis would affect the charged rates. Id. at *18-19. It can sometimes be difficult to obtain all facts necessary to determine the extent of a misrepresentation or omission immediately after a loss. If this is the case, filing a declaratory judgment action would allow the carrier to perform discovery on unresolved questions prior to filing a motion for summary judgment. Certain policies also provide the opportunity for a carrier to take an examination under oath of the insured.

Auto Policies

When contemplating the rescission of a personal lines auto policy, careful consideration must be given to O.C.G.A. §§ 33-24-22 and 33-24-45, which contain specific requirements for noticing a cancellation of insurance, the content of such notice, and the appropriate grounds for cancellation. Importantly, if a carrier attempts to rescind an auto policy without following the strict requirements of O.C.G.A. § 33-24-45, such an attempt will be ineffective. Liberty Ins. Corp. v. Ferguson, 263 Ga. App. 714, 589 S.E.2d 290 (2003); Pearce v. Southern Guaranty Ins. Co., 246 Ga. 33; 268 S.E.2d 623 (1980).

Refunding Premiums

When rescinding a policy, the carrier must return all premiums paid by the insured since the inception of the subject policy. American General Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331 (11th Cir. 2009). The rationale behind the return of premiums is that it places the parties back at the status quo ante and prevents the carrier from being unjustly enriched by the rescission.


Perhaps the most frustrating and sometimes unforeseen misstep a carrier can make is taking some action inconsistent with asserting its right to rescind the policy or delaying a rescission. Both inconsistent actions and delay can result in a waiver of the right to rescind. Grange Mut. Cas. Co. v. Bennett, 350 Ga. App. 608, 612, 829 S.E.2d 834 (2019); Lee v. Mercury Ins. Co. of Georgia, 343 Ga. App. 729, 808 S.E.2d 116 (2017). As the court held in Bennett, “[i]f an insurer, instead of rescission, issues a denial of coverage and cancels the policy with a future effective date. . . the right and defense of rescission is waived as a matter of law.” Id. at 612. Often carriers are motivated by good intentions when sending a denial, coupled with a notice of cancellation on a future date in that they wish to provide the insured with the opportunity to obtain a different insurance policy without a lapse in coverage. However, Georgia courts have no sympathy for this argument and apply the opposite rationale, finding that the failure to rescind “lulls the insured into not purchasing other insurance and thus subjects the insured’s property to continuing non-coverage.” Florida Intl. Indem. Co. v. Osgood, 233 Ga. App. 111, 503 S.E.2d 371 (1998). 

As indicated above, a delay in time can also result in a finding of waiver or a jury question regarding question of whether a carrier waived its right to rescind the policy.

Lee v. Mercury Ins. Co. of Georgia, 343 Ga. App. 729, 808 S.E.2d 116 (2017). In Lee, the court found a question of fact existed regarding waiver where the carrier took two recorded statements and an examination under oath, renewed the policy, requested and received a proof of loss, and waited over 7 months after a fire before rescinding the policy. The delay, coupled with the carrier’s inability to explain what additional investigation remained ongoing during the 7-month period, resulted in a jury question regarding whether the carrier waived its right to subsequently rescind the policy. Id. at 747-48.

The Middle District of Georgia recently addressed the question of waiver in a case with facts similar to those in Lee, discussed above. Nautilus Ins. Co. v. Baconsfield Apartments, Inc., 2022 WL 11860469 (M.D. Ga. Oct. 20, 2022). In Baconsfield Apartments, the insured answered “no” to a question on an insurance application which asked: “Is the building currently damaged by fire or otherwise?” The buildings had, in fact, sustained prior fire damage that remained unrepaired at the time of the application. After Nautilus placed coverage, Baconsfield Apartments submitted a claim for fire loss. Nautilus investigated the claim and discovered that four previous fires occurred at the property. As a result of this investigation, Nautilus issued a cancellation notice informing the insured that coverage would remain in place for another 45 days, after which it would be cancelled. After sending the notice of cancellation, Nautilus engaged in an extensive claim investigation, including the taking of an examination under oath of multiple owners. Approximately 7 months after receiving the report that identified the four prior fires, Nautilus filed a complaint for declaratory judgment seeking to rescind the policy.

While the Middle District of Georgia found that the misrepresentation was material as a matter of law, a question of fact existed regarding the issue of waiver and regarding potential exposure for bad faith damages under O.C.G.A. § 33-4-6.


As discussed herein, unassuming and well-meaning carriers can be subject to rather harsh outcomes. In the context of waiver, carriers must delicately balance the desire to thoroughly investigate a claim and flesh out all facts with the requirement to take prompt action to rescind a policy when presented with facts supporting an application misrepresentation. Often the safest option for carriers is to file a declaratory judgment action early in the claim investigation in order to preserve the right to rescind while also taking advantage of the opportunity to conduct discovery. In order to meet the “uncertainty” component of filing a declaratory judgment action, carriers must refrain from issuing a denial letter or from rescinding the policy prior to filing the complaint for declaratory relief.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Part of the Whole: Idaho District Court Holds Economic Loss Rule Bars Tort Claims Related to Water Supply Line that was Part of Home Purchase

Gus Sara | The Subrogation Strategist

In Safeco Ins. Co. of Ill. v. LSP Prods. Grp., 2022 U.S. Dist. LEXIS 139566, the United States District Court for the District of Idaho (District Court) considered whether the plaintiff’s tort claims against the manufacturer of an allegedly defective toilet water supply line were barred by the economic loss rule. The defendant filed a motion for summary judgment arguing that, since the supply line was a part of the home when the plaintiff’s insureds purchased it, the plaintiff was barred by the economic loss rule from bringing tort claims against the manufacturer. The District Court granted the defendant’s summary judgment motion, ruling that the supply line was a part of the home, which was the subject of the transaction, at the time it was purchased. Thus, the District Court held that the economic loss rule barred the plaintiff’s tort claims.

In 2012, Melissa Norris and Richard Meyers (collectively, the Homeowners) purchased a newly built home in Eagle, Idaho. In 2016, a toilet supply line in one of the bathrooms began leaking, causing water damage to the home as well as to window blinds, an oven and dishwasher. The Homeowners also incurred a loss of rental income. The Homeowners submitted a claim to Safeco Insurance Company (Insurer), their property insurance carrier, who ultimately covered the Homeowners’ losses.

Insurer brought a subrogation action against LSP Products Group, Inc. (LSP) the manufacturer of the water supply line, which Insurer alleged was defective and caused the water leak. Specifically, Insurer alleged that a plastic coupling was defectively designed, making it prone to fracture during the ordinary and intended use of the product. Insurer’s complaint contained counts of strict liability, negligence and breach of warranty.

LSP filed a motion for summary judgment, arguing that Insurer’s torts claims were barred by the economic loss rule and that its’ warranty claim failed as matter of law because there was no privity of contract between LSP and the Homeowners. Insurer agreed to dismiss the warranty claim, which left the court to decide one issue: whether the economic loss rule barred Insurer’s tort claims.

The District Court acknowledged that Idaho’s economic loss rule generally prohibits the recovery of economic loss in strict products liability and negligence cases. The court also recognized that previous Idaho courts defined economic loss to include the cost to repair and replace defective property that was the subject of the transaction, as well as commercial loss for inadequate value and consequential loss of profits/use.  Essentially, Idaho’s economic loss rule bars tort claims for damage to property that was part of a contractual transaction which, in this instance, LSP argued was the purchase of the home.

Insurer argued that the subject of the transaction was the house, not the water supply line. More particularly, Insurer argued that the small, replaceable plumbing product was not integrated into the whole house, and, thus, its’ tort claims should not be subjected to the economic loss rule.  Alternatively, Insurer argued that some of the damaged property, such as the blinds, oven and dishwasher, may not have been purchased as part of the house and, thus, the economic loss rule did not apply to bar claims based on damage to those items. Insurer also claimed that the loss of rental income was recoverable because such expenses were “parasitic to an injury.”

As part of its consideration into whether the water supply line was part of the subject of the transaction, the District Court deferred to the Supreme Court of Idaho’s conclusion that the “subject of the transaction” is synonymous with the “subject matter of the contract.” Rather than focus on the size, purpose or functionality of the water supply line, the court simply considered the subject matter of the contract and whether the supply line was part of the subject matter at the time of the sale. The court determined that the house was the subject matter of the transaction, and as a result, the economic loss rule applied to anything that was a part of the house when it was purchased. Since the water supply line was part of the house when it was sold, any tort claims related to the supply line were barred by the economic loss rule.

In addition, the District Court held that, although the economic loss rule does not apply to damage to property that was not the subject of the transaction, since Insurer did not provide evidence that the contents of the house, including the damaged blinds, oven and dishwasher, were purchased after the Homeowners’ bought the home, the court found that claims for those damages were also barred by the economic loss rule. Finally, the District Court ruled that the loss of rental income claim was barred by the economic loss rule since, under Idaho law, the definition of economic loss includes loss of profits from a property.

This case establishes that, in Idaho, tort claims by a property owner for damage to any items that are inside a property when purchased may be barred by the economic loss rule. This case is also an important reminder that, in Idaho, the economic loss rule applies to claims for loss of rental income or profits as well. Subrogation professionals handling property losses in Idaho should keep this case in mind when determining whether the economic loss rule poses challenges to recovery.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Eleventh Circuit Affirms Dismissal of First-Party Property Complaint for Failure to Meet Pleading Standard

J. Kent Crocker | PropertyCasualtyFocus

The Eleventh Circuit Court of Appeals, in M&M Sisters LLC v. Scottsdale Insurance Co., affirmed the district court’s dismissal of an insured’s third amended complaint against its insurance carrier for failure to state a claim for relief without further leave to amend.

The plaintiffs, M&M Sisters LLC and its two owners Bertha Garcia and Maria Mendez, purchased a commercial general liability policy from the defendant, Scottsdale Insurance Co., covering an apartment building located in Miami, Florida. In May 2019, the plaintiffs filed a claim for damage to the building and subsequently demanded an audio/video recording of the inspection, which Scottsdale refused.

In October 2019, the plaintiffs filed a complaint in Florida state court seeking a declaratory judgment that Scottsdale must agree to the audio/video recording of the inspection, that the plaintiffs’ claim was covered under the policy, and that Scottsdale’s delay in inspecting the property and determining coverage constituted a constructive denial of coverage. Scottsdale filed a motion to stay the action pending a determination of coverage, which the court granted.

In January 2021, Scottsdale denied the plaintiffs’ claim based on the determination that the loss was excluded from coverage after its structural engineer attributed the damage to wear and tear in the roof and windows, and to faulty workmanship. In May 2021, the plaintiffs filed an amended complaint against Scottsdale for breach of contract that alleged that the property “sustained a sudden, accidental and/or otherwise covered loss under the Policy, resulting in extensive damage to the interior and exterior of the insured risk” and that Scottsdale had “refuse[d] to perform” its duties “to promptly investigate, adjust and issue payment for the Covered Loss,” which “include[ed], but [was] not limited to, the actual cash value of the loss and/or damages.”

Scottsdale moved to dismiss the plaintiffs’ amended complaint for a more definite statement, which the plaintiffs agreed for the state court to grant without prejudice and provide the plaintiffs 20 days to file a second amended complaint that “allege[d] [their] damage and the cause of [their] alleged loss with greater particularity.” Thereafter, the plaintiffs filed a second amended complaint that alleged the property “suffered a sudden, accidental and/or otherwise covered loss”; “more specifically … extensive roof damage which resulted in ensuing water damage to the interior of” multiple apartment units. The plaintiffs repeated that Scottsdale had “refuse[d] to perform” its duties “to promptly investigate, adjust and issue payment for the Covered Loss,” which “include[ed], but [was] not limited to, the actual cash value of the loss and/or damage” of more than $30,000. Later, the plaintiffs estimated the damages at $2,591,333.16, at which time Scottsdale removed the action to the U.S. District Court for the Southern District of Florida and moved to dismiss the plaintiffs’ second amended complaint.

The district court subsequently dismissed the second amended complaint, finding that the plaintiffs “alleged [no] facts explaining what ‘roof damage’ or ‘ensuing water damage occurred’ … [or] how that ‘covered loss’ caused damage to the roof or interior of the property.” The district court also stated that “merely assert[ing] unidentified damage from an unidentified cause … and that [Scottsdale had] breached the policy by failing to pay the claim,” without providing “facts that, if true, demonstrate [Scottsdale’s] liability” was “insufficient to support a breach-of-contract claim.” The district court’s dismissal of the plaintiffs’ second amended complaint was without prejudice to amend within 14 days.

Instead of adhering to the district court’s observations, the plaintiffs filed a third amended complaint that was virtually identical to its predecessor. The only differences were that the plaintiffs added allegations that Scottsdale denied coverage, that the plaintiffs purchased an “all risks” policy, which they claimed had no applicable exclusions, and that the adverse decision was “improper … [for] fail[ing] to identify an applicable exclusion.” Scottsdale then moved to dismiss the plaintiffs’ third amended complaint and submitted a copy of its denial letter, which the district court granted without leave for the plaintiffs to file a fourth amended complaint. The district court ruled that the complaint still failed to allege specific facts indicating that the damage was covered by the policy, which covered “fortuitous” or unexpected losses. The district court explained that the “sparse allegations” as to the alleged property damage and the event that purportedly caused the damage made it impossible to determine one way or another if the “damage causing event was plausibly fortuitous.” The district court also noted that the plaintiffs had failed to correct the deficiencies that were highlighted in the order dismissing the second amended complaint.

In affirming the district court, the Eleventh Circuit found it did not need to decide whether the plaintiffs had to allege that the loss was “fortuitous” in order to withstand a motion to dismiss. The court found the third amended complaint failed to state a claim for a more fundamental reason: the plaintiffs “alleged no facts from which the district court could plausibly infer that Scottsdale breached its contract by denying [the plaintiffs’] claim.” The court noted that an “all risks” policy is triggered if the insured property suffers a loss while the policy is in effect, “unless the cause of the loss is expressly excluded from coverage.” Although the plaintiffs alleged that the policy was in effect when the property was damaged, the court explained that Scottsdale’s denial letter, which was incorporated into the third amended complaint by reference, “established that the insurer denied coverage based on exclusions in its policy for wear and tear, for deterioration, for faulty or defective repairs, materials, and maintenance, and for interior water damage not connected to a covered loss to the roof or walls of the building.” The court held that the conclusory allegation in the third amended complaint that the “[p]roperty sustained a sudden, accidental and/or otherwise covered loss under the Policy,” failed to allege specific facts from which the district court could have plausibly inferred that the damage was attributable to anything other than the causes identified in Scottsdale’s denial letter. The court then held that the district court did not err by dismissing the third amended complaint, and did not abuse its discretion by failing to sua sponte afford the plaintiffs a fourth opportunity to amend the complaint, as the plaintiffs had already failed to correct the deficiencies when given an opportunity to do so on three separate occasions.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Misrepresentation by Insured? It’s Complicated, Florida Appeals Court Rules

William Rabb | Insurance Journal

Proving that an insured misrepresented the extent of damage from a storm may have just become a little more complicated for Florida insurance companies.

Florida’s 5th District Court of Appeals last week reversed a trial court’s summary judgment order, which found that a homeowner in Orlando had made false statements about existing roof problems, allowing Security First Insurance Co. to deny coverage. The appellate court remanded the case to the Orange County Circuit Court, noting that the trial judge should have let a jury decide the credibility of the insured’s statements.

“The general rule remains intact: Credibility determinations and weighing the evidence ‘are jury functions, not those of a judge,’ when ruling on a motion for summary judgment,” the DCA wrote, citing 1986 and 2018 federal appeals court decisions.

The case could ultimately end up in the insurer’s favor, after a trial and appeal. But for now, it could put insurers on notice that courts generally “abhor forfeiture of insurance coverage,” as the DCA noted in the Sept. 9 Gracia vs. Security First opinon. Insurers also may need to take extra steps to show a claimant intentionally concealed or misrepresented information, and a carrier probably should think twice before asking a judge to dismiss a suit based on that.


“Yes, it complicates things in that the court commented about how courts are so anti-forfeiture of insurance coverage,” said Michael Packer of Fort Lauderdale, managing attorney and co-chair of the insurance practice group at Marshall Dennehey law firm. “But it also shows that if someone has truly misrepresented, there are ways to demonstrate that.”

The dispute began in 2017, when Mariana Gracia filed a claim for losses due to roof damage after a spring storm. Ormond Beach-based Security First investigated and agreed to pay $11,000 for restoration work. Gracia demanded more, the insurer denied the larger amount, and Gracia filed suit for breach of contract.

The key moment came during a deposition, when Gracia revealed that a home inspection had been done on the property in 2015. When asked about the results, she said that “everything was good,” and “the roof was in good condition.”

Security First obtained the inspection report, which included photographs showing ceiling damage, roof issues and leaks consistent with the damage Gracia had cited in her claim. The insurer then amended its defense of the claim, citing the policy’s concealment and fraud provision that triggered forfeiture of coverage.

Gracia’s attorney argued to the trial court that, despite the inspection report, the damage the homeowner was claiming happened in the 2017 storm, and that the report did not automatically establish that she had intentionally misrepresented the facts.

The trial court sided with Security First on its motion for a summary judgment, declaring that the policy was voided and finding that the homeowner’s explanation was not credible.

The judge relied on Florida’s recently adopted Rules of Civil Procedure, handed down by the state Supreme Court in 2021. The rules appear to allow judges to decide credibility issues when it is obvious that a jury would agree. But the appeal court’s opinion said the trial judge, Kevin Weiss, overstepped and that the credibility decision in most cases should go to a jury.

“Only when the record evidence blatantly contradicts a litigant’s version of the facts will a court be allowed to weigh conflicting evidence or determine the credibility of a witness,” the DCA wrote.

The per curiam opinion also acknowledged that recent decisions by other appeals courts in Florida have questioned the conflicting wording of similar insurance policies, in which one line appears to require the insurer to show intentional misrepresentation, while another line does not.

Florida courts also have held in recent years that the question of intent turns on when the statement is made. If the insured misrepresents during the initial policy application process, “the law in Florida is clear: An insurer can later void a policy based on an insured’s false statement without a showing of intent to mislead.”


But for statements made after a loss, two appeals courts in the last two years have found that insurers must prove intentional fraud to trigger the voiding of the policy. What Security First offered in the Gracia case – Gracia’s short deposition statement about the pre-existing damage – was too vague to establish falsity, 5th DCA Judge Eric Eisnaugle wrote in a concurring opinion.

Security First officials and its attorney in the appeal, Angela Flowers, could not be reached for comment. And the court opinion did not address one practical matter: Whether a four-point inspection, now required by more and more Florida insurers when writing new policies, would have uncovered the existing damage and why Security First did not ask for one.

Packer, the insurance defense attorney who is not associated with the Gracia case, said that it may be impractical, time-consuming and expensive for insurers to require the inspections on all properties. Inspection reports also can differ greatly, depending on the inspector.

Packer said the appellate court’s opinion offers other guideposts for insurers: Future HO policies could include language to the effect that post-loss misrepresentations need not be intentional to trigger cancelation of the policy. And, he added, carriers’ attorneys should be prepared to ask more questions in deposition, especially if the insured reveals that a previous inspection had been done, in order to nail down misrepresentation and intent.

The homeowner’s appeals lawyer in the case, Melissa Giasi, could not be reached. But attorneys for policyholders have said that insurers are often too quick to argue misrepresentation or fraud by the insured and this decision could help put up some guardrails.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

In Review: the Essentials of Insurance and Reinsurance Law in USA

Bill O’Neill, Jenna Tyrpak, Michael T. Carolan, Thomas J. Kinney | Troutman Pepper

All questions

Insurance and reinsurance law

i Sources of law

Each state has both statutory and common law applicable to insurance issues. State common law is a significant source of law for the purpose of resolving disputes. In broad terms, it applies to issues such as legal duties, the interpretation of contracts, procedure and damages. Individual state statutes applicable to insurance, though they vary in breadth and focus, generally regulate insurance companies operating within the state. Common state statutes include provisions requiring companies to be licensed or barring insurers from acting or marketing their products in a deceptive manner.

Under the US Constitution, federal statutes may pre-empt state statutes and laws where they overlap. Thus, a federal statute may pre-empt inconsistent state laws. Federal common law, while fairly narrow in scope, impacts insurance and reinsurance companies indirectly. One example is federal common law relating to the application of the Federal Arbitration Act, which guides decisions on whether policyholders or cedents are bound to arbitrate a dispute with insurers or reinsurers.

ii Making the contract

The requirements for the creation of an enforceable insurance or reinsurance contract mirror those of most written contracts – offer, acceptance, consideration, legal capacity and legal purpose. In practical terms, an application or submission and the tender of the initial premium represent the offer to contract. Acceptance is generally demonstrated through execution of the policy or agreement. Without an offer and acceptance, there is no meeting of the minds and no contract.

Insurance and reinsurance contracts are negotiated and placed both directly and through intermediaries. In either case, prospective policyholders or cedents provide the information requested by the insurance carrier or reinsurer for the placement. If necessary, the insurance carrier or reinsurer’s underwriter can (but is not necessarily required to) seek more information. At all times, the prospective policyholder or reinsured generally is under an obligation to disclose all material information relating to the risk being covered.

Following the agreement on terms, the insurance or reinsurance contract is documented. In most individual consumer insurance markets, the insurance policy is initially crafted by the insurance company. In other instances, a manuscript policy may be negotiated.

iii Interpreting the contract

Because of variations among state laws, there are no overarching rules of insurance contract interpretation. In general, the rules of interpretation applicable to commercial contracts apply to insurance policies. State or federal courts that interpret contract provisions typically try to determine the objective intent of the parties. Unambiguous insurance policy provisions are generally enforceable. While these principles apply to reinsurance agreements as well, reinsurance disputes are typically viewed through the prism of industry custom and practice. Indeed, in reinsurance arbitrations the arbitrators’ charge is often to view the parties’ agreement as an ‘honourable engagement’, meaning arbitrators are directed to interpret the contract without a need to follow strict rules of law and with a view to effecting the purpose of the contract in reaching their decision.

iv Intermediaries and the role of the broker

Insurance intermediaries, including agents and brokers, play a key role in the US insurance and reinsurance markets. Currently, there are more than 2 million individuals and more than 236,000 businesses licensed to provide insurance services in the US.33

There are various types of agents and brokers. Broadly speaking, a general insurance agent contractually represents the insurance company and is authorised to accept risks and issue policies, a soliciting agent has authority to seek insurance applicants but has no authority to bind an insurance company, and a broker is a licensed, independent contractor who represents insurance applicants and ceding insurers in the negotiation and purchase of insurance or reinsurance.34

The conduct of insurance intermediaries is regulated through state statutes and laws. Typically, an agent or broker has a duty to faithfully carry out the instructions of its client. Depending upon the circumstances, a heightened ‘fiduciary duty’ may also apply.

v Claims

The laws regarding insurance and reinsurance claims issues vary from state to state. Key issues include notice, good faith, and dispute resolution.

With respect to notice, both insurance and reinsurance claims generally require that a policyholder or cedent provide reasonably timely notice of claims or other information. For insurance claims, timely notice is considered a condition precedent to coverage in many states, meaning a claim may not be covered if there is not reasonably timely notice. For reinsurance claims, if timely notice is not a stated condition precedent in the reinsurance contract, some jurisdictions require a reinsurer to prove that it was economically prejudiced if it seeks to avoid a claim on account of late notice.

Both insurance and reinsurance claims may involve issues of good faith and fair dealing. Insurance companies, for their part, must respond to the claims of their policyholders consistent with contractual good faith and fair dealing requirements. In reinsurance, the duty of utmost good faith applies to both cedents and reinsurers. Thus, while cedents must fully disclose all material information about the ceded risk, for most lines of business reinsurers have a concomitant duty to ‘follow the fortunes’ of their cedents, which requires indemnifying cedents for all business-like, good faith, reasonable claim payments.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.