Policy Rescinded Based On Insured's Material Misrepresentation In Renewal Application

An Indiana federal court, applying Indiana law, has held that an insurer could rescind a claims-made-and-reported professional errors and omissions policy based on misrepresentations made by the insured in the policy renewal application.Accent Consulting Grp., Inc. v. Great Am. Assur. Co., 2024 WL 2272126 (S.D. Ind. May 20, 2024). The court allowed the insurer to raise the rescission argument for the first time in coverage litigation because the court found that the insurer had not breached its duty to defend.

During the previous policy period, a former customer filed a consumer complaint with the Indiana Office of the Attorney General (the Indiana OAG) against the insured real estate appraiser, demanding an investigation into an appraisal done by the insured. The Indiana OAG commenced an investigation and sought documents from the insured, which she provided. The insured did not report the consumer complaint or the Indiana OAG investigation to her insurer. Less than six months after the complaint was filed and the commencement of the investigation by the Indiana OAG, the insured submitted a renewal application. In the renewal application, the insured answered "no" to a question asking if she was "aware of any ... [c]omplaint, disciplinary action, investigation, or license suspension/revocation by any regulatory authority" in the past 12 months.

After the policy was renewed, the Indiana OAG filed a complaint against the insured before the state professional licensing board, citing the allegations in the consumer complaint and requesting disciplinary sanctions. The insured tendered the defense of the licensing board proceeding to her insurer. The insurer denied a defense on the grounds that the insured failed to timely report the consumer complaint within the first policy period and that the licensing board proceeding was not a "claim" but a "disciplinary action" for which the policy did not impose a duty to defend. The insurer's coverage position did not address rescission.

The insured ultimately sued the insurer for failing to provide a defense in the licensing board proceeding. Following the receipt of discovery in the coverage litigation, the insurer amended its pleadings to include a claim for rescission of the policy based on the insured's material misrepresentation in the renewal application. In response, the insured argued that her misrepresentation was not material because the consumer complaint did not qualify as a claim under the policy and because the insurer waited until the coverage litigation to rescind the policy instead of doing so when it first learned of the consumer complaint. The insured further maintained that the insurer was estopped or had otherwise waived its ability to rescind the policy because it wrongfully denied a defense for other reasons.

Granting summary judgment in favor of the insurer, the court concluded that the insured's misrepresentation was material. The court found that a direct line could easily be traced from the consumer complaint to the Indiana OAG investigation and then to the licensing board proceeding, such that the first two directly affected the risk and exposure involved in the third for which the appraiser now sought coverage. The court further explained that whether the insurer had waived or was estopped from now asserting this argument turned on the soundness of the insurer's initial explanation for denying a defense. Because the licensing board proceeding was a "disciplinary action" for which the insurer owed no duty to defend, the court held that the insurer was not estopped from raising the affirmative defense of misrepresentation and thus allowed the insurer to rescind the policy in full.