Misrepresentation of Material Facts on Application Requires Rescission

Dr. Lies on Application & Policy Rescinded

As I have reported multiple times in this blog that the covenant of good faith and fair dealing applies equally to the person insured as the insurer. When a doctor applies for insurance and falsely states that he has never been cancelled, refused, non-renewed nor had an insurer refused a claim, and that he had no knowledge of any potential claims, he has deceived the insurer.

In Svabek v. Lancet Indemnity Risk Retention Group, Inc., Slip Copy, Court of Appeals of Indiana, 2017 WL 1955048 (May 11, 2017) Steven J. Svabek, D.O., appealed the trial court’s entry of summary judgment in favor of Lancet Indemnity Risk Retention Group, Inc. (“Lancet”) on Lancet’s complaint seeking rescission of Svabek’s medical malpractice insurance policy.

FACTS

Dr. Svabek is an orthopedic surgeon residing in Boca Raton, Florida. Dr. Svabek previously practiced medicine in the State of Indiana.

Lancet is an insurance company organized under the laws of the State of Nevada with its corporate office in Las Vegas, Nevada, and its executive office in Tampa, Florida.

The Effective Date of the policy is December 7, 2012, with a Retroactive Date of December 7, 2010. The Policy is a “Tail Policy” only with no prospective coverage. The Policy only covers an Occurrence on or after December 7, 2010 [the Retroactive Date] and before December 7, 2012 which was first made against Dr. Svabek and reported to Lancet between December 7, 2012 and December 7, 2013 [the Policy Period].

In entering the contract for the Policy, on December 7, 2012, Dr. Svabek completed and submitted an application to Lancet. In that application, Dr. Svabek confirmed, among other things, that he had no known potential or anticipated losses and that no prior carrier had declined or refused coverage for a medical incident. The Policy states that Lancet relied upon the statements made by Dr. Svabek in his application for insurance and that Dr. Svabek warrants those statements are true.

On August 28, 2012, the Indiana Patient’s Compensation Fund (“PCF”) through the IDOI, sent notice of the Sykes/Williams Matter to Dr. Svabek. On November 20, 2012, counsel for Ms. Sykes and Mr. Williams sent the Proposed Complaint directly to Evanston Insurance, the insurance company that provided a medical malpractice policy that covered Dr. Svabek for the period of January 12, 2010 until January 12, 2011. On November 20, 2012, a senior claims examiner with Markel Corporation, a company acting as claims manager for Evanston Insurance, sent Dr. Svabek the correspondence and Proposed Complaint that it received from the lawyer representing Sykes/Williams.

On December 4, 2012, Markel sent correspondence to Dr. Svabek advising that no coverage was available under the Evanston policy for the Sykes/Williams Proposed Complaint because the Evanston policy lapsed on January 12, 2011 and thus would not cover the Proposed Complaint filed on August 15, 2012. The Markel December 4, 2012 denial letter was sent to Dr. Svabek by certified mail. It was also sent to Dr. Svabek by email to svabek.steve @gmail.com.

On December 7, 2012, three days after Evanston sent its denial of coverage to Dr. Svabek by certified mail and by email, Dr. Svabek completed and submitted an application to Lancet for medical malpractice insurance coverage. In that application, Dr. Svabek confirmed, among other things, that he had no known potential or anticipated losses and that no prior carrier had declined or refused coverage for a medical incident. The Lancet Policy excludes coverage for any claim that was the subject of an administrative proceeding, civil litigation or written demand for damages which existed prior to the Policy’s Effective Date of December 7, 2012.

Lancet moved for summary judgment. Following a hearing, the trial court concluded in relevant that Lancet is entitled to rescind the Policy because Lancet relied on false and material representations in Dr. Svabek’s insurance application.

ANALYSIS

Insurers rely on the truthfulness and completeness of the information on the application in assessing whether to issue a policy and on what terms. Rescission protects the insurer’s right to know the full extent of the risk it undertakes when an insurance policy is issued. Dr. Svabek’s insurance application erroneously stated that no prior insurance carrier had refused or declined to issue coverage regarding any medical incident or threat of claim. Dr. Svabek’s prior insurance carrier denied coverage to Dr. Svabek for the Sykes/Williams claim pursuant to a denial letter issued on December 4, 2012.  Dr. Svabek’s representation that a prior carrier had not previously denied coverage, whether intentional or not, was false. As a result the trial court concluded that Dr. Svabek’s failure to disclose a known claim entitles Lancet to rescind the Policy.

False representations warrant rescission regardless of whether the misrepresentation was innocently made or made with fraudulent design because innocent misrepresentations are just as injurious as intentional fraud.  Dr. Svabek’s subjective intent in providing the false information to Lancet does not impact whether rescission is appropriate.

The information that Dr. Svabek did not disclose in his insurance application was material. A representation in an application for insurance is deemed material if the facts represented reasonably enter into and influence the insurer’s decision whether to issue the policy or charge a higher premium. Lancet would have either declined to issue the Policy or offered the Policy to Dr. Svabek on different terms if Dr. Svabek had provided truthful information in the Statement of No Known Claims.

Fraud in the inducement of a contract is a proper basis for rescission. The remedy of contract rescission functions to restore the parties to their pre-contract position, that is, the status quo. A request for rescission of a contract is addressed to the sound discretion of the trial court. The party seeking rescission bears the burden of proving his right to rescission and his ability to return any property received under the contract. On the other hand, the party appealing the trial court’s grant of rescission has the burden of demonstrating that the trial court’s decision was erroneous. Rescission is appropriate where the party seeking rescission is not in default and the defaulting party can be restored to the same condition he occupied before the making of the contract.

On appeal, Svabek does not deny that he falsely claimed in his application that no prior insurance carrier had refused or declined to issue coverage regarding any medical incident or threat of claim.  And Svabek does not challenge the trial court’s conclusions that “a prior carrier’s previous denial of coverage for an existing claim is material to an insurer’s decision to issue coverage” and that, “[a]ccordingly, [his] untruthful statement entitles Lancet to summary judgment in its favor as to its request for a judgment declaring its right to rescind the Policy.”

In sum, Svabek failed to demonstrate the absence of any genuine issue of fact as to a determinative issue, namely, that Lancet is entitled to rescission based on Svabek’s misrepresentation on his application for insurance regarding a prior denial of coverage.

ZALMA OPINION

Dr. Svabek lied. The evidence was clear that he lied and he did not even dispute he lied. The lie was material to the decision of the insurer to insure him and the insurer proved that he knew the information provided was false when it was provided. He obtained a policy of insurance by fraud and deserved to have the policy rescinded from its inception and be returned to the position he was in before the policy was acquired.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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