It is generally held that when an insured has made material misrepresentations in applying for an insurance coverage, an insurer later has the ability to void the policy back to inception, forming the basis to deny any claims that may arise. But what happens when there is an additional insured under the policy — and that additional insured was not involved in the misrepresentations?
Previously, a line of decisions issued by New York appellate courts were generally interpreted to hold that claims submitted by an innocent additional insured could not be rejected due to material misrepresentations made by the named insured. Now, however, the Court of Appeals has weighed in on the topic with an important decision for insurers.
In Admiral Ins. Co. v. Joy Contractors, when the insured, Joy Contractors, applied for its CGL policy, it represented that it specialized in drywall installation, did not carry out exterior work and performed no work above two stories in height from grade other than drywall interior work. Subsequently, a tower crane operated by Joy collapsed, killing seven people, injuring others, and causing significant property damage. An investigation into the claim revealed that, despite the statements made in the policy application, Joy was actually the structural concrete contractor, performing work on the building’s entire exterior with the tower crane.
Based on the misrepresentations, the insurer denied the claims that arose out of the crane collapse and filed a declaratory judgment, seeking rescission of the policy as to all parties, including various property owners and developers that were named as additional insureds. Citing prior precedent, the lower court held that coverage could not be denied to the additional insureds based on misrepresentations made by the insured, and the Appellate Division upheld the decision.
But the Court of Appeals reversed, finding that in none of the earlier cases did the insurer actually seek rescission of the policy. Further, the Court found that in the prior cases, the named insured’s misrepresentations did not deprive the insurer of knowledge of or the opportunity to evaluate the risks for which it was later asked to provide coverage. In addition, in the prior cases, the additional insureds were actually named in the policy so the insurers knew their interests. Most importantly, setting aside these distinguishing factors, the Court specifically refused to endorse the prior holdings to the extent those decisions may be read to apply to situations where an insurer seeks rescission.
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