Rescission can be a powerful remedy for insurers to counter fraudulent misrepresentations made in insurance applications. A property insurer recently availed itself of this remedy when it was misled by its insured in 128 Hester LLC v. New York Marine and General Ins. Co.

In the Summer of 2009, 128 Hester LLC received notice from the NYC Department of Buildings (DOB) that its building was in imminent danger of collapsing and needed to be demolished because of extensive damage caused by the construction of a neighboring hotel. 128 Hester immediately submitted a claim to its property insurer, Tower Insurance, who came on the risk only about a month earlier.

In the course of its coverage investigation, Tower discovered that the DOB previously issued notice to 128 Hester describing the insured building as in an “unsafe/collapse prone” condition. In fact, before Tower issued its policy, 128 Hester provided notice of the property loss to its previous insurer. Tower disclaimed and 128 Hester brought a declaratory judgment action seeking coverage. Tower moved to dismiss based on the loss having taken place before the inception of the policy and also asserted that the policy was  void because 128 Hester materially misrepresented the risk in its insurance application.

The First Department reversed the trial court’s denial of Tower’s motion. The court found that even innocent misrepresentations are sufficient to set forth a claim for rescission. The court ruled that “Tower’s insurance application unequivocally asked for loss history,” and therefore 128 Hester was under a duty to notify Tower of the DOB declaration. Moreover, the court found that 128 Hester was clearly aware of the damage when it provided notice of the loss to its prior insurer. As such, the policy was rescinded.`

Thanks to Steve Kaye for his contribution to this post and please write to Mike Bono for more information.