First Department Rebuffs Common Insurer Premium, Rescission Claims
The Appellate Division, First Department’s recent ruling in Alexi Home Design, Inc. v. Union Mutual Fire Insurance Co. is a significant victory for insureds in 2024—particularly for insureds facing rescission/misrepresentation-in-the-application claims.
A building in the Bronx was damaged by fire. The owner’s property insurer denied coverage, claiming that it had the right to rescind the policy based on a misrepresentation in the application about the number of apartment units inside the building.
The Appellate Division, First Department affirmed the denial of the insurer’s motion for summary judgment. It agreed that the insurer did not meet its burden of proving that the owner made a material misrepresentation in the application that would allow it to rescind the policy ab initio, or cancel it “from the beginning.” Although the insurer claimed that it would have charged the owner additional premium if it had known the actual number of apartments on the premises, it did not point to any specific rating guidelines or supporting testimony. The First Department also held that the application question—asking to identify the number of “apartment units” on the premises—was ambiguous, as it could have been reasonably interpreted to mean only apartment units that were actually occupied. The undisclosed third apartment was on the first floor, but the fire department determined that the fire started on the third floor. At the time of the fire, the undisclosed apartment was unoccupied, used only for storage, and did not cause or contribute to the fire. The First Department further held that whether the insurer waived its right to rescind the policy was a fact issue. Specifically, discovery revealed that the insurer inspected the premises after submission of the application and the purpose of the inspection was to “ensure the risk [had] the actual number of units reported.” The insurer also renewed the policy twice before the fire and continued accepting premium payments.
Insurers often look to the original application for the policy to find bases to deny a claim and rescind the policy. However, a misrepresentation on an application cannot form the basis for policy rescission unless that misrepresentation is “material.” That is typically a fact issue under New York law, as it must include an examination of the questions themselves, the reasons for including them on the application, and how the answers to those questions impact the insurer’s decision to bind a policy and the premium to be charged. It is not enough for an insurer to simply state that it would not have issued the policy or would have charged more for the premium. And, an insurer may be found to waive its right to rescind based on its post-loss conduct and representations.
Alexi Home Design held the insurer to its burden of proof on its rescission claim, making it one of the first significant victories for insureds in 2024.