( U.S. Specialty Insurance Co. v. Bridge Capital Corporation (2007) WL 1138863)
A recent ruling illustrates that even where an insured discloses prior claims when applying for coverage, the insurer may rescind the policy if the insured mischaracterizes the nature of the prior claims.
Bridge Capital Corporation applied to U.S. Specialty Insurance Company for a directors and officers policy. The application requested disclosure of any claims made against Bridge Capital or any of its officers and directors in the past five years. Bridge disclosed one gender discrimination suit in response to the question, and stated that Bridge’s attorney believed the claim was “frivolous.” The next year, when Bridge applied for a renewal of the policy, Bridge identified the same suit listed on the initial application, plus another suit for gender discrimination claim as well as a suit for unpaid commissions.
After issuing the renewal policy, and while defending Bridge in suit brought by a third party, U.S. Specialty learned for the first time that the three suits Bridge had disclosed on the applications also included allegations of wrongful termination, sexual harassment and retaliation. In addition, after issuing the renewal policy, U.S. Specialty learned of a fourth claim for harassment that Bridge had settled without litigation.
Upon learning of this information, U.S. Specialty asserted it was rescinding both policies. U.S. Specialty then filed an action for declaratory relief, seeking a determination that the rescission was proper, the policies were void and that U.S. Specialty had no obligation to defend Bridge against the third party’s suit.
The federal district court granted summary judgment in favor of U.S. Specialty. The evidence established that Bridge’s chief executive had personal knowledge of each prior claim, and that he had signed the two insurance applications. The evidence also established that U.S. Specialty relied on Bridge’s misrepresentations and omissions when U.S. Specialty issued the policies, and that U.S. Specialty would not have issued the policies if Bridge had disclosed the prior allegations of sexual harassment. Under the circumstances, U.S. Specialty’s rescission was proper, the policies were void from inception and the rescission applied to Bridge and all of its officers and directors.