Article Archives >> Lead Stories >> February 1-28, 2009

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Acceptance of Premiums Defeats
Insurer’s Effort to Rescind
Subsequent notice of termination said
policy would remain in effect until expiration

The failure of a nonprofit religious center to tell an insurance carrier that it allowed a caterer to use a portion of its space for independent activities does not give the carrier the right to rescind the policy when it accepts a premium payment and sends a notice of termination after receipt of a claim.  A federal District Court in New York has ruled that the carrier is obligated to defend the center in the lawsuit resulting from an injury in the space.  (Guideone Specialty Mutual Insurance Company v. Congregation Adas Yereim, E.D. NY, No. 1:04-cv-5300, 1/20/09.)

Congregation Adas Yereim, an Orthodox Jewish organization in Brooklyn, obtained general liability and umbrella insurance on 21 facilities from Brooklyn to Philadelphia.  With regard to a synagogue and religious school in Boro Park, it failed to tell the carrier that it leased about 2000 square feet to an independent caterer, which had the exclusive right to hold events in the facility.  The caterer had a key, was responsible for maintenance, and used the facility for many functions unassociated with the center.  In December, 2003, a participant at one of the events fell and later died.  When the estate gave notice of a claim, the center forwarded it to the carrier.

After completing an investigation, the carrier filed suit to disclaim coverage, on the basis of the center’s alleged breach of the cooperation clause in the policy. It later amended its complaint to allege a failure to disclose the leasing arrangement.  A few months later, it amended again to seek rescission of the policy.

After its investigation, however, it accepted additional premiums and then notified the center that it would not renew the policy for the following year. The termination notice specifically said the policy would be effective until its expiration date.

Although there was substantial dispute about who knew what and when, the Court concluded that the carrier knew of the caterer’s arrangement by early May 2005 but did not seek to rescind until ten months later. “With respect to GuideOne’s right to rescind, only Rip Van Winkle slept longer,” the Court said.

When the carrier accepted the premiums after learning of an event allowing for cancellation of the policy, it said, New York law provides that the carrier effectively waived the right to cancel or rescind.  And where it sent a notice of non-renewal stating coverage would remain effective until the end of the policy, the carrier was estopped from seeking rescission.

The carrier also argued that it could disclaim responsibility to defend the specific incident on the basis of misrepresentation about the lease, even if it could not rescind entirely.  But the Court said it cited no case “allowing an insurer, all the while collecting premiums and electing to keep its policy in effect until its established expiration date, to disclaim coverage for a particular occurrence falling under that policy on the basis of the insured’s misrepresentations during contract formation….  New York law arms the insurer only with the hatched of rescission and not the scalpel of unilateral modification.”

The Court also awarded the center attorneys’ fees for its successful defense against the carrier’s “attempt to free itself from its policy obligations.”

YOU NEED TO KNOW

The carrier’s conduct made this a relatively easier case for decision.  If the carrier had tried to cancel as soon as it learned of the caterer’s arrangement, it would have been a closer case, even though the testimony showed that the carrier would have issued the policy with an additional premium of less than $500 a year.  (The Congregation paid more than $267,000 on the policies over four years.)

We have read a lot of cases in which the carrier has tried to cancel the contract and say it was void from the beginning, although we don’t remember the cases talking about the carrier giving back the premiums it had collected, sometimes for several years.

Article Archives >> Lead Stories >> February 1-28, 2009