Defendant homeowner’s insurer properly rescinded the policy based on insureds’ innocent misrepresentation that the home was to be occupied, and the insurance broker had no duty to make sure the insureds properly filled out the application.

The Second Department held that defendant insurer properly rescinded plaintiffs’ fire insurance policy based upon the plaintiffs’ misrepresentation the residence would be owner-occupied because a misrepresentation can be innocently made and still trigger rescission. The Second Department also found that the broker had no obligation to make sure that plaintiffs properly filled out the insurance application.

Before plaintiffs bought the subject residence in Brooklyn, plaintiffs’ mortgage broker told plaintiffs that plaintiffs needed insurance to close.  The mortgage broker contacted defendant insurance broker to procure a homeowners’ insurance policy based upon plaintiffs’ representations in their loan application that they would occupy the premises as their primary residence.  Plaintiffs signed an application for owner-occupied homeowner’s insurance and defendant insurance carrier issued a homeowner’s insurance policy on the closing date.

After fire damaged the premises, defendant insurer discovered that plaintiffs did not occupy the premises as their primary residence and rescinded the policy, on the ground that plaintiffs’ material  representation about occupancy induced the insurer to issue a policy that it normally would not have issued.

Plaintiffs sued the insurer and the insurance broker for breach of contract and negligence. Held:  Supreme Court properly granted summary judgment to defendant insurer and defendant insurance and properly denied the plaintiffs’ cross motion for summary judgment against both defendants.

The insurer established its prima facie entitlement to summary judgment by submitting evidence showing that the plaintiffs’ application for insurance contained a misrepresentation regarding whether the premises would be owner occupied and showing that it would not have issued the subject policy if the application had disclosed that the subject premises would not be owner occupied.  In holding that plaintiffs failed to raise a triable issue of fact, the Second Department  stated:

• Plaintiffs admitted that, when they signed the application for insurance, they did not intend to occupy the premises. Plaintiffs unsuccessfully contended that, although the application was completed before to closing and before to the inception of the policy, the representation that the premises was an owner-occupied primary residence established, in effect, a material misrepresentation of a then existing fact that the premises would be owner occupied, which was sufficient for rescission under Insurance Law § 3105.

• Secondary evidence of plaintiffs’ first application for insurance which plaintiffs signed was proof in admissible form under CPLR 4539[b]). And plaintiff’s unsigned second application was also admissible.

• The question on the application about owner occupancy was unambiguous and therefore could properly serve as the basis for a claim of misrepresentation. Moreover, plaintiffs admitted that they did not read the application when they signed it, so they could not have been misled by any unclear language.

• The insurer was not required to establish that plaintiffs’ misrepresentation was willful. An innocent or unintentional material misrepresentation is enough to warrant rescission of an insurance policy.

• The policy language did not require a showing of willfulness for rescission based on a misrepresentation made when applying for coverage.

• Although there was a question of fact as to whether the insurance broker was an agent or a broker vis-à-vis the insurer, there was no issue of fact as to whether the insurance broker knew of the material misrepresentation, so no such knowledge could not be imputed to the insurer.

With regard to the insurance broker, insurance brokers have a common-law duty to obtain coverage that their client request within a reasonable time or inform the client of the inability to do so, but they have no continuing duty to advise, guide or direct a client to obtain additional coverage.  So to state cause of action for negligence or breach of contract against an insurance broker, plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy.

Although in exceptional circumstances a special relationship may develop between the broker and client that will make the broker liable for failing to advise or direct the client to obtain additional coverage even in the absence of a specific request, none of those circumstances applied here.  The three exceptional situations are: (1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.

The insurance broker demonstrated that none of the exception circumstances applied and further demonstrated that it procured the insurance requested.

Joseph v Interboro Ins. Co., 2016 NY Slip Op 08050, 2nd Dept 11-30-16 http://nycourts.gov/reporter/3dseries/2016/2016_08050.htm