Insurance Policy Rescission After a Claim is Filed: Bad Faith and Third-Party Claims

While insurers' counsel view the rescission of an insurance policy as an underutilized tool in handling insurance claims, policyholders contend rescission is often nothing more than opportunistic, post-claims underwriting that leaves the policyholder and sometimes injured third parties defenseless. The representations of the insurer and its agents at the time of purchasing the coverage may also play a role in whether rescission is proper as well as the policy exclusions.

Rescission is an equitable remedy, but its use and scope are matters of state statutory law. The remedy targets material misstatements in the application or claims presentation process, but applications and other paperwork are often confusing. Attempting to rescind a policy after losses often leads to bad faith and litigation claims with costs that could exceed the claim amount. A valid choice of law provision does not necessarily control applicable "bad faith" law.

Because rescission often requires some intentionality, summary judgment is seldom practical for the insurer. Insurers must be careful not to waive the right to rescission and exercise it carefully. Policyholders, however, have significant defenses, including bringing claims or counterclaims for bad faith.

Listen as the panel discusses the increasing use of rescission in all types of policies, including general liability coverage, auto coverage (fleet and business coverage), and individual policies.