Property Casualty Focus

When state law provides that an insurance contract can be rescinded for misrepresentations only if they are “material,” can an insurer contract around that rule by adding an exclusion for all claims based on any misrepresentation, regardless of materiality? The Southern District of New York says “yes” in Mt. Hawley Insurance Co. v. Beach Cruiser LLC.

The insureds were the owner and property manager of various rental properties, including a house in downtown Charleston, South Carolina. One summer day, two of their renters fell from a second-floor balcony after the railing collapsed. The renters, unsurprisingly, sued the insureds for their injuries. The insureds, in turn, put their commercial general liability carrier on notice of the claim.

The policy included an endorsement providing: “There is no coverage under this policy, this insurance shall not apply, and we shall have no duty to defend or indemnify any insured for any claim,” if the insured had provided any “incorrect, false, inaccurate or incomplete information” in their policy application. The application had asked the insureds whether “any” of their properties were rented “by the day or by the week,” to which the insureds had answered “No.” But the renters had only rented the property at issue for a long weekend, and, as Mt. Hawley learned during its investigation of the claim, three of the insureds’ 30 properties were listed for short-term rental on Vrbo and Airbnb. Mt. Hawley sent the insureds a letter reserving its rights under the policy and purporting to rescind the policy.

Mt. Hawley then filed suit, seeking a declaration that it had no duty to defend or indemnify the insureds and was owed reimbursement for defense costs to that point. The insureds filed counterclaims seeking a declaration that they were owed defense and indemnity and for breach of contract.

On cross-motions for summary judgment, the court ruled for Mt. Hawley, concluding that there was no coverage, without analyzing the materiality of the insureds’ false answer at all. It construed the endorsement as an exclusion and found that it unambiguously excluded coverage because the insureds had falsely stated in their application that none of their properties were rented on a short-term basis. It rejected the insureds’ argument on this point that the answer was “reasonably accurate” because only a few of their properties were short-term rentals. As the court explained, the insureds’ answer was “not only ‘not 100% accurate,’ it was 100% false.”

The court also found that New York Insurance Law section 3105 did not render the exclusion invalid. That provision provides that “[n]o misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material.” Reviewing decisions of the New York state appellate courts applying the provision, the court concluded that it created an implied condition that allowed insurers to rescind policies based on material misrepresentations, which was “distinct from insurers’ ability to defeat claims under an exclusion within the insurance contract itself.” Put another way, the court concluded that section 3105 was relevant only when there was coverage under the policy in the first place. Here, however, there was no coverage because the misrepresentation exclusion contained no materiality requirement.

Finally, the court rejected the insureds’ arguments that the exclusion was invalid as a matter of public policy either because it conflicted with section 3105 or because it was overbroad. As the court said, it had already determined that the exclusion and section 3105 were not in conflict. As for the insureds’ overbreadth argument, the court pointed out that the insureds were experienced in negotiating insurance policies, having been in the rental property business for many years. Moreover, the court said, the insureds could have avoided application of the exclusion by simply refraining from giving false answers on their application in the first place.