In a recent ruling out of Nevada involving an insurer’s attempt to rescind two policies for misrepresentation, a judge reconsidered her predecessor’s judgment.  The previous holding was in favor of the insurer.  The prior judge found the insurer was entitled to rescind only one of the policies despite the insured’s misrepresentation.

Nevada Law on Rescission

In Nevada, recission of insurance contracts is justifiable “if any one of the enumerated factors in NRS 687B.110 applies.”^[i]  NRS 687B.110 provides misrepresentations in an application for an insurance policy may prevent recovery under the policy if such misrepresentations are:

• fraudulent; or
• material either to the acceptance of the risk, or to the hazard assumed by the insurer; or
• the insurer in good faith would either not have issued the policy or contract, or would not have issued it at the same premium rate, or would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.[ii]

Factual Background

Between January 2017 and August 2018, three separate grievances were filed against Nevada Attorney Cory J. Hilton.  These resulted in formal hearings before the Nevada State Bar in 2019, ultimately resulting in a 5-year suspension.[iii]

James River provided legal malpractice insurance to Nevada Attorney Cory J. Hilton as well as his former and current law offices (collectively “Hilton”) from 2013 to 2020.  The initial application and each annual renewal required Hilton to disclose all potential claims of which the applicant was aware, including the question “[i]n the last 12 months, has any attorney associated with your firm been the subject of any new or current investigation, disciplinary action or proceeding?”[iv]  James River relied on the application in deciding whether to issue a policy.  In each application and renewal, Hilton answered “no” to Question 16.  These facts were undisputed.

On July 22, 2019, during the period of the sixth policy issued to Hilton, James River received a claim for legal malpractice against Hilton.  The claimant, Tomiko Barnes (“Barnes”), alleged Hilton failed to file her personal injury action within the statute of limitations.  In September 2019, Barnes sent James River two e-mails which described various communications she received from the State Bar and provided 235 pages of documents from the State Bar.

On February 4, 2020, during the period of the seventh policy (60411-6) issued to Hilton, James River received another claim for legal malpractice against Hilton.  The claimant, Brian Gotti (“Gotti”) alleged Hilton mishandled his personal injury claim.

The Rescission Action

On April 16, 2020, James River filed a complaint for declaratory relief, seeking to rescind the implicated policies for fraudulent misrepresentation.[v]  James River named Hilton, Barnes, and Gotti as defendants.  James River moved for summary judgment claiming, “at all relevant times during the insurance renewal application process, they had no information that contradicted the ‘no’ answer, and…relied on the ‘no’ answer in setting the premium and deciding to issue the policies.”[vi]  James River also stated they would not have issued the sixth and seventh policies if they had known of Hilton’s pending disciplinary proceedings.  After a hearing, summary judgment was granted in favor of James River.  Defendants Hilton and Gotti filed motions for reconsideration.

• The Sixth Policy (or Entitled to Rescission)

Upon reconsideration, with regard to the sixth policy, the judge found the “paucity of evidence regarding James River’s knowledge of the existence of proceedings against Hilton precludes any genuine dispute of material fact as to whether James River would have declined to insure the Hilton Defendants at the same premium rate.”[vii]  The court found James River’s declaration the misrepresentation affected its decision to issue the policy persuasive because once it had some knowledge of the misrepresentations, it raised the premiums charged to Hilton.[viii] [ix]  Thus, James River was entitled to rescind this policy, and judgment in its favor was proper.

• The Seventh Policy (or Not Entitled to Rescission)

However, with regard to the seventh policy, the court noted, “to the extent James River in fact had knowledge of the Hilton Defendants’ material misrepresentation on [the seventh policy], James River has waived the right to rescind the policy based on that misrepresentation.”[x]  Nevada law provides “[w]hen an insurer knows that an applicant has made a material misrepresentation on its application, it waives the right to rescind the policy on the basis of the misrepresentation.”[xi]

The judge found a genuine dispute of material fact as to whether James River knew Hilton’s “no” response to Question 16 was false, and as to whether James River would have issued the policy if it knew of the misrepresentation.  The court noted the evidence suggested James River had knowledge of the misrepresentation but still issued the policy.[xii]  The fact James River raised the premium signified to the court it adjusted the price of the risk assumed based on this knowledge.  However, these were issues to be determined by the jury and summary judgment was inappropriate.

Takeaways

While an insured’s misrepresentation of a material fact in an application allows an insurer to rescind the policy, the insurer should expect heavy scrutiny as to its actual knowledge of the facts.  If the insured and/or claimant can show “actual knowledge” in the company’s “files,” rescission will not be allowed.  Thus, best practices should include claims handlers referring such information to underwriting.  Also, once an insured has made a misrepresentation in an application, expect the insured to do so again.

[i] Morales v. Prudential Ins. Co. of Am., 124 Nev. 1485, 238 P.3d 830 (2008).

[ii] James River Ins. Co. v. Hilton, No. 220CV00687CDSVCF, 2022 WL 2704792, at *6 (D. Nev. July 11, 2022).

[iii] In the Matter of Discipline of Hilton, 466 P.3d 940 (Nev. 2020).

[iv] “Question 16”.

[v] James River Ins. Co., 2022 WL 2704792, at *6.

[vi] Id.

[vii] Id., at *7.

[viii] Id.

[ix] James Rivers increased the premium for the seventh policy to $13,656 (compared to the prior year’s premium of $10, 723), an increase of over 27%.

[x] James River Ins. Co., 2022 WL 2704792, at *8.

[xi] Id. (citing Morales v. Prudential Ins. Co. of Am., 238 P.3d 830 (Nev. 2008) (citing Vigoren v. Transnational Ins. Co., 482 P.2d 96, 97 (Nev. 1970)).

[xii] In an attempt to avoid reversal of judgment in its favor, James River argued its knowledge of the bar complaint did not equal knowledge of a “disciplinary action or proceeding” to inform it of the misrepresentation.  The court rejected this argument as under Nevada law, disciplinary proceedings are treated as a civil action (citing Matter of Discipline of Arabia, 495 P.3d 1103, 1109 (Nev. 2021).  The court also noted at a minimum, the bar complaint provided notice of an “investigation” sufficient to inform James River of the misrepresentation as to Question 16.

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