Policy Void From Its Inception – No Duty to Defend
The implied covenant of good faith and fair dealing applies equally
on the person insured as it applies to an insurer. When a person applies
for insurance and misrepresents material facts the covenant is breached
and the insurer has the right to seek a court order that the policy is
rescinded from its inception and that any duty to defend on the policy
does not exist since rescission establishes that the policy never
existed.
In Philadelphia Indemnity Insurance Company v. William Asperi,
Civil Action No. 18-cv-02372-CMA-NRN, United States District Court for
the District of Colorado (February 13, 2019) Philadelphia Indemnity
Insurance Company’s asked the USDC for Default Judgment as Against
William Asperi and an declaration that its policy was void from its
inception.
BACKGROUND
On November 14, 2014, Defendant completed a Professional Liability
Insurance Application and submitted it to Plaintiff. As part of the
application, Plaintiff made a number of false representations, including
that he had never been convicted of a misdemeanor or a felony. Based on
the information in the application, Plaintiff issued an Allied
Healthcare Providers Professional and Supplemental Liability Insurance
Policy (the “Policy”), which was effective from November 14, 2014, to
November 14, 2015. The terms of the Policy provides: “We will pay on
your behalf those sums that you become legally obligated to pay as
damages because of a professional incident that takes place in the
coverage territory and occurs during the policy period. The professional
incident must result from the practice of the profession shown in the
Declarations.”
FACTS
On June 20, 2017, Tabatha Goodrich filed a complaint against
Defendant in Denver County District Court, case number 2017CV32255 (the
“underlying lawsuit”). In the underlying lawsuit, Ms. Goodrich indicated
that beginning in January 2015, she had been treated by Defendant, who
claimed to be a “Registered Psychotherapist in the State of Colorado
[and]
held himself out as having knowledge and skill in the field of
neuropsychology and psychology.” She also alleged that Defendant’s
registration was based on Defendant’s submission of “false, misleading,
incomplete and fraudulent information in his Application for
Registration with the Colorado State Board.” Specifically, he lied to
the Board, with regard to his physical and mental condition and his
criminal record. Defendant was suspended from the practice of
psychotherapy on September 22, 2015.
Defendant’s fraudulently obtained credentials allowed him to provide
mental health services to Ms. Goodrich. Defendant spent substantial
time psychoanalyzing Ms. Goodrich, “telling her that he was trying to
find out what was wrong with her,” and he eventually diagnosed Ms.
Goodrich with Borderline Personality Disorder. Ms. Goodrich subsequently
became pregnant as a result of her relationship with Defendant.
Defendant’s conduct gave rise to the underlying lawsuit in which Ms.
Goodrich sued Defendant for multiple claims including negligence.
Plaintiff was provided notice of the underlying lawsuit on August 11,
2017, and Plaintiff is currently providing a defense to Defendant
pursuant to a reservation of rights. Plaintiff sued seeking declaratory
relief with respect to the validity of the Policy and argues that the
Policy should be declared void because Defendant made material
misrepresentations in the application on which the Policy was based.
DEFENDANT HAS DEFAULTED
Plaintiff served Defendant via personal service on November 16, 2018.
Defendant has nevertheless failed to answer the Complaint or otherwise
respond, and the time to do so has long since expired.
DECLARATORY JUDGMENT
Under Colorado law, when a policyholder misrepresents material facts
to obtain insurance, the provisions obtained under those circumstances
are void from their inception. Materiality is established if a false or
concealed fact materially affected either the risk accepted or the
hazard insured against such that the insurer would not have included the
coverage provision had it been truthfully informed.
In the instant case, Plaintiff has shown that it may void the Policy.
Defendant explicitly represented that he had never been convicted of a
misdemeanor or a felony. Moreover, by executing the agreement, Defendant
acknowledged that he understood “that incorrect information could void
the insurance coverage.”
In fact, Defendant had a lengthy criminal record that spanned more
than two decades, and included more than two dozen criminal cases and a
felony conviction before he applied for insurance with Plaintiff in
2014. Therefore, Defendant misrepresented facts in his insurance
application.
Plaintiff’s decision to issue coverage was made in reliance on
Defendant’s misrepresentations and Plaintiff would not have issued the
coverage if it had truthful information. Therefore, the Policy was void ab initio, which is to say void from its inception.
Where, as here, a contract is void ab initio, the party
penalized has no rights thereunder. Accordingly, this void Policy does
not impose on Plaintiff any duty to defend or indemnify Defendant for
any claim related to the underlying law suit. Therefore, Plaintiff does
not owe Defendant a duty of defense or indemnification with respect to
the underlying lawsuit.
ZALMA OPINION
Insurers are compelled, by the covenant of good faith and fair
dealing, to believe the facts represented by a prospective insured at
the time of the application since the cost of investigating each fact
represented would be prohibitive and since almost 100% of prospective
insureds are honest and forthright. Misrepresentations are usually
discovered when a claim is presented. In this case it was obvious since
the underlying suit alleged that the insured lied to the licensing board
with lies that were also material to the insurer.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and
summarize cases published by courts of the various states and the United
States. The court decisions have been modified from the actual
language of the court decisions, were condensed for ease of reading, and
convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an
insurance consultant specializing in insurance coverage, insurance
claims handling, insurance bad faith and insurance fraud almost equally
for insurers and policyholders. He also serves as an arbitrator or
mediator for insurance related disputes. He practiced law in California
for more than 44 years as an insurance coverage and claims handling
lawyer and more than 50 years in the insurance business. He is available
at http://www.zalma.com and zalma@zalma.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to
insurance, insurance claims and the need to defeat insurance fraud. He
has created the following library of books and other materials to make
it possible for insurers and their claims staff to become insurance
claims professionals.