Hunton Insurance Recovery Blog

Policyholders purchase insurance policies as a safety net, promising financial protection in times of need. However, that safety net can disappear when an insurer rescinds a policy—a devastating consequence for potentially innocent policyholders. We recently published a post following a Fourth Circuit decision addressing this issue. The Ninth Circuit has also addressed this issue, most recently in the decision discussed below.

No policyholder wants to hear the word “rescission” in the context of an insurance claim. The reality, however, is that when policyholders complete applications for insurance, they are typically focused on obtaining the best policy terms for the best rate. Nuances about question wording, the breadth of the applicant’s representations or how a court may analyze the insurer’s questions or the policyholder’s answers usually take a back seat to the central importance of placing and renewing coverage at a realistic price. But once a claim is made, insurers look back at applications to assess the accuracy and completeness of all information received during the underwriting process, especially in signed applications. If the insurer discovers a misrepresentation, it can be used to rescind the policy, leaving the insured with no coverage. 

Hunton Andrews Kurth's insurance coverage team recently published a client alert discussing a D&O coverage dispute arising from a credit union’s post-acquisition fraud claims.

Everest National Insurance Company has filed a lawsuit denying any obligation to cover a post-acquisition lawsuit by a credit union alleging fraud against two banks and their executives. The seller paid additional premium for an extended reporting period to report claims based on pre-acquisition wrongful conduct, but the insurer denied coverage on the ground that any claims asserted by the buyer are excluded under the D&O policy’s “insured vs. insured” exclusion. The decision underscores the importance of not only ensuring continuity of D&O coverage before and after a transaction but also evaluating all possible claim scenarios arising out of a deal to ensure that all stakeholders are adequately protected.

In responding to a certified question from the Fifth Circuit in Richards v. State Farm Lloyds, the Texas Supreme Court held that the “policy-language exception” to the eight-corners rule articulated by the federal district court is not a permissible exception under Texas law.  See Richards v. State Farm Lloyds, 19-0802, 2020 WL 1313782, at *1 (Tex. Mar. 20, 2020).  The eight-corners rule generally provides that Texas courts may only consider the four corners of the petition and the four corners of the applicable insurance policy when determining whether a duty to defend exists.  State Farm argued that a “policy-language exception” prevents application of the eight-corners rule unless the insurance policy explicitly requires the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent,” relying on B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634, 645 (N.D. Tex. 2006).  The Texas Supreme Court rejected the insurer’s argument, citing Texas’ long history of applying the eight-corners rule without regard for the presence or absence of a “groundless-claims” clause.