In September 2012, the highest court of the Granite State reversed a decision that rescinded an insurance contract on the basis of a material false statement in the application. The Supreme Court held that rescission was unavailable, because the policy was ambiguous. The court suggested, in other words, that an insurance policy must clearly express the insurer’s intention not to be forced to provide coverage on the basis of misrepresentations. Parties to other types of contract will probably not carry a similar burden.
Thomas Tessier, a partner in the law firm of Christy & Tessier, misappropriated assets while serving as Administrator of an estate. Tessier’s partner, Robert Christy, was unaware of the theft, but he did facilitate it: He notarized documents that purported to be signed by beneficiaries of the estate, without actually witnessing the signatures. In early 2007, Tessier entered into a settlement with the estate, but, in the event, he was unable to keep up the payments.
A month after that agreement was signed, the firm applied for renewal of its professional liability coverage, and it was required to respond to this question: “After inquiry, is any lawyer aware of any incident, act, error or omission . . . that could result in a professional liability claim.” Christy said he asked Tessier if he was aware of such a claim, and Tessier said he wasn’t. On the firm’s application, Christy answered the question, “no.”
When the story came out, the firm’s insurer, Great American, brought an action to rescind the policy. The trial court granted rescission, but the Supreme Court of New Hampshire reversed, in Great American Ins. Co. v. Christy, No. 2011-228 (N.H. Sept. 28, 2012).
The decision turned, in part, on a self-described “Innocent Insured” provision. The policy contained an exclusion for claims as to which the firm failed to give the insurer notice “as soon as possible,” but it also waived that exclusion if the failure to give notice occurred “solely because of the default or concealment . . . by one or more Insureds responsible for the loss or damage . . . .” This provision, the court held, showed “that the parties intended to distinguish actual from imputed knowledge and not to penalize insureds who did not have actual knowledge of wrongful acts.”
The thing is, Great American’s claim didn’t depend on the late notice exclusion; it was a claim for rescission of the insurance contract, based on the insurer’s claim that it would never have issued the renewal policy if the law firm hadn’t lied in its application. Yet the court found that the consequences of that lie should be determined by the terms of the contract itself: “It is not clear,” the court reasoned, that the “Innocent Insured” provision “[did] not apply to giving notice” of claims in the application for the policy. Therefore, “in the absence of language specifically imputing knowledge to innocent insureds of false statements made” in the application, “the contract read as a whole is ambiguous.” And ambiguities, of course, must be resolved against the insurer.