Rescission of insurance coverage normally results from a material misrepresentation on the application for coverage. But what does this actually mean. There are a number of ways where issues come up that cause the malpractice insurer to want to get off of an exposure. Rescission is the most extreme tool that an insurer has available to get off of a risk. Here are the most likely tools that an insurer has to get off of an exposure:
1. Cancel coverage at inception--Many policies allow the insurer to revoke or cancel coverage during the 1st 30 to 60 days at the inception of coverage. Normally this is for a material issue not known at the effective date of coverage. Sometimes a conditional binder is issued at inception subject to conditions being met. If conditions not met, coverage is cancelled.
2. Midterm Cancellation—A material change to the risk generally is a reason that an insurer is allowed to cancel midterm. Without a material change coverage must continue until expiration.
3. Non-Renewal—Prior to the renewal cycle an insurance carrier with giving the proper state required notice to the insured, informs the insured in writing that the insurer will not be renewing coverage. The reasons for this can range from changes in the exposure, insurer withdrawing from the market, underwriting reasons, claims experience, or a variety of other reasons.
4. The 30-Day (60-Day) extension—When the dates to give proper notice for the non-renewal at expiration date are missed, the 30-Day extension provides the need notice for the non-renewal.
5. Rescission—Generally a rescission results from a material misrepresentation by the insured, i.e. not telling the insurer on the application about claims activity that has occurred is a common example. Often this issue comes up when a claim is reported and discovery by the claims department finds non-disclosed material issues that should have been known to the insurer at the time coverage was originally underwritten or renewed. Often the insurer goes to court getting a declaratory judgement that allows the insurer to remove coverage back to a certain date. This can result in the insured losing many years of coverage.
With claims-made coverage a rescission is the worst-of-all-worlds. If a claim is involved claim coverage is declined. Not only is current coverage lost, but past acts coverage is gone. There is no good way to get past acts coverage back after a rescission. It is as if the insured never had malpractice insurance except for the insurance history issues and likely wasted thousands of dollars of premiums through the years.