Opinion ID: 1458870
Heading Depth: 2
Heading Rank: 3

Heading: Grounds for Rescission in the Bond

Text: Therefore, the relevant inquiry is whether CBC's failure to report the Harmony Designs loss, the indictments of MTB officers, and Lloyds' decision not to renew or extend its fidelity bond were in fact material misrepresentations. Although a single misrepresentation entitles GAIC to rescind the bond, we will consider each of the three statements individually. As did the district court, we borrow general principles of Connecticut insurance law to interpret the terms of the fidelity bond. Under Connecticut law, an insurance policy is voidable by the insurer if the applicant made [m]aterial representations . . ., relied on by the company, which were untrue, and known by the assured to be untrue when made. Middlesex Mut. Assurance Co. v. Walsh, 218 Conn. 681, 590 A.2d 957, 963 (1991) (quoting State Bank & Trust Co. v. Conn. Gen. Life Ins. Co., 109 Conn. 67, 145 A. 565, 567 (1929)) (emphasis omitted). To succeed on a defense of misrepresentation, GAIC as the movant bears the burden of establishing (1) a misrepresentation (or untrue statement) by the plaintiff which was (2) knowingly made and (3) material to defendant's decision whether to insure. Pinette v. Assurance Co. of Am., 52 F.3d 407, 409 (2d Cir.1995). The determination of whether an answer in an insurance application is untrue must be made in light of the question asked. Walsh, 590 A.2d at 964. Where a question in the application is ambiguously worded and the applicant could reasonably have understood the question as calling for a particular response, and the response given in accordance with that understanding is not false, the response does not amount to a misrepresentation. Id. at 965. Additionally, a fact is material if it would so increase the degree or character of the risk of the insurance as to substantially influence its issuance, or substantially affect the rate of premium. Pinette, 52 F.3d at 411(quoting Davis Scofield Co. v. Agric. Ins. Co., 109 Conn. 673, 145 A. 38, 40 (1929)). Matters made the subject of special inquiry are deemed conclusively material. State Bank & Trust Co., 145 A. at 566; see also id. (Where the representation is contained in an answer to a question contained in the application which is made a part of the policy, the inquiry and answer are tantamount to an agreement that the matter inquired about is material.). First, we take up CBC's failure to report the $950,000 advanced by MTB agents based on fraudulent invoices under the factoring agreement with Harmony Designs. The Reliance application (as well as the GAIC application) asked whether the applicant had sustained any losses in the prior three years, and CBC replied None. We see no ambiguity in the question and no reason to construe it, as Van Bergen allegedly did, to refer to losses sustained by CBC but not MTB. At the time she completed the application, the relevant applicant was the newly expanded CBC, a company which included MTB's factoring business and eventually recouped some of the loss from Harmony Designs. It is undisputed that CBC knew about the Harmony Designs loss when it acquired MTB's factoring unit, knew that the loss played a role in Lloyds' decision not to renew or extend its fidelity bond for the CBC-MTB entity, and knew about the loss when it applied for new fidelity coverage from GAIC. Keeping in mind that the application was for insurance that would cover precisely the type of loss which occurred with the Harmony Designs fraud, no reasonable interpretation of the question would lead to the conclusion that None was a complete and truthful answer. As prior losses were the subject of specific inquiry, CBC's response is presumptively material. Moreover, [c]ommon sense tells us that an applicant's prior loss history is material to a reasonable insurance company's decision whether to insure that applicant or determination of the premium. Pinette, 52 F.3d at 411. Consequently, there is no factual issue, and GAIC was entitled to rescind the fidelity bond on the basis of CBC's material misrepresentation that it had not sustained any losses in the prior three years. Next, we turn to CBC's failure to disclose the indictments of MTB officers. GAIC argues that this information was relevant to the prompt for reporting losses in the previous three years, as well as to a catch-all question which requested any knowledge of or information concerning any occurrence or circumstance whatsoever which might materially affect the insurer's decision to issue fidelity coverage. Again, it is undisputed that CBC was aware of the indictments and resulting lossesfor which CBC sought recovery under the Lloyd's bondat the time it applied for new fidelity coverage. The FDIC argues that the indictments had no bearing on its insurance risk profile because CBC did not purchase the precious metals business or employ the indicted officers. However, this after-the-fact justification does not diminish the materiality of the disclosures. As we have already established, information about previous losses is presumptively material. It follows that information that losses were incurred under a cloud of criminal suspicion is also material. Moreover, the determination of risk is one properly left to the insurer, not the insured, and the insurer cannot make an accurate risk assessment without full disclosure from the applicant. The very purpose of such broadly worded catch-all questions is to prevent the type of self-selective reporting that occurred here. It must be noted that CBC had specific reason to know that this information would substantially influence a potential insurer's decision to issue a fidelity bond because Lloyd's explicitly stated that it was very concerned at the allegations being made against senior officials of [MTB] and would not renew its CBC-MTB bond absent a face-to-face meeting to discuss, among other things, the indictments. We find no issue of fact that CBC's failure to report the indictments of MTB officers and resulting losses in the Reliance application constituted a material misrepresentation. Finally, we consider the issue of CBC's failure to disclose Lloyds' decision not to renew or extend its fidelity coverage. The Reliance and GAIC applications asked whether insurance of a similar nature had been declined or cancelled in the previous three years, and CBC answered No. However, at the time it responded, CBC was aware that Lloyd's declined to renew its fidelity coverage for the new CBC-MTB entity and it refused to grant CBC a 30-day extension of its expiring coverage. The FDIC argues that CBC walked away from Lloyd's and not vice versa, thus CBC did not interpret the question to require information regarding coverage it chose not to renew. The FDIC urges a narrow and overly literal reading of the question to include instances where an insurer cancelled a policy prior to its expiration, or rejected a new application, but not those where existing coverage was not renewed or extended. We find no ambiguity, either in the wording of the question or the type of information it intends to solicit. Both terms used in the Reliance application declined or cancelledseek information regarding another company's unwillingness to insure. Knowledge of Lloyds' initial reluctance and ultimate refusal to continue its bond would have alerted GAIC to potential red flags, prompting a careful review of CBC's application to accurately appraise the risks to be insured. Although CBC ultimately did not take the necessary steps to renew the Lloyd's bond, and in that sense walked away from its insurer, Lloyd's made it clear that the only way to obtain continuing coverage would be to attend a meeting in London, and even that meeting could not guarantee renewal. Furthermore, CBC sought a 30-day extension of the CBC-MTB fidelity bond, which Lloyd's rejected in light of outstanding claims. Lloyds' actions fall within the scope of the request for information about prior insurance cancellation or declination. As this was a subject of specific inquiry, the information is material. We additionally find that even if we were to agree with the FDIC's interpretation of the Reliance application, we would nevertheless hold that the information regarding Lloyds' nonrenewal and refusal to extend coverage should have been disclosed in the catch-all question; no reasonable construal of the request for any information concerning any occurrence or circumstance whatsoever which might materially affect this proposal would exclude CBC's negotiations with Lloyd's. Therefore, CBC's statement that no coverage had been cancelled or declined was a material misrepresentation for which GAIC was entitled to rescind the fidelity bond. We have considered the FDIC's other arguments and do not find them persuasive.