Key Takeaway
Pennsylvania law allows insurers to rescind policies for misrepresentation, but innocent third parties retain protection rights despite the rescission.
Pennsylvania Insurance Law and Innocent Third-Party Protection
Insurance policy rescission cases often involve complex questions about who remains protected when an insurer successfully voids a policy due to misrepresentation. This becomes particularly intricate when multiple state laws apply and choice of law analysis determines which jurisdiction’s legal standards govern the dispute.
Under Pennsylvania law, insurance companies have the right to rescind policies when they can demonstrate material misrepresentation by the policyholder. However, this right to retroactive rescission doesn’t automatically eliminate all coverage obligations. Pennsylvania recognizes an important exception that protects innocent third parties who may have been injured in accidents involving vehicles covered under the rescinded policy.
The question of whether someone qualifies as an “innocent third party” requires careful legal analysis, particularly in cases where the policy has been voided after an accident has already occurred. Courts must balance the insurer’s legitimate right to cancel fraudulent policies against the need to protect parties who had no involvement in any misrepresentation.
Jason Tenenbaum’s Analysis:
Quality Psychological Servs. v Infinity Prop. & Cas. Co., 2015 NY Slip Op 50645(U)(App. Term 1st Dept. 2015)
“While defendant-insurer submitted proof indicating that it properly rescinded the underlying insurance policy pursuant to Pennsylvania law based upon misrepresentations made by the insured, one Catrina Gordon, in the underlying policy application, defendant failed to demonstrate that plaintiff’s assignor, who was injured in an accident involving the Gordon vehicle, was “not an innocent third party” who should be precluded from receiving protection under the policy”
Key Takeaway
Even when an insurer successfully rescinds a policy for misrepresentation under Pennsylvania law, they bear the burden of proving that injured parties should not receive protection as innocent third parties. This case demonstrates that rescission alone doesn’t automatically eliminate all coverage obligations, particularly for parties who had no involvement in the underlying fraud.
