Pennsylvania Policy Rescission and the Innocent Third Party Doctrine in New York No-Fault Litigation

The Decision

Island Life Chiropractic, P.C. v Infinity Group, 2017 NY Slip Op 27040 (App. Term 2d Dept. 2017)

I do not normally post about PA-NY choice of law issues on here, but I have seen a trend of appeals where Infinity has gotten a little too “trigger happy” in disclaiming coverage. This is the second or third case I have recently seen on this issue. Parenthetically, PA has hourly attorneys fees when a claim is “wrongfully” disclaimed. I am trusting my memory on that one – not taking the time to research- but this case should spawn a $10,000 attorney fee for Island Life, provided they make a prima facie case in accordance with PA law.

“Under Pennsylvania law, an insurer has a common-law right to rescind a policy of automobile insurance (see 40 P.S. §§ 991.2002, 991.2004; Erie Ins. Exch. v Lake, 543 Pa 363, 375, 671 A2d 681, 687 ; Klopp v Keystone Ins. Cos., 528 Pa 1, 595 A2d 1 ). The Pennsylvania Supreme Court has held, however, that while an automobile insurance policy may be retroactively rescinded as to an insured who has made a material misrepresentation, the policy may not be retroactively rescinded with respect to third parties “who are innocent of trickery, and injured through no fault of their own” (see Erie Ins. Exch. v Lake, 543 Pa at 375, 671 A2d at 687). In the case at bar, the papers defendant submitted in support of its motion set forth no facts tending to demonstrate that the assignor was anything other than an innocent third party. Consequently, defendant failed to establish its prima facie entitlement to summary judgment dismissing the complaint as a matter of law.”

The Legal Background: Rescission and the Innocent Third Party Doctrine

Rescission is the remedy that treats an insurance policy as void from its inception — as though it never existed — usually because the insured made a material misrepresentation when applying for coverage. It is a far more powerful weapon than cancellation, which only terminates coverage going forward. If a carrier can rescind a policy ab initio, every claim under that policy potentially evaporates, including first-party no-fault claims held by medical providers as assignees of the injured person.

Whether rescission is available at all depends on which state’s law governs the policy. New York and Pennsylvania answer that question very differently. Under New York law, an insurer generally cannot retroactively rescind an automobile liability policy; the statutory cancellation scheme supplants the common-law remedy, and a carrier that discovers fraud in the application is ordinarily limited to canceling the policy prospectively. Pennsylvania, by contrast, preserves a common-law right to rescind an auto policy for material misrepresentation, as the Appellate Term’s quotation of 40 P.S. §§ 991.2002 and 991.2004 and the Erie Ins. Exch. v Lake line of cases reflects.

But Pennsylvania’s rescission right is not unlimited. As the court explains, the Pennsylvania Supreme Court has held that even where a policy may be retroactively rescinded as against the insured who committed the misrepresentation, it may not be rescinded as against third parties “who are innocent of trickery, and injured through no fault of their own.” That carve-out — the innocent third party doctrine — is what decided this appeal. A claimant who had nothing to do with procuring the policy does not lose protection because the named insured lied on the application.

Why does a New York court apply Pennsylvania law in the first place? In contract matters, New York courts resolve choice-of-law questions by looking to the state with the most significant relationship to the insurance contract — typically the state where the policy was issued and delivered. When a Pennsylvania-issued policy ends up in a New York no-fault suit because the accident or treatment occurred here, the substantive validity of the policy is measured under Pennsylvania law, and New York courts apply Pennsylvania’s doctrines faithfully — including their limits.

Why the Insurer Lost This Motion

The procedural posture matters. The insurer moved for summary judgment dismissing the provider’s complaint on the ground that the policy had been rescinded. On summary judgment, the movant bears the initial burden of making a prima facie showing of entitlement to judgment as a matter of law; if that showing is not made, the motion fails regardless of the sufficiency of the opposing papers.

Here, the defect was in the carrier’s own proof. Because Pennsylvania law shields innocent third parties from retroactive rescission, an insurer relying on rescission against an assignee provider must come forward with facts demonstrating that the assignor — the injured person who assigned the no-fault benefits — was complicit in the misrepresentation. The carrier’s papers, the court found, “set forth no facts tending to demonstrate that the assignor was anything other than an innocent third party.” The burden never shifted, and the motion failed.

Why This Matters

For medical providers and their counsel, the case is a reminder that an assignee stands in the shoes of the assignor. If the assignor is an innocent third party under Pennsylvania law, a retroactive rescission of a Pennsylvania policy does not defeat the assigned first-party claim. A rescission letter from the carrier is not the end of the analysis — the governing state’s limits on rescission must be checked.

For insurers, the lesson is one of proof. Disclaiming on rescission grounds without evidence tying the claimant to the fraudulent procurement invites exactly the result here: denial of summary judgment, continued litigation, and — as noted above — potential fee exposure under Pennsylvania law where a disclaimer is found wrongful.

Practical Takeaways

• Identify the governing law early. A Pennsylvania-issued policy litigated in a New York no-fault case is construed under Pennsylvania substantive law, including the innocent third party doctrine.
• An insurer moving on rescission must address the assignor’s role. Silence on whether the assignor participated in the misrepresentation is fatal to the prima facie showing.
• Providers opposing these motions should scrutinize the carrier’s papers for actual evidence of the assignor’s complicity — the burden is the movant’s, not the provider’s.
• Rescission and cancellation are different remedies with different consequences; do not assume a “voided” policy defeats every downstream claim.

Related Resources

• Fraudulent procurement defense precluded — our cluster hub on fraudulent procurement defenses in New York no-fault cases
• The firm’s Legal Encyclopedia — plain-language explainers on New York no-fault and personal injury doctrine
• No-Fault Defense practice page
• Pennsylvania Insurance Law in New York Courts: Navigating Choice of Law and the Innocent Third Party Doctrine
• Understanding Choice of Law in Multi-State Personal Injury Cases
• When NY and NJ Insurance Laws Collide: Understanding Cross-State Claims
• Interstate Insurance Law Complications in New York Personal Injury Cases