Rescission: A Cyber Insurance Time Bomb? (Part Three: Litigating the Text of the Insurance Application)
In Parts 1 and 2 of this series, we discussed how insurance companies sometimes try to void policies (the legal term for this is rescission) and explained why cyber insurance policies, in particular, might be more vulnerable to the risk of rescission than other types of insurance. In this part of our series, we will discuss the legal rules that apply when insurers try to rescind coverage.
Are The Questions Ambiguous?
The concept of ambiguity is often central in insurance litigation. Generally, ambiguity matters greatly when the parties disagree regarding the correct interpretation of insurance policy language, because courts in almost every state have held that ambiguous language must be interpreted in favor of coverage. But does that rule also apply to questions in an application for insurance? In many states, the answer to that question is yes.
Although case law regarding ambiguous questions in insurance applications is less well developed than the cases involving ambiguous policy language, courts in several states have held that the same rules apply to both insurance policies and insurance applications. For example, the New Jersey Supreme Court has explained that “ambiguities in insurance contracts or application forms are to be resolved against the insurer.” Remsden v. Dependable Ins. Co., 71 N.J. 587, 589 (1976) (internal citation omitted; emphasis added). In Remsden, the Court stated:
“The ambiguity in the application form is evident. When the carrier requested the names of ‘the only drivers’ of the vehicle, what information would the applicant understand was being sought? Should possible emergent drivers be listed? Occasional drivers? Possible drivers who were members of the same household? The only reasonable interpretation of the request to an average purchaser of insurance would be the names of regular drivers.
Id. at 589-90 (internal citations omitted). Cases from other states support this approach. For example, in O’Riordan v. Fed. Kemper Life Assurance Co., 36 Cal. 4th 281, 287–88, 114 P.3d 753, 757 (2005), the court found certain questions regarding smoking were ambiguous, and construed them favorably to the insured:
The first question asked, “Have you smoked cigarettes in the past 36 months?” That inquiry can reasonably be construed as an attempt to determine habitual use, not the smoking of a single cigarette or two during that entire period. Had Kemper intended disclosure of the latter, it could have inquired into the smoking of “any” cigarette during the relevant period. The second question asked: “Have you used tobacco in any other form in the past 36 months?” Because this question directly followed the question pertaining to cigarette use, an applicant could reasonably construe it as inquiring into use of tobacco in any form other than cigarettes. Therefore, an applicant who, like Amy, has smoked just a couple of cigarettes but has not used tobacco in any other form during the period at issue could correctly answer “no” to this question.
Thus, if (as plaintiff maintains) Amy smoked only a cigarette or two during the 36 months preceding her application and did not use any other tobacco products, she did not conceal her cigarette usage by answering “no” to the two questions at issue.
Another California court has expressly stated that the principles of insurance policy interpretation apply to questions in the application for insurance.
We construe ambiguities against the insurer, as drafter of the policy. These principles apply likewise to the questions in an application prepared by an insurer. Therefore, although an insurer generally “has the right to rely on the applicant’s answers without verifying their accuracy[,] … [¶] … [t]he insurer cannot rely on answers given where the applicant-insured was misled by vague or ambiguous questions.”
Duarte v. Pac. Specialty Ins. Co., 13 Cal. App. 5th 45, 54, 220 Cal. Rptr. 3d 170, 178 (2017) (emphasis added), as modified (June 29, 2017) (internal citations omitted).
Likewise, a Florida appellate court held in a rescission case that “any ambiguity in the insurance policy application should be construed against the insurer.” Boca Raton Cmty. Hosp., Inc v. Brucker, 695 So. 2d 911, 913 (Fla. Dist. Ct. App. 1997) (citing Comprehensive Benefit Adm’rs, Inc. v. Nu–Cape Constr., Inc., 549 So.2d 700 (Fla. 2d DCA 1989)). As well, in Comprehensive Benefit Adm’rs, Inc. v. Nu–Cape Constr., Inc., 549 So.2d 700 (Fla. 2d DCA 1989), the Florida appellate court found that an application question was “ambiguous as to whether it asked about a then existing condition (in which case the negative answer would have been correct) or about a prior condition (in which case the negative answer would have been incorrect),” and therefore held that the “trial court properly construed the ambiguity against the insurer and found that coverage was not precluded.”
Other courts are in accord. A federal court applying Oklahoma law cited and applied standard principles of insurance policy interpretation when holding that a question in an application for insurance was ambiguous and must be construed against the insurer. Matlock v. Texas Life Ins. Co., 404 F. Supp. 2d 1307, 1312 (W.D. Okla. 2005) (citing cases involving ambiguous policy language). The Second Circuit Court of Appeals, in a case decided under Connecticut law, recognized that ambiguous questions are to be construed against the insurer. “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.’” F.D.I.C. v. Great Am. Ins. Co., 607 F.3d 288, 294–95 (2d Cir. 2010) (citing Middlesex Mut. Assur. Co. v. Walsh, 218 Conn. 681, 693–94, 590 A.2d 957, 964 (1991)).
Likewise, under Maryland law, “courts will construe the language of a policy favorably to the insured, and will relieve the latter from responsibility for erroneous answers to questions in an application if they are in any wise ambiguous.” Schloss v. Metro. Life Ins. Co., 177 Md. 191, 203-04, 9 A.2d 244, 249 (1939). A federal court applying Wisconsin law applied similar principles of insurance policy interpretation (e.g., contra proferentum) to conclude the insured had not made misrepresentations in response to arguably ambiguous questions in Hejsak v. Great-W. Life & Annuity Ins. Co., 331 F. Supp. 2d 756, 764 (W.D. Wis. 2004) (“Thus, one reasonable interpretation of the term “disorder” is “illness” only.”)
These legal rules will be crucial in cyber rescission cases because (as discussed in Parts 1 and 2) cyber applications involve complex, technical IT systems and procedures, and the questions often use terms of art within the fields of IT, cyber security, and/or insurance. If a disputed question can be interpreted in more than one way, then it should be construed in the way that is most favorable to the insured (and least favorable to the insurer’s attempt to rescind the policy).
In Part 4, we will discuss additional legal rules that impact whether, and when an insurer can rescind a policy.