An insurer for University of Southern California recently filed suit in California federal court against the university and a former gynecologist at USC’s Student Health Center seeking to rescind USC’s insurance policy. The dispute concerns North American Capacity Insurance Company’s coverage obligations for hundreds of sexual abuse-based lawsuits brought against USC. NACIC seeks, among other things, to rescind a policy it sold to USC based on alleged failures by USC to disclose material facts during the policy application process. NACIC is also seeking to avoid its coverage obligations under the policy’s “Prior Known Acts” exclusion.
NACIC’s lawsuit against USC is just one of many recent examples of insurers seeking to duck coverage based on the policyholder’s alleged lack of transparency during the underwriting process. The lawsuit thus shows that policyholders should carefully consider all questions and disclosures during the underwriting process (including ongoing obligations to disclosure as part of renewals) to avoid potential disputes should a claim arise. The lawsuit also shows how insurers often look to prior events to undercut coverage. Policyholders therefore need to be mindful of any exclusions tying coverage to prior events while negotiating coverage.
The NACIC Policy
The NACIC policy is an Excess Healthcare Professional Liability Policy for the policy period July 1, 2017 to July 1, 2018 (“NACIC Policy”). The NACIC Policy follows form to a BETA Risk Management Authority Contract issued for the same policy period (“BETARMA Policy”). The NACIC Policy provides $20 million in coverage, excess of $40 million in underlying coverage.
The Non-Disclosure Allegations and Prior Events
NACIC alleges USC had “knowledge of facts or circumstances” to believe a claim might be made under the NACIC Policy. In support of its allegation, NACIC contends that knowledge of its doctor’s inappropriate conduct toward patients began accumulating at least as early as 1990, USC conducted investigations into the doctor’s inappropriate conduct, and such investigations led to USC putting him on administrative leave and ultimately firing him. NACIC argues that USC never “communicated, notified, disclosed, or informed NACIC about the reports, investigations, findings, Dr. Tyndall’s administrative leave, or Dr. Tyndall’s termination” prior to the NACIC Policy incepting in 2017.
NACIC’s Request for Rescission
NACIC is seeking rescission of the NACIC Policy as an alternative remedy. In doing so, NACIC relies on the California Insurance Code, which provides that a party’s “[n]eglect to communicate that which a party knows, and ought to communicate is concealment” which “[c]oncealment, whether intentional or unintentional, entitles the injured party to rescind insurance.” Cal. Ins. Code §§ 330, 331.
According to NACIC, its renewal quote and binder to USC for the NACIC Policy included, among other things, the following special condition:
B. DUTY OF DISCLOSURE; DISCLAIMERS THEREOF VOID.
This Coverage is provided on the basis that all information given to Insurer by or on behalf of the Insured in its underwriting submission and/or in its responses to the underwriter’s requests for information is reliable, truthful, and complete to the best of the Insured’s information and knowledge.…
Similarly, the BETARMA Policy included a condition that “[a]ll Members represent that the statements contained in the application, any updated or supplementary application and all materials submitted to BETARMA in connection with an application, are true, accurate and complete.” The BETARMA Policy condition then states that “[a]ll Members agree that” the statements are material to the acceptance of the BETARMA Policy and it “is issued in reliance upon the truth, accuracy and completeness of those statements.”
NACIC alleges that USC breached its obligations under these provisions, warranting rescission of the NACIC Policy. According to complaint, USC had “substantial knowledge of events, reports, complaints, and the investigation findings concerning the allegations” against the doctor before applying for the NACIC Policy, yet USC never disclosed such facts. NACIC further claims that, but for USC’s non-disclosure, NACIC would not have issued the NACIC Policy under the same terms. Thus, NACIC contends the NACIC Policy should be rescinded over USC’s concealment of facts material to the issuance of the NACIC Policy.
NACIC’s Denial of Coverage Due to “Prior Known Acts”
NACIC is also seeking to avoid its coverage obligations based on the NACIC Policy’s “Prior Acts Exclusion.” The NACIC Policy’s Exclusion (f) excludes coverage, in part, for:
[A]ny actual or alleged injury, damage, payment, or liability, loss, cost or expense arising out of or relating to any Medical Incident that was known…prior to the first effective date of continuous coverage provided by the Insurer…[by a]ny person holding any of the officer positions created by your charter, constitution, by-laws or any other similar governing document; your internal legal counsel; your risk manager (or person in the equivalent position); any of your employees responsible for monitoring or managing medical incidents or occurrences under the risk manager’s direction.
NACIC argues the “Prior Acts Exclusion” forecloses coverage for the sexual abuse claims because “[n]umerous qualifying individuals had prior knowledge of the alleged injuries, liabilities, and losses contained” in the sex abuse cases before the effective date of the NACIC Policy.
While NACIC’s lawsuit is still in its very early stage, the coverage dispute illustrates insurers will investigate all parts of a policy’s application and the policyholder’s prior knowledge and acts, to support all potentially available defenses, including rescission of the policy altogether. Vigilance by policyholders during the policy procurement and underwriting process (whether for the first policy or a renewal) is therefore vital. The time to assess disclosure obligations and exclusions that might foreclose coverage based on prior events is before the policy is procured or renewed.
As NACIC’s suit shows, the outcome of those exclusions or defenses is highly dependent not only on the relevant documents (e.g., applications, quotes, binders, policies and claims), but also on governing law, since some states (like in California) have statutes buttressing the analysis of the parties’ respective rights and obligations under the controlling contract documents. For that reason, choice-of-law, choice-of-forum and similar provisions can be of critical importance when defending against rescission claims like those raised in NACIC’s suit.
Engaging experienced risk professionals, including coverage counsel, before a claim or dispute arises can help ensure policy applications are submitted properly and exclusions are eliminated or narrowly tailored to mitigate the risk of a coverage dispute and maximize the chance of recovery in the event of a claim.