Material Misrepresentation by Insured Voids Medical Malpractice Coverage
The medical malpractice insurer sought a rescission of its insured physician's policy and a declaratory judgment as to its duty to defend or indemnify the insured in connection with malpractice claims. This case is Medical Protective Company v. Fragatos, 2010 WL 3722559 (Ohio App. 8 Dist.).
Fragatos was sued by several parties for medical malpractice. Fragatos sent the claims to his insurer, Medical Protective Company. The insurer then commenced an action against Fragatos seeking a declaratory judgment that its policy with Fragatos was void ab initio. The insurer alleged that Fragatos materially misrepresented the number of past claims made against him and that the policy only covered Fragatos in his practice as a neurologist and not as a neurosurgeon. The trial court ruled in favor of the insured and said that Medical Protective had waived any right to deny coverage based upon its failure to reserve its rights at the onset of litigation. This appeal followed.
Medical Protective argued in its appeal that the trial court erred in its finding that the insurer waived any defenses. The appeals court agreed and noted that the record revealed that a lawsuit was filed against Fragatos on June 30, 2008 and that the insurer tendered its reservation of rights letter approximately two months later on September 4, 2008. So, aside from the bald assertion that such delay constituted prejudice to the insured, the court found no evidence that the insured suffered actual prejudice as a result of the two-month period.
Medical Protective also argued that the trial court erred in denying its motion for summary judgment on its rescission and declaratory judgment claims. Medical Protective moved for rescission on two separate grounds: a common law claim for rescission arising out of fraudulent misrepresentations and a claim based on warranties contained in the policy language. However, the insurer then dropped its common law argument and focused solely on its claim that the policy was void ab initio because Fragatos breached policy warranties.
The appeals court said that Ohio law distinguishes among material misrepresentations depending on whether they are mere representations or warranties. A false warranty will render an insurance policy void ab initio, while a misstatement (which is fraudulently made and the fact is material to the risk) that does not rise to the level of a warranty will render the policy voidable. The insurer's decision to incorporate the statement in or to omit it from the policy generally controls whether the statement is a warranty or a representation.
In this case, the record established that Fragatos lied about the number of past claims filed against him when he applied for the insurance from Medical protective. He also misrepresented the nature of the services that he would be performing in his practice. The policy language clearly stated that, by acceptance of the policy, the insured agreed that the statements in any application are true and correct. The policy also declared that the company reserved the right to rescind the policy for any material misrepresentation made by the insured. Therefore, it was clear to the appeals court that the insurer expressly incorporated Fragatos's answers to his application as part of the policy, and that the insurer had explicitly warned the insured that any material misrepresentation would render the policy null and void. The court found that the insurer had satisfied the test to establish that the statements by the insured regarding the number of prior claims constituted a warranty. The insured's breach of this warranty rendered the policy void ab initio.
The opinion of the trial court was reversed and the case was remanded to the lower court for further proceedings consistent with this opinion.
Editor's Note: Insurance policies almost universally contain provisions stating that truthful and correct statements are the basis upon which the insurer's decision to issue the contract is made, and that fraud or misrepresentation voids the policy. In this case, the court, relying on Ohio law, made a distinction between mere representations and warranties, with false warranties being the deciding factor in rendering a policy void ab initio. Since the statements made by the insured were deemed to meet the definition of false warranties, the insurer was within its right to have this policy declared void.