Montana Overturns Decades of Precedent by Rendering Policy Void Ab Initio
September 4, 2018
The Montana Supreme Court has decided that Montana insurance law does not permit insurers to rescind insurance policies and declare the “void ab initio”, and in doing so has reversed over 50 years of precedent. The case is ALPS Property and Casualty Ins. Co. v. McLean & McLean PLLP, No. 17-2421, 2018 U.S. App. LEXIZ 23296 (6th Cir. Aug. 21, 2018).
A father and son duo, David and Michael McLean, practiced law together in McLean & McLean PLLP (M&M) in Montana. David, the father, was disbarred after a disciplinary proceeding, and pleaded guilty to two counts of federal wire fraud, and was sentenced to 42 months in federal prison. His insurance company, ALPS Property & Casualty Insurance Company, who had issued professional liability insurance to the McLeans and their law firm, rescinded its professional liability policy for “misrepresentation, omission, concealment of facts, and incorrect statements by the Named Insured in the application for insurance which were fraudulent and material to the acceptance of the risk and hazard assumed by the Company.”
ALPS went to court, and sought an order declaring that the policy had been properly rescinded or that there was no coverage for claims made under the policy. M&M filed a counterclaim, seeking a declaration that the policy was still in force and claiming damages for breach of contract. In his individual capacity, Michael counterclaimed seeking remedies and adding several claims, including intentional infliction of emotional distress and breach of contract due to the insurance company's refusal to recognize him as the “innocent insured” under the policy.
Soon after ALPS filed its action, two other parties informed ALPS of a potential malpractice claim against the insured, and intervened in the action seeking coverage under the policy against David. The trial court granted summary judgment to ALPS, and determined that ALPS had properly rescinded the policy under Michigan law and that rendered the policy void from the inception of the coverage period for all of the involved parties. The McLeans and the third parties appealed.
Under Montana Code Annotated, section 33-15-403, (1) All statements and descriptions in any application for an insurance policy or annuity contract or in negotiations for an insurance policy or annuity contract by or on behalf of the insured or annuitant are considered representations and not warranties. (2) Misrepresentations, omissions, concealment of facts, and incorrect statements do not prevent a recovery under the policy or contract unless they are fraudulent, material either to the acceptance of the risk or to the hazard assumed by the insurer, or the insurer in good faith would not have issue the policy.
Based on the Montana law, the court ruled that the trial court had erred in finding that ALPS could rescind the policy under the applicable law. Since the section referenced did not use the term “rescission of the policy” or “unilateral rescission” or “avoidance” to describe the remedy, but that the section states that a recovery “under the policy” can be prevented if the misrepresentations, omissions, concealment of facts or incorrect statements were fraudulent, material, or would have otherwise affected the insurer's decision to issue the policy.
The court then overruled decades of precedent because it had incorrectly inserted rescission as a remedy into the applicable section. The court stated that even absent the remedy of rescission, though, ALPS could appropriately deny coverage under section 33-15-403 for the claims against M&M because of the misrepresentations on the policy application.
The court concluded that since the third parties claim had not been filed until more than a month after the policy was cancelled, their claim was not viable.
Editor's Note: The legal definition of void, or specifically “void ab initio” is not legally binding. A document that is void ab initio is useless and worthless, as if the document had never been drafted in the first place. In this case, the policy was deemed void ab initio because the insured lied on the policy application in the first place, so the insurer was not aware of the risks they were covering in providing coverage to the insured.