Rescission Is An Equitable Remedy As Ancient As The Common Law Of Britain

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When the United States was conceived in 1776 and1789 the founders were concerned with protecting their rights under British common law. They adopted it as the law of the new United States of America modified only by the limitations placed on the central government by the U.S. Constitution approved in 1789.

The viability and ability to enforce contracts was recognized as essential to commerce. Courts of law were charged with enforcing legitimate contracts. Courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair.” [ Barry Zalma, Rescission of Insurance – 2nd Edition]

The common law developed rules that courts could follow to refuse to enforce the terms of a contract that was entered into because of mutual mistake of material fact, a unilateral mistake of material fact, the breach of warranty (a presumptively material promise to do or not do something), a material concealment, or a material misrepresentation. “The remedy – called rescission – created a method to apply fairness to the insurance contract and allow an insurer to void a contract and allowed courts to refuse to enforce such a contract entered into by misrepresentation or concealment of material facts.” [Barry Zalma, The Equitable Remedy of Rescission, LexisNexis Legal Newsroom Insurance Law, (April 21, 2015), https://www.lexisnexis.com/legalnewsroom/insurance/b/insurancelaw/archive/2015/04/21/the-equitable-remedy-of-rescission-a-tool-to-defeat-fraud.aspx?Redirected=true – See more at: https://searchenginereports.net/matchtext.]

Some plaintiffs’ lawyers contend that rescission is “post loss underwriting” rather than the exercise of a legitimate equitable remedy as old as the common law. In California, one of the biggest proponents of the theory failed to overturn a legitimate rescission in Nieto v. Blue Shield of California Life & Health Insurance Co., No. B214669 (Cal.App. Dist.2 01/19/2010), proving that it is not only not nice to lie to your insurance company, it is fatal.

Under applicable New Jersey law, the designation of Great American’s post-claim investigation as post-loss underwriting does not serve, either alone or in conjunction with the flawed underwriting on the 1999 and 2000 renewals, to defeat Great American’s reasonable reliance on the insured’s applications. [In re Tri-State Armored Services, Inc., 332 B.R. 690 (Bankr. N.J. 2005)

Rescission is an important equitable remedy hoary with age and should not be limited by claims of bad faith after an insurer legitimately exercises the rights provided to parties to an insurance contract by the California Insurance Code. If, after completing the thorough investigation required by law, the investigator finds that the application misrepresented what appears to be a material fact or material facts or concealed a material fact or material facts, the investigation is not complete.

An insured’s material misrepresentation or omission of fact in the procurement of insurance can render the insured’s coverage voidable at the insurance company’s option because there can be no “meeting of the minds” as to the insured risk. [Foster v. Auto-Owners Ins., Co., 703 N.E.2d 657, 659 (Ind. 1998); see also Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664, 672 (Ind. 1997) Med. Protective Co. of Fort Wayne Ind. v. Am. Int’l Specialty Lines Ins. Co. (N.D. Ind., 2019)]

(c) 2025 Barry Zalma & ClaimSchool, Inc.

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