Fourth Circuit Holds that Rescission is Not Available to Innocent Co-Insureds

The United States Court of Appeals for the Fourth Circuit, applying South Carolina law, has affirmed a trial court’s determination that a professional liability insurance policy afforded coverage to innocent co-insureds despite fraudulent misrepresentations in the application submitted by an individual applicant posing as a doctor. Evanston Ins. Co. v. Agape Senior Primary Care, Inc., 2016 WL 192748 (4th Cir. Jan. 15, 2016). The court found that the insurer could have limited coverage in the face of fraud in drafting the policy, the co-insureds had no knowledge of the fraud, and public policy would not be served by rescission.

The insurer issued a medical malpractice liability policy to a company employing doctors and nurses. The company hired an individual who falsely held himself out to be a licensed doctor. Prior to the discovery of the fraud, the company and all individual physicians, including the imposter, submitted separate renewal applications to the insurer, and the insurer accepted. After discovery of the fraud, several lawsuits were filed against the company. The insurer filed a declaratory judgment action, seeking to rescind the entire policy as issued to the company and its employees. The trial court invalidated coverage as to the imposter, but it left coverage for the company and its innocent employees intact.

On the insurer’s appeal, the Fourth Circuit affirmed, holding that principles of law and equity required that coverage for the innocent co-insureds remain in place. The court observed that three factors weighed in favor of maintaining coverage for the innocent co-insureds: 1) the insurer, as the drafter of the policy, could have included forfeiture language in the policy to address fraudulent misrepresentations by one applicant, 2) neither the company nor any of its employees had any knowledge of the fraud, and 3) public interest would not be served by rescission. The court observed that pursuant to South Carolina statutory law and policy, the fraudulent actions of one insured cannot deprive the other innocent insureds of the benefits of their respective contracts.