JUNE 2016 BAD FAITH CASES: COURT REFUSES TO DISMISS INSURER’S CLAIM FOR EQUITABLE RESCISSION OF POLICY; EQUITABLE RESCISSION ACTION DOES NOT REQUIRE PRIOR RETURN OF PREMIUMS (Philadelphia Federal)

In Aspen Specialty Insurance Company v. Hospitality Supportive Systems, LLC, an insurer sought equitable rescission of its policy. The insured moved to dismiss the rescission claims or for a move specific pleading of fraud under Rule 9. The motion was denied.

The court observed the applicable standard: “an insurer must demonstrate that (1) the insured made a false representation, (2) the insured knew the representation was false or made the representation in bad faith, and (3) the representation was material to the risk being insured.” The court found the insurer clearly pled facts sufficient to state a plausible claim for equitable rescission under Pennsylvania law by averring that the insured knew of potential claims additional named insured faced, while representing that no claims existed. The court found the claims were material to the insured risk, as the insurer potentially would have had the duty to defend and indemnify the insured and the additional named insureds on those claims.

The court distinguished rescission at law, which requires return of premiums before seeking rescission, from equitable rescission which has no such requirement. Moreover, even an expired policy can be rescinded, since it would never have been issued if the relief sought were warranted. The court further found the insurer did not sit on its rights, but acted promptly after completing its investigation. The court also found the allegations of fraud sufficiently pleaded.

Date of Decision: June 9, 2016

Aspen Specialty Ins. Co. v. Hospitality Supportive Sys., LLC, 2016 U.S. Dist. LEXIS 75110 (E.D. Pa. June 9, 2016) (Dalzell, J.)