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The Rogak Report: 31 Mar 2005 ** Material Misrepresentation - Cancellation **

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  • Lawrence Rogak
    Message 1 of 1 , Mar 31, 2005
    • 0 Attachment

      Matter of Cruz v. New Millennium Construction & Restoration Corp., et
      al., NYLJ 3/31/05 (3d Dept 2005)

      On October 24, 2001, 14 claimants were employed by New Millennium
      Construction & Restoration Corporation, a subcontractor on a building
      reconstruction project in New York City. Each was injured or died
      when an exterior scaffold collapsed. Claimants thereafter sought
      workers' compensation benefits pursuant to a policy that had been
      issued to New Millennium on August 31, 2001 by Realm National
      Insurance Company.

      After Realm's investigation into the accident revealed that New
      Millennium had misrepresented the scope of its work on its
      application for coverage (the application omitted the fact that there
      would be exterior work), Realm notified New Millennium by letter
      dated November 19, 2001 that it was rescinding the policy pursuant to
      Insurance Law §3105(b). It also commenced a declaratory judgment
      action in Supreme Court, Queens County, seeking a declaration that
      the policy was void ab initio pursuant to this same statutory
      provision. New Millennium defaulted in that action and a judgment was
      entered declaring the subject policy void ab initio.

      In each of the workers' compensation proceedings, Realm
      unsuccessfully asserted that it had no obligation to any claimant
      because the policy issued to New Millennium was properly declared
      void ab initio. Ultimately, the Workers' Compensation Board
      determined that Insurance Law §3105(b) could not be used by Realm to
      circumvent the workers' compensation statutory scheme pertaining to
      cancellation of policies.

      This appeal by Realm concerned whether a workers' compensation
      carrier can declare a workers' compensation policy as void ab initio
      under Insurance Law §3105(b) or whether Workers' Compensation Law §54
      (5) abrogates such right.

      "First, as no claimant, the Board, the State Insurance Fund nor the
      Uninsured Employees' Fund was a party to the prior declaratory
      judgment action or in privity with any party to that action, that
      judgment cannot have collateral estoppel or res judicata effect on

      "Next, we are compelled to note that the precise question of whether
      Workers' Compensation Law §54(5) abrogates an insurer's right to
      declare a workers' compensation policy as void ab initio under
      Insurance Law §3105 has never been considered by this Court or any
      other state court. In now considering it, we conclude that the
      doctrine of void ab initio, or retroactive cancellation, under
      Insurance Law §3105(b) is incompatible with Workers' Compensation Law
      §54(5) such that the subject policy was in effect on the day of the

      As a general rule, an insurer may void an insurance contract if the
      insured made a false statement of fact as an inducement to enter into
      the contract and the misrepresentation was material. Here, Realm
      contended that New Millennium made a material misrepresentation when
      it omitted information that it performs exterior construction work on
      its application. Realm further contended that it would not have
      issued a workers' compensation policy to New Millennium had it known
      such fact.

      "To be sure, Insurance Law §3105 has been successfully invoked to
      rescind policies providing disability coverage, life insurance, fire
      insurance, marine open cargo coverage, accidental death benefit
      coverage, and health insurance benefits."

      "In the arena of no fault insurance coverage, however, it is well
      settled that a policy cannot be cancelled retroactively under
      Insurance Law §3105(b) even if an insured has made misrepresentations
      in procuring it. Rather, it has been established that Vehicle and
      Traffic Law §313 supplants an insurance carrier's common-law right to
      cancel a contract of insurance retroactively on the grounds of fraud
      or misrepresentation, and mandates that the cancellation of a
      contract pursuant to its provisions may only be effected
      prospectively. In placing the burden on an insurer to discover any
      fraud either before issuing a policy or as soon as possible
      thereafter, Vehicle and Traffic Law §313 protects innocent third
      parties who may be injured due to the insured's negligence. The same
      rationale applies here given the language of Workers' Compensation
      Law §54(5) itself and the policy behind the Workers' Compensation Law

      "In our view, the language of Workers' Compensation Law §54(5), like
      Vehicle and Traffic Law §313, is comprehensive and all-embracing.
      Entitled "Cancellation and termination of insurance contracts," it
      sets forth the specific mechanisms by which a carrier must cancel a
      contract of workers' compensation insurance due to non-payment of
      premiums, or any reason other than non-payment of premiums. No matter
      what the reason for cancellation, the statute requires that a written
      notice of cancellation, with the cancellation date specified in the
      notice, be filed with the Board's chair and served on the employer.
      Cancellation for nonpayment does not take effect until at least 10
      days from such filing and service and cancellation for any other
      reason does not take effect until at least 30 days thereafter. This
      broad language would include voiding a contract for fraud, thereby
      making it impossible to have ab initio rescission.

      The Court also found it to be against public policy to retroactively
      cancel a workers comp policy and leave the workers without protection.

      "Thus, whether the action taken by a workers' compensation carrier
      upon the discovery of fraud is called a rescission or a cancellation,
      Workers' Compensation Law §54(5) and public policy mandate that it
      cannot be effective until at least 30 days after its mailing. As this
      was not done by Realm in this case, the policy issued to New
      Millennium was in effect on the date of claimants' accident."

      Larry Rogak
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