Rescission is a Remedy for Fraud in an Application for Insurance
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Post 5018
Beach Cruiser, LLC and Flyway Management, LLC own and manage multiple rental units. In 2021, Plaintiff Mt. Hawley Insurance Company (“Mt. Hawley”) issued Defendants an insurance policy (the “Policy”). The Policy covered bodily injury liability in connection with their units but excluded coverage in the event that Defendants provided “incorrect, false, inaccurate or incomplete information” in their application for insurance.
In Mt. Hawley Insurance Company v. Beach Cruiser, LLC, et al., No. 1:22-cv-10354-GHW, United States District Court, S.D. New York (March 6, 2025) the court applied New York’s law of rescission.
BACKGROUND
Plaintiff Mt. Hawley Insurance Company (“Mt. Hawley”) is an insurer, Defendant Beach Cruiser, LLC (“Beach Cruiser”) owns multiple residential properties and rents them out to tenants. It owns a residential property located at 146 President Street, Unit C, Charleston, South Carolina (the “Property”). Defendant Flyway Management, LLC (“Flyway,” and together with Beach Cruiser, “Defendants”) managed the Property on behalf of Beach Cruiser at all relevant times.. Nonparty USI Insurance Services (“USI”) served as an insurance broker for Beach Cruiser with respect to the Policy.
THE REPRESENTATIONS
Defendants’ application for the Policy checked “No” in response to the question “Are any properties rented by the day or by the week?”
Contrary to the statement in the application Defendants had been renting some of their units by the day or by the week for years.
THE ACCIDENT & INJURIES
On July 23, 2022, two of the tenants allegedly fell from the second floor of the Property after a porch railing collapsed. Both tenants sought damages from Defendants for their alleged injuries. Defendants claim coverage under the Policy. Plaintiff argues that Defendants’ claims are excluded from coverage because Defendants misrepresented the Property’s rental status in their application.
INSURANCE EXCLUSIONARY CONDITION
The principal question before the Court was whether New York Insurance Law § 3105(b) (“Section 3105(b)”) modifies the parties’ agreed-upon exclusion of coverage based on Defendants’ misrepresentations. The Court concluded that it does not. It does not apply where, as here, an insured’s claim is excluded from the insurance contract by prior mutual agreement.
The Policy includes coverage for, among other things, “bodily injury liability” up to $1,000,000 per occurrence subject to the Policy’s terms and conditions. For purposes of an endorsement: “the Application(s) includes, without limitation, any application forms and any other forms, documents, or information submitted to us in connection with or relating to issuance of this policy. For purposes of this endorsement, the Application(s) is a part of this policy and is incorporated herein.”
Beach Cruiser checked the “No” box in response to the question “Are any properties rented by the day or by the week?” However, Beach Cruiser had been renting the Property through Vrbo, an online platform for short-term vacation rentals, since 2018.
On January 25, 2022, Beach Cruiser executed a three-day rental contract through Vrbo for a party to stay at the Property from July 21 to July 24, 2022. The party included Walter Patrick Humphrey and Jonathan Charles Slade.
Mr. Humphrey filed an action in South Carolina state court against Beach Cruiser and Flyway arising from his alleged injuries (the “Humphrey Action”). Mr. Slade sent Flyway a demand letter alleging various causes of action arising from his alleged injuries.
On November 14, 2022, Mt. Hawley sent Beach Cruiser a letter stating that it was rescinding the Policy.
DISCUSSION
Summary judgment is appropriate here because the Policy unambiguously excludes coverage in connection with the July 23, 2022 incident. There is only one reasonable reading of Question 3 in the Application. Defendants’ response to Question 3 was plainly false. And the Endorsement unambiguously excludes coverage if the insured provided false answers in the Application.
The Policy unambiguously excludes coverage for Defendants’ claims. New York courts have held that, where there has been a misrepresentation by an insured, the insurance company can avoid liability on the policy by showing that the misrepresentation was material.
Because enforcing the Endorsement according to its terms is not inconsistent with Section 3105(b), the Endorsement is not, as Defendants and Nationwide argue, “void . . . as a matter of public policy.”
Plaintiff’s motion for summary judgment was GRANTED and Defendants’ and Nationwide’s motions for summary judgment was DENIED. The Court declared that Plaintiff Mt. Hawley Insurance Company has no obligation under the Policy to defend or indemnify Defendants Beach Cruiser, LLC and Flyway Management, LLC in connection with the July 23, 2022 incident.
Accordingly, because the Policy unambiguously excludes claims in the event of a misrepresentation in Defendants’ application, and because Defendants’ application unambiguously misrepresented the rental status of the Property, Plaintiff’s motion for summary judgment was GRANTED and Defendants’ and Nationwide’s motions for summary judgment were DENIED.
ZALMA OPINION
Insurance is a contract of good faith that requires each party to the contract to act fairly and in good faith to each other. When one party, seeking insurance, lies about the risks faced by the insured and the property that is the subject of the proposed insurance contract, he, she or it, has misrepresented a material fact and the law of equity requires the policy to be declared void.
(c) 2025 Barry Zalma & ClaimSchool, Inc.
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The Professional Claims Handler
Post 5218
Read the full article at https://www.linkedin.com/pulse/zalma-philosophy-claims-handling-part-8-barry-zalma-esq-cfe-zdwsc, see the full video at https://rumble.com/v70zl4s-the-zalma-philosophy-of-claims-handling-part-8.html and at https://youtu.be/MIYcF71ffRQ, and at https://zalma.com/blog plus more than 5200 posts.
Claims Commandment X – Thou Shall Not Pretend to be a Lawyer
Some experienced and professional claims people know the law in their area of expertise better than most lawyers.
Adjusters should be adjusters and leave lawyering to lawyers. Similarly, lawyers should be lawyers and never try to be adjusters.
Claims Commandment XI – Thou Shall Empathize With the Claimant
Everyone presenting a claim is unhappy, disturbed, shocked, injured and needs help.
Empathy is identification with and understanding of another’s situation, feelings, and motives. It is the ability to understand another person’s circumstances, point of view, thoughts, and feelings....
HOW TO CREATE AN EXCELLENCE IN CLAIMS HANDLING PROGRAM
See the full video at https://rumble.com/v70wb2i-the-zalma-philosophy-of-claims-handling-part-6.html and at https://youtu.be/tL5nDKPEs40 and at https://zalma.com/blog plus more than 5200 posts.
Post 5217
This is a change from my normal blog postings. It is my attempt. in more than one post, to explain the need for professional claims representatives who comply with the basic custom and practice of the insurance industry.
An Excellence in Claims Handling program begins with a statement in the insurer’s claims manual or statement of professionalism that it is dedicated to providing excellence in claims handling to every insured who presents a claim.
The excellence in claims handling program should include, at a minimum:
A series of lectures supported by text materials explaining:
A definition of insurance.
How to read and understand an insurance policy.
How to interview an insured, witness, or claimant.
How to assist an insured in the insured’s obligation to ...
The Professional Claims Handler
Post 5216
Read the full article at https://www.linkedin.com/pulse/zalma-philosophy-claims-handling-part-5-barry-zalma-esq-cfe-jde8c, see the full video at https://rumble.com/v70q4x8-the-zalma-philosophy-of-claims-handling-part-5.html and at https://youtu.be/6b9tZQsEkB4, and at https://zalma.com/blog plus more than 5200 posts.
This is a change from my normal blog postings. It is my attempt. in more than one post, to explain the need for professional claims representatives who comply with the basic custom and practice of the insurance industry.
Standards to be a Professional Claims Adjuster
The Insurance claims professional should be a person who:
1. Can read and understand the insurance policies issued by the insurer.
2. Understands the promises made by the policy.
3. Understand their obligation, as an insurer’s claims staff, to fulfill the promises made.
4. Are competent investigators.
5. Have empathy and recognize the difference between empathy and sympathy.
6. ...
The Professional Claims Handler
Post 5219
Posted on October 31, 2025 by Barry Zalma
An Insurance claims professionals should be a person who:
Can read and understand the insurance policies issued by the insurer.
Understands the promises made by the policy.
Understand their obligation, as an insurer’s claims staff, to fulfill the promises made.
Are competent investigators.
Have empathy and recognize the difference between empathy and sympathy.
Understand medicine relating to traumatic injuries and are sufficiently versed in tort law to deal with lawyers as equals.
Understand how to repair damage to real and personal property and the value of the repairs or the property.
Understand how to negotiate a fair and reasonable settlement with the insured that is fair and reasonable to both the insured and the insurer.
How to Create Claims Professionals
To avoid fraudulent claims, claims of breach of contract, bad faith, punitive damages, unresolved losses, and to make a profit, insurers ...
The History Behind the Creation of a Claims Handling Expert
The Insurance Industry Needs to Implement Excellence in Claims Handling or Fail
Post 5210
This is a change from my normal blog postings. It is my attempt. in more than one post, to explain the need for professional claims representatives who comply with the basic custom and practice of the insurance industry. This statement of my philosophy on claims handling starts with my history as a claims adjuster, insurance defense and coverage lawyer and insurance claims handling expert.
My Training to be an Insurance Claims Adjuster
When I was discharged from the US Army in 1967 I was hired as an insurance adjuster trainee by a professional and well respected insurance company. The insurer took a chance on me because I had been an Army Intelligence Investigator for my three years in the military and could use that training and experience to be a basis to become a professional insurance adjuster.
I was initially sat at a desk reading a text-book on insurance ...
The History Behind the Creation of a Claims Handling Expert
The Insurance Industry Needs to Implement Excellence in Claims Handling or Fail
Post 5210
This is a change from my normal blog postings. It is my attempt. in more than one post, to explain the need for professional claims representatives who comply with the basic custom and practice of the insurance industry. This statement of my philosophy on claims handling starts with my history as a claims adjuster, insurance defense and coverage lawyer and insurance claims handling expert.
My Training to be an Insurance Claims Adjuster
When I was discharged from the US Army in 1967 I was hired as an insurance adjuster trainee by a professional and well respected insurance company. The insurer took a chance on me because I had been an Army Intelligence Investigator for my three years in the military and could use that training and experience to be a basis to become a professional insurance adjuster.
I was initially sat at a desk reading a text-book on insurance ...
