Today, we turn to a fundamental aspect of New York's insurance laws. The basic question is: can an insurance carrier cancel a New York automobile insurance policy retroactively? The basic answer is: no. As we'll see, the legal acrobatics involved in getting to that answer have an important impact on no-fault litigation.
Vehicle and Traffic Law ("VTL") § 313(1)(a) provides that "[n]o contract of insurance…shall be terminated by cancellation by the insurer until at least twenty days after mailing to the named insured at the address shown on the policy a notice of termination..."
Thus, "[i]t has long been recognized that this provision 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." Liberty Mut. Ins. Co. v. McClellan, 127 A.D.2d 767, 769 (2d Dep’t, 1987). See also A.B. Med. Servs. PLLC v Commercial Mut. Ins. Co., 12 Misc.3d 8 (App. Term, 2d Dep’t, 2006).
Even where there is an allegation that fraud was committed in the procurement of the insurance policy, "Vehicle and Traffic Law § 313 places the burden on the insurer to discover any fraud before issuing the policy, or as soon as possible thereafter, and protects innocent third parties who may be injured due to the insured’s negligence." Insurance Co. of North America v. Kaplun, 274 A.D.2d 293, 298 (2d Dep’t, 2000). Thus, where a carrier has failed to properly cancel an insurance policy in accordance with VTL § 313 prior to an accident, the carrier "is responsible to any innocent third parties injured in the accident, despite the proof adduced...that [the insured] obtained the policy by misrepresentations." Id.
Nevertheless, "[w]hen the insured brings an action to recover benefits under a policy, the insurance carrier may assert as an affirmative defense that the insured's misrepresentations and/or fraud in obtaining the policy precludes any recovery by the insured." Id. at 298-299.
In no-fault matters, medical providers who treat patients through an assignment of benefits do not qualify as "innocent third parties" for this purpose. See A.B. Med. Servs. PLLC v Commercial Mut. Ins. Co., supra.
However, in order to assert such a defense in a no-fault matter, the carrier must present "evidence that plaintiffs' assignors participated in the fraudulent scheme." D.A.V. Chiropractic, P.C. v. GEICO Indem. Co., 21 Misc.3d 138(A) (App. Term, 2d Dep’t, 2008). Where the carrier fails to demonstrate that the assignor was a party to the fraudulent procurement, the carrier fails to even create a triable issue of fact sufficient to defeat a provider’s motion for summary judgment, no less satisfy the burden for the carrier’s own motion for summary judgment. Id.
For the purposes of typical no-fault litigation, either on a motion or at trial, the core issue of this defense will be whether the carrier has submitted sufficient admissible evidence to demonstrate that the assignor was a party to a scheme to fraudulently procure an insurance policy. The procurement is fraudulent where there are material misrepresentations and, had the carrier had known the truth, the policy would not have otherwise been issued.