February 27, 2018 Practice Points

Rescission of Insurance Policies Covering Insureds in Bankruptcy

In the event that a policyholder or other party-in-interest files for bankruptcy protection, either prior to a contemplated rescission action by an insurer or during a pending rescission action, what happens to the rescission action?

by Robert K. Scheinbaum

Recession in the insurance context is the annulment of an insurance contract ab initio as if such policy were never established. Insurers sometimes seek the remedy of equitable rescission on the grounds of, e.g., false or fraudulent statements or concealment of relevant facts in the application for insurance coverage. It is often the case that the insurer discovers the alleged misrepresentation or other potential grounds for rescission of the policy after the policy has incepted.

In the event that a policyholder or other party-in-interest files for bankruptcy protection, either prior to a contemplated rescission action by an insurer or during a pending rescission action, what happens to the rescission action? The primary underlying question is, procedurally, which forum—the bankruptcy court or a non-bankruptcy forum—will ultimately decide the rescission issue.

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