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Condominium Unit Owners Face Lack of Insurance Coverage For Flood Due to Misrepresentation as to Occupancy of Unit

A homeowners’ insurance policy was held to be void, and the insurer not obligated to defend or indemnify the insureds, where the owners made a “material misrepresentation” in the insurance application that the property would be owner-occupied, but it was not. Piller v. Otsego Mutual Fire Ins. Co., 2018 N.Y. App. Div. LEXIS 5512, 2018 N.Y. Slip Op. 5615 (2d Dep’t Aug. 1, 2018).

In this case, the owners of a townhouse condominium unit applied for homeowners’ insurance in 2002.  As part of the insurance application, the owners represented to the insurance carrier that the townhouse unit was their primary dwelling; that it was a single-family dwelling; that it was occupied daily by the owners; and that they did not own, occupy, or rent any other residences.  In 2011, plaintiffs made a claim under the policy for water damage sustained when a pipe broke.  While investigating the claim, the insurer discovered that the owners had never lived in the townhouse and resided elsewhere.  Rather, the townhouse was occupied by the owners’ daughter and her family.  The insurer disclaimed coverage and declared the policy void based upon material misrepresentations in the application.

The owners sued the insurer seeking damages for breach of the insurance contract.  The insurer counterclaimed for a declaratory judgment that the insurance policy was void from inception due to the misrepresentations in the application.  The court agreed with the insurance carrier’s position and declared the insurance policy invalid.  The owners appealed, but the appellate court affirmed the lower court’s decision.

In its decision, the appellate court stated that “[t]o establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when he or she secured the policy” and that “[a] misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented.”  Here, the court found that the insured had established that it was entitled to prevail by submitting evidence demonstrating that the owners’ application for insurance contained a misrepresentation regarding whether the townhouse would be owner-occupied and that the insurer would not have issued the policy if the application had disclosed that it would not be owner-occupied.

The court also rejected the owners’ contention that the insurer was required to establish that the misrepresentation was “willful,” because “a material misrepresentation, even if innocent and unintentional, is sufficient to warrant rescission of an insurance policy.”  As a result, the insurer obtained a judgment declaring that the insurance policy was void and the carrier was not obligated to cover the owners’ loss.