Date:July 3, 1996
To:All Property and Casualty Insurers
From:Josephine W. Musser, Commissioner of Insurance
Subject:1995 Wisconsin Act 259
Grounds and Notice Requirements for Rescission of Insurance Contracts

This bulletin summarizes Act 259 which became effective May 7, 1996. A copy of the Act is furnished below. The Act amends ss. 631.11 and 631.36, Wis. Stat. The Act addresses the grounds and notice requirements for rescission of insurance contracts.

Property and casualty insurance companies, unlike life and health companies, previously could not rescind a policy for misrepresentation or fraud due to the Wisconsin Supreme Court decision of WHEDA v Verex Assurance Company, 166 Wis. 2d 636. Before Act 259, property and casualty companies could only cancel a policy with a 10-day notice as required under s. 631.36 (2), Wis. Stat. The Act changes ss. 631.11 and 631.36, Wis. Stat., and establishes the ability to rescind a property and casualty policy if the insurer complies with certain requirements.

METHODS OF NOTIFICATION FOR RESCISSION

The Act requires the insurer to use one of three methods to notify the policyholder of the conditions under which the policy may be rescinded. The first two methods previously existed in the statute. The Act adds the third method. The Act states:

No statement, representation or warranty made by a person other than the insurer or an agent of the insurer in the negotiation for an insurance contract affects the insurer's obligations under the policy unless it is stated in any of the following:

  1. The policy.
  2. A written application signed by the person, provided that a copy of the written application is made a part of the policy by attachment or endorsement.
  3. A written communication provided by the insurer to the insured within 60 days after the effective date of the policy.

The statute requires that the three notification methods disclose the specific statement, representation, or warranty made in the negotiation of the specific insurance contract and on which the insurer is relying. Listing general categories in the policy or other communication does not meet the notice requirements of the statute.

Additionally, it is OCI's position that the insurer should provide a disclosure to the insured, either separately, in the policy, in the application, or in declarations page that explains that the insurer is relying on the statements, representations, and warranties made in the negotiation of the insurance contract. The disclosure should also explain the consequences of any false or fraudulent statement, representation or warranty. The consequences being that the insurer may rescind the policy and/or deny claims.

Any statement, representation, or warranty made in a renewal application is also a representation made in the negotiation of an insurance contract and requires the insurer to use one of the three notification methods in order to use any statement, representation, or warranty in the renewal application to rescind a policy.

The criteria for a statement, representation, or warranty remain the same, i.e., the statement, representation, or warranty must be material or made with the intent to deceive, or must contribute to the loss. However; regarding a misrepresentation, the Act adds the criterion that the person knew or should have known that the representation was false.

For knowledge acquired by the insurer after a policy is issued, the knowledge must be of sufficient facts to constitute grounds for rescission of a policy or defense against any claims. The insurer must still notify the insured of its intention to rescind the policy or defend against a claim, if one should arise, within 60 days after acquiring such knowledge. This has not changed.

FORM CHANGES

Prior to the Act, OCI objected to language in property and casualty policies that allowed rescission or voiding of a policy. Insurers that wish to have the contractual option of rescission need to revise their policy language and submit any amended forms and changed applications to OCI for approval before they are used.

If you use rescission notification method #3, you are not required to submit the written communication notice to OCI for approval. It is not a form subject to the our form approval process.

NOTICE OF RENEWAL WITH ALTERED TERMS

If you change the terms of a policy by adding rescission language, you must provide proper notice (60 days mailed prior to renewal) as required by s. 631.36 (5), Wis. Stat., before the change can take effect.

Any questions regarding this bulletin call Rhonda Peterson (608) 267-7186.


1995 Senate Bill 362
Date of enactment: April 22, 1996
Date of publication*: May 6, 1996

1995 WISCONSIN ACT 259

AN ACT to renumber and amend 631.11 (1) (a), 631.11 (1) (b), 631.11 (1) (c), 631.11 (2) and 631.11 (4); to amend 631.11 (1) (title), 631.11 (3) and 631.36 (1) (e); and to create 631.11 (1) (a) 3., 631.11 (4m) (title) and 631.11 (6) of the statutes; relating to: grounds, and notice requirements, for rescission of insurance contracts.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

SECTION 1. 631.11 (1) (title) of the statutes is amended to read:

631.11 (1) (title) EFFECT OF NEGOTIATIONS FOR CONTRACT.

SECTION 2. 631.11 (1) (a) of the statutes is renumbered 631.11 (1) (a) (intro.) and amended to read:

631.11 (1) (a) (title) Statement or warranty. (intro.) No statement, representation or warranty made by a person other than the insurer or an agent of the insurer in the negotiation for an insurance contract affects the insurer's obligations under the policy unless it is stated in any of the following:

  1. 1. The policy.
  2. 2. A written application signed by the person, provided that a copy of the written application is made a part of the policy by attachment or endorsement.

SECTION 3. 631.11 (1) (a) 3. of the statutes is created to read:

631.11 (1) (a) 3. A written communication provided by the insurer to the insured within 60 days after the effective date of the policy.

SECTION 4. 631.11 (1) (b) of the statutes is renumbered 631.11 (4m) (a) and amended to read:

631.11 (4m) (a) (title) Copy of application to be made available. The policyholder under a life or disability insurance policy and any person whose life or health is in-sured under the policy may request in writing a copy of the application if he or she did not receive the policy or a copy of it, or if the policy has been reinstated or renewed without attachment of a copy of the original application. If the insurer does not deliver or mail a copy as requested within 15 working days after receipt of the request by the insurer or its agent, or, in the case of a group policy certificate holder, does not inform such person within the same period how he or she may inspect the policy and application during normal business hours at a place reasonably convenient to the certificate holder, nothing in the application affects the insurer's obligations under the policy to the person making the request. A person whose life or health is insured under a group life or disability insurance policy has the same right to request a copy of any document specified in par. (b), including the certificate.

SECTION 5. 631.11 (1) (c) of the statutes is renumbered 631.11 (4m) (b) and amended to read:

631.11 (4m) (b) (title) Statement or warranty. No statement, representation or warranty made by or on behalf of a particular certificate holder under a group life or disability insurance policy affects the insurer's obligations under the certificate unless it is stated in the certificate, or in a written document signed by the certificate holder, a copy of which is supplied to the certificate holder or the beneficiary whose rights would be affected.

SECTION 6. 631.11 (2) of the statutes is renumbered 631.11 (1) (b) (intro.) and amended to read:

631.11 (1) (b) (title) Misrepresentation or breach of affirmative warranty. (intro.) No misrepresentation, and no breach of an affirmative warranty, that is made by a person other than the insurer or an agent of the insurer in the negotiation for or procurement of an insurance contract constitutes grounds for rescission of, or affects the insurer's obligations under, the policy unless, if a misrepresentation, the person knew or should have known that the representation was false, and unless any of the following applies:

  1. 1. The insurer relies on the misrepresentation or affirmative warranty and the misrepresentation or affirmative warranty is either material or made with intent to deceive.
  2. 2. The fact misrepresented or falsely warranted contributes to the loss.

SECTION 7. 631.11 (3) of the statutes is amended to read:

631.11 (3) EFFECT OF FAILURE OF CONDITION OR BREACH OF PROMISSORY WARRANTY. No failure of a condition prior to a loss and no breach of a promissory warranty constitutes grounds for rescission of, or affects an insurer's obligations under, an insurance policy unless it exists at the time of the loss and either increases the risk at the time of the loss or contributes to the loss. This subsection does not apply to failure to tender payment of premium.

SECTION 8. 631.11 (4) of the statutes is renumbered 631.11 (4) (a) and amended to read:

631.11 (4) (a) (title) Knowledge when policy issued. No misrepresentation made by or on behalf of a policyholder and no breach of an affirmative warranty or failure of a condition constitutes grounds for rescission of, or affects an insurer's obligations under, an insurance policy if at the time the policy is issued the insurer has either constructive knowledge of the facts under s. 631.09 (1) or actual knowledge. If the application is in the handwriting of the applicant, the insurer does not have constructive knowledge under s. 631.09 (1) merely because of the agent's knowledge.

(b) (title) Knowledge acquired after policy issued. If after issuance of a an insurance policy an insurer acquires knowledge of sufficient facts to constitute grounds for rescission of the policy under this section or a general defense to all claims under the policy, the insurer may not rescind the policy and the defense is not available unless the insurer notifies the insured within 60 days after acquiring such knowledge of its intention to either rescind the policy or defend against a claim if one should arise, or within 120 days if the insurer determines that it is necessary to secure additional medical information.

SECTION 9. 631.11 (4m) (title) of the statutes is created to read:

631.11 (4m) (title) LIFE AND DISABILITY CONTRACTS.

SECTION 10. 631.11 (6) of the statutes is created to read:

631.11 (6) INCONTESTABILITY PROVISIONS. This section is subject to ss. 632.46 and 632.76.

SECTION 11. 631.36 (1) (e) of the statutes is amended to read:

631.36 (1) (e) (title) Rescission or reformation. This section does not apply to the rescission or reformation of any insurance contract.

SECTION 12. Initial applicability.

(1) The treatment of section 631.11 (1) (title), (a), (b) and (c) and (4m) (title) of the statutes and the creation of section 631.11 (1) (a) 3. of the statutes first apply to insurance contracts that are issued or renewed on the effective date of this subsection.

(2) The treatment of sections 631.11 (2), (3) and (4) and 631.36 (1) (e) of the statutes first applies to actions for the rescission of an insurance contract that are commenced on the effective date of this subsection.

*Section 991.11, WISCONSIN STATUTES 1993-94: Effective date of acts. "Every act and every portion of an act enacted by the legislature over the governor's partial veto which does not expressly prescribe the time when it takes effect shall take effect on the day after its date of publication as designated" by the secretary of state [the date of publication may not be more than 10 working days after the date of enactment].