In a non-precedential decision, the United States Court of Appeals, 3rd Circuit, has affirmed a district court ruling dismissing a workers’ compensation carrier’s declaratory judgment action seeking rescission of the policy it had written for its insured.

David B. Torrey

The appellate panel agreed with the trial court that the proper forum for such an action was before the workers’ compensation judge.

In this case, American Builders Insurance Co. had written a policy of insurance for a Custom Installations Contracting Services Inc. During the policy period, a Custom Installations worker sustained serious injuries while undertaking roofing work. According to American Builders, however, Custom Installations had, during the underwriting, “falsely represented that it did not perform roofing work.”

After issuing a notice of compensation payable and paying disability and medical benefits, American Builders filed a declaratory judgment action in federal court, seeking rescission of the policy.

In the 2017 district court ruling that followed, the court found that the sought-out rescission reflected a workers’ compensation dispute and, therefore, one exclusively within the WCJ’s jurisdiction. A lawsuit in rescission by the carrier against its erstwhile insured for alleged misleading in the underwriting was, hence, held not cognizable. 

The court recognized, notably, that Commonwealth Court authority existed allowing rescission in proceedings commencing before the workers’ compensation authorities, and it cited that case as even more evidence of where such disputes are appropriately litigated.

Notably, the court allowed the carrier’s associated fraud action.   

The 3rd Circuit has affirmed. The court stated: 

“We agree with the District Court’s reasoning and disposition of this case … We continue to approve of our observation in Winterberg quoted by the District Court, that courts ‘have been very cautious about permitting common law litigation in matters arguably connected with work-related injuries.' ... We are also mindful of the Supreme Court of Pennsylvania’s admonitions in Kuney that the Pennsylvania workers’ compensation statute was ‘designed and intended to establish exclusive jurisdiction, practice and procedure in all matters pertaining to such subject matter’ … [(quoting American Cas. Co. of Reading v. Kligerman)], and that ‘[w]hen the allegations of a claim have as their ultimate basis an injury compensable under the [Workers’] Compensation Act, the claim must be considered within the framework of the statute.' ... Accordingly, we will affirm the District Court’s judgment.”

It is submitted that the better rule is that the issue of fraud in the underwriting is one exclusively between insurer and insured. Thus, the policy should not be rescinded either in civil court or before the compensation judge.

The fact of such alleged fraud should never prejudice the helpless injured worker. It makes no sense, and it is unjust, to create a no-fault social insurance scheme, and then let insurers undermine the process via rescission actions. 

This advocacy is hardly radical. Indeed, that this outcome (the policy rescinded and claimant left with nothing) is unsatisfactory, and must not be allowed, has long been recognized.

In this regard, Larson many years ago admonished in his treatise, “The employer’s misstatements affecting the risk do not relieve the insurer of its obligations to the employee,” though “they may vitiate the contract as to the employer.”

Such vitiation is accommodated by the fraud action that the district court held cognizable. If a carrier believes that it has been misled by the employer, its insured, the carrier can sue the same and seek indemnity. 

In any event, no social insurance system undergirded by private carriers will work if such carriers can try to avoid workers’ compensation responsibilities via rescission actions.

Pennsylvania law, in fact, says that the carrier is making a direct promise to pay the injured worker. Title 40, § 811, provides: 

“Every policy of insurance against liability under ‘The Workmen’s Compensation Act’ ... shall contain the agreement of the insurer to pay all compensation ... for which the insured employer may become liable under such [law] during the term of such insurance ... Such agreements shall be construed to be a direct promise to the injured employee ... having a claim under such acts, and shall be enforceable by action brought in the name of such injured employee ... Such obligation shall not be affected by any default of the insured, after an accident ... in the payment of premiums or in the giving of any notices required by such policy or otherwise.”

David B. Torrey is adjunct professor of law at the University of Pittsburgh School of Law, and is a workers’ compensation judge with the Pennsylvania Department of Labor & Industry. This entry is republished from the Workers' Compensation Law Professors blog, with permission.