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In a first impression insurance case, an upstate New York appellate panel last week held that a workers’ compensation carrier cannot retroactively cancel a contract, even one granted under fraudulent pretenses. The Appellate Division, 3rd Department, in Matter of Jesus Cruz, 96089, applied to Workers’ Compensation Law an established principle in no-fault insurance law. It held that in workers’ compensation, just like vehicle and traffic law matters, a policy cannot be cancelled retroactively even when the insured obtained the contract through misrepresentations. Justice Anthony J. Carpinello, writing for the unanimous court, said, “the serious potential adverse effects of retroactive cancellation on employees mandate exacting and strict compliance with the requirements for cancellation and termination under Workers’ Compensation Law �54(5).” He said the law imposed a high burden on insurers to discover fraud before issuing a policy, or promptly thereafter. The appeal decided last week stemmed from a tragic accident on Oct. 24, 2001, when a 13-story scaffold on a New York office building collapsed, killing five people and injuring 11. It involved New Millennium Construction & Restoration Corp., a subcontractor on the project at 210 Park Avenue South. Workers’ compensation benefits were sought on behalf of injured or killed victims, who had been employed by New Millennium, under a policy that had been issued to their employer by Realm National Insurance Co. Realm, however, denied coverage on the grounds that New Millennium misrepresented the nature of its work when it obtained the policy. Court records show that New Millennium indicated on its application for coverage that the work would entail wallboarding, painting and carpentry — making no mention of exterior work. On Nov. 19, 2001, about three weeks after the accident, Realm notified New Millennium that it was retroactively rescinding the policy. It also commenced a declaratory judgment action seeking a declaration that the policy was void ab initio under Insurance Law �3105. New Millennium defaulted in that action. Regardless, the Workers’ Compensation Board held that the insurance contract was in effect. Last week, the 3rd Department affirmed in a novel opinion. Justice Carpinello noted that no other state court has yet addressed the question of whether the doctrine of void ab initio, or retroactive cancellation, of an insurance contract is compatible with Workers’ Compensation Law. In resolving that question, the court turned to no-fault law, where it is clear that a policy cannot be retroactively cancelled, even for fraud. Carpinello said the language in Insurance Law, written to ensure that innocent third parties are not deprived of compensation because of the insured’s negligence, is similar to that in Workers’ Compensation Law. The Workers’ Compensation statute requires written notice of cancellation that must be filed with the Workers’ Compensation Board. Cancellation for nonpayment cannot occur until at least 10 days after the filing, and cancellation for any other purpose cannot take effect until at least 30 days after filing. Since cancellation of a policy cannot take effect until 30 days after the notice is mailed — and since that did not occur here — the court concluded that Realm National Insurance is bound by the contract. “This broad language [in the Workers' Compensation Law] would include voiding a contract for fraud, thereby making it impossible to have ab initio rescission,” Carpinello wrote. “Furthermore, we find it difficult to reconcile the existence of a right to rescind a workers’ compensation policy ab initio with the public policy considerations underlying the compulsory workers’ compensation statutory scheme … namely, to surely and swiftly compensate an injured employee or a dependent of a deceased employee.” Joining the opinion were Justices Thomas E. Mercure, Robert S. Rose, John A. Lahtinen and D. Bruce Crew III. Assistant Attorney General Steven Segall argued for the Workers’ Compensation Board, whose determination was upheld. Stroock & Stroock & Lavan was counsel of record for Realm National Insurance Co., with Hugh O’Boyle of Foley, Smit, O’Boyle & Weisman of Manhattan arguing in an of counsel role.

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