As discussed in an article Zelle drafted in November 2023, "Viewpoint: Non-renewal, Cancellation, Reformation and Rescission of Insurance Policies in Texas", an insurer that wishes to rescind an insurance policy on the basis of misrepresentation or fraud, among other requirements, must do so within 90-days of the date the insurer discovers the falsity of a material misrepresentation by an insured. This requirement was recently addressed by a court in Houston.
In Century Sur. Co. v. Carriage Place Apartments Houston LLC, the United States District Court for the Southern District of Texas, Houston Division, focused on this 90-day requirement as laid out in Tex. Ins. Code Section 705.005(b). Carriage Place involved the attempted rescission of a liability policy because the insured affirmatively checked a “No” box on a renewal application, questioning whether there had ever been any assault and battery incidents or claims on the insured premises. Contrary to the insured’s assertion, a September 2023 lawsuit alleged a former tenant of the apartment complex had been sexually assaulted at the property. The assault lawsuit further stated that there had been roughly 1,000 9-1-1 calls from the property, including reports of one sexual assault, nine aggravated assaults, and other crimes.
As part of the investigation of the underlying assault claim, Century Surety Company (“Century”) received a report from an independent adjuster on September 26, 2023, which included a sheriff’s department location inquiry listing the 9-1-1 calls from the property. Century then issued a reservation of rights letter referencing the allegations in the underlying assault lawsuit on October 13, 2023. But Century alleged in Carriage Place that it discovered the material misrepresentation on January 5, 2024, and then timely provided notice of the rescission on March 8, 2024, less than 90-days later. Century argued that despite the fact that it was made aware that the information provided in the renewal application was potentially inaccurate, it did not “discover” the falsity of the application statement until after it had time to determine whether the misrepresentation was material under Tex. Ins. Code Section 705.004.
The court rejected the argument stating:
Texas courts have repeatedly held that the 90-day clock under § 705.005 begins running when the insurer possessed the facts indicating a potential misrepresentation, not when the insurer completes its investigation or determines the misrepresentation was material. Myers v. Mega Life & Health Ins. Co., 2008 WL 1758640, at *5 (Tex. App.—Amarillo Apr. 17, 2008) (“The statute contains no... pre-condition [that the insurer determine materiality] to the running of the [90] day period and we will not create one.”); see e.g., Prudential Ins. Co. v. Torres, 449 S.W.2d 335, 337-38. Century’s interpretation would render § 705.005’s deadline meaningless, as insurers could indefinitely delay notice by claiming they were still investigating materiality. The statute requires notice within 90 days of discovering the falsity—not the legal significance—of the representation.
The court then pointed to the contradictory exhibits filed by Century, establishing Century had knowledge of the alleged misrepresentation by September 26, 2023, at the latest. Accordingly, the court held that Century’s rescission claim failed as a matter of law.
The court went on to dismiss Century’s Fraudulent Misrepresentation and Negligent Misrepresentation claims based on the heightened pleading standard in Fed. R. Civ. P. 9(b).
Importantly, the court did not address the substantive issue of whether the facts alleged gave rise to the rescission claim. The Texas Supreme Court has outlined five elements an insurance carrier must establish in order to rescind an insurance policy based on a material misrepresentation: 1) the making of the misrepresentation; 2) the falsity of the misrepresentation; 3) the reliance thereon by the insurer; 4) the intent to deceive on the part of the insured making the misrepresentation; and 5) the materiality of the representation.
While Tex. Ins. Code § 705.004 does not explicitly require an intent to deceive, which is often the most arduous element to substantiate, the Texas Supreme Court has required that intent nonetheless.
It can be difficult for an insurer to satisfy each of the elements required for rescission under Texas law. But, as Carriages illustrates, the satisfaction of the five elements becomes moot if the insurer does not assert its right to rescission within 90-days of discovering the facts indicating a potential misrepresentation. Accordingly, it is imperative that insurers establish mechanisms for a coordinated effort between their claims and underwriting departments to promptly identify potential misrepresentations, investigate whether the misrepresentations are indeed false, material to the risk, and relied upon, and issue rescission notices, if appropriate.
Century Sur. Co. v. Carriage Place Apartments Houston LLC, No. 4:24-CV-00992, 2025 WL 1938777 (S.D. Tex. July 15, 2025)
