In a rescission case, carriers effectively seek to nullify coverage they've written because the insured made a materially false representation when applying for or renewing coverage. In such actions, insurers contend that they wouldn't have issued a policy at the same terms, if they knew, at the outset, information that has now come to light.

Rescissions, Mr. Weiner explained, are most prevalent in the life and health world, but the possibility of misrepresentations about the financial health of companies explain their prevalence in the directors and officers liability world and other professional lines.

Considerations regarding potential bad faith claims and even policy renewal negotiations complicate decisions to proceed with rescission actions, speakers at the conference said.

Statutes, which vary by state, typically require insurers to conduct "prompt and appropriate investigations" to support their rescission actions, they said.

"This is usually a big problem," Mr. Weiner noted, explaining that, on the one hand, an insurer will want numerous people to sign off on such an important decision and will want to conduct a full investigation to help prevent bad faith claims.

"Unfortunately, you can't wait too long, because it has been held by courts that claims of rescission can be waived due to inaction," he added.

In the Federal Insurance case, decided Sept. 12 in Boston, the insurer had brought a rescission claim relative to a $1 million executive risk policy in the face of a $4.7 million crime claim.

The basis of the action was an inaccurate answer to a question on the insurance application. The question asked whether employees who reconciled monthly bank statements either signed checks, handled deposits or had access to check-signing machines or signature plates.

The insured answered no. But after the claim was filed, the insured hired an accounting expert as an investigator, and the expert found that the thief reconciled "at least one account" over which he had signatory authority, Mr. Weiner said.

The insurance claims handler concluded, based on this report commissioned by the policyholder, that the thief had signed checks and reconciled the statement of all the bank accounts.

Two senior insurance company officials then authorized a suit for rescission. And the decision of whether or not to bring a suit was discussed with inside and outside counsel, he said. There was also discussion with the underwriter who issued the policy "as to the hypothetical increase in risk entailed by failure of the insured to segregate check-writing and reconciliation duties."

"You would have thought that might be enough," Mr. Weiner said. The steps, in fact, are among the steps that other speakers during the session said were appropriate to take before pursuing rescission.

When Mr. Weiner read the decision in the case, however, it turned out that these activities on the part of the insurer were actually too much in many respects, but lacking in one==the failure to ask the insured to explain itself.

After the suit was brought, the insurer was informed that the thief had check-writing authority over only one of several accounts, Mr. Weiner said.

"The jury was very unhappy," he said. "It found that the increase in risk was not material. And the judge found that the investigation was unreasonable" and that the insurer engaged in "willful violation" of the Massachusetts Unfair Claims statute, assessing double damages and double attorneys fees.

Judge Stearns ruled the insurer should have asked the insured why the discrepancy existed between the answer to the question in the insurance application and the information contained in the accountant's report.

"The insured was no stranger to the insurer, having purchased insurance continuously from the insurer for some 14 years," Mr. Weiner reported that the judge said, adding that the ruling continued, "Given this longstanding relationship, one would expect at least some consideration by the insurer of the interests of a loyal customer."

Mr. Weiner concluded that an investigation must be thorough and in this case, involve consultation with the insured. But the insurer can't be too late in bringing a rescission action, he said, suggesting the kind of tightrope insurers need to walk when they pursue rescission actions.