## Facts

- Lloyd’s underwriters issued an insurance package to The Penn Central Company on July 2, 1968, consisting of (1) a directors and officers (D&O) liability policy covering present and former officers/directors and (2) a company reimbursement policy covering Penn Central.
- Both policies were obtained through one written application, expressly incorporated into the policies.
- The application was executed by David C. Bevan, Penn Central’s Finance Committee chair.
- The insurers alleged Bevan fraudulently answered an application question asking whether any proposed insured knew of any act, error, or circumstance that might give rise to a claim; the insurers alleged the answer was in bad faith, material to the risk, and relied upon.
- Three insured individuals (Kattau, Kirk, and Annenberg) sought summary judgment, arguing their coverage could not be rescinded based on Bevan’s alleged fraud because they were innocent and their coverage should be treated as separate.
- On reargument of a prior denial of summary judgment, the court reconsidered the structure of the insurance arrangement and whether Bevan’s knowledge could be imputed to individual insureds under Pennsylvania law.

## Issues

1. Whether the insurance arrangement should be treated as a unitary contract with Penn Central as the contracting party, or as a series of individual contracts with each officer/director.
2. If the arrangement involved individual contracts, whether Bevan’s alleged fraudulent knowledge and misrepresentation in the application could be imputed to the insured officers/directors, allowing rescission as to them.

## Decision

- The court construed the arrangement as two distinct policies (D&O coverage and company reimbursement coverage) issued as part of one insurance program procured through a single, incorporated application.
- The court held that, under Pennsylvania agency and insurance law, Bevan acted as an agent in procuring coverage and his alleged fraudulent knowledge and misrepresentation could be imputed to the insured officers/directors.
- The court rejected the argument that each officer/director should be treated as having made separate, individualized application representations that would preserve coverage for “innocent” insureds.
- Summary judgment for the moving individual defendants was not granted; potential rescission as to all insureds remained available if the alleged fraud were proven.

## Legal Principles

- A material misrepresentation in an insurance application, if relied upon, may support rescission of coverage.
- When an application is incorporated into the policy and serves as the basis for issuance of coverage to multiple insureds, a single fraudulent application response may affect coverage for all insureds.
- Under Pennsylvania agency principles, an agent’s fraud in procuring insurance can be imputed to principals, including innocent insureds, where the agent acts on their behalf in obtaining coverage.

## Conclusion

The court concluded that, although the D&O and reimbursement coverages were issued as two policies, they were procured through a single incorporated application, and alleged fraud by the applicant-agent could be imputed to insured officers and directors, leaving open the possibility of rescission against all insureds if the misrepresentation was proven.


Bird v. Penn Cent. Co., 341 F. Supp. 291 (E.D. Pa. 1972)