Rescission Repeat: Be Careful What You Ask

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Our Insurance Notes recently reviewed the two rulings by California appellate courts about insurers’ right to rescind insurance policies.  Rescission was also the subject of a recent case decided in June.

In Duarte v. Pacific Specialty Insurance Company, 13 Cal.App 5th 45 (2017), the California Court of Appeal reversed a trial court’s summary judgment order granting rescission in favor of the insurer.  The insurer had argued that the insured made material misrepresentations in its answers to two questions in the application for a property policy: (4)  “Has damage remained unrepaired from previously claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes and/or (d) lawsuits?” and (9) “Is this any type of business conducted on the premises?”  At the time of the application, the insured had attempted to evict tenants from the property and there were ongoing disputes with the tenant within the jurisdiction of the City of Oakland’s Rent Program, including the tenant’s claims of retaliatory eviction.  In connection with the eviction proceedings, Duarte had asserted that the tenant operated a welding shop on the property.  The trial court held that the insured had made material misrepresentations, but the Court of Appeals disagreed.

Although the Court of Appeal acknowledged that there was admissible evidence of the ongoing lease-related dispute, the Court rejected the insurer’s argument that a misrepresentation had been made. The Court held the question 4 to be “utterly ambiguous.”  The Court found the syntax to be “garbled” and spent several paragraphs unsuccessfully attempting to dissect the clause at issue.  Applying policy interpretation case law that holds ambiguous policy language is construed against the insurer, the drafter of the language, the Court concluded that  the insured’s interpretation of question 4 relating to previous or pending claims as referring to previous “insurance claims” was reasonable.  The Court then reversed because, under that interpretation, the insurer had not met its burden to show a misrepresentation.

As to the second claimed misrepresentation regarding operation of a business on the premises, again, the Court held that the question was ambiguous.  The Court concluded that the insured’s interpretation that it referred to a “regular and ongoing activity,” as opposed to “occasional sales,” was reasonable.  As the Court found the evidence conflicting as to whether there was a “business” “being conducted” on site, the Court reversed on this ground as well.

Thus, finding that both questions asked on the application were vague and ambiguous and the answers were not misrepresentations under the insured’s reasonable interpretation of the questions on the application, the Court denied the insurer’s requested rescission and remanded for further proceedings to evaluate the insured’s motion against the insurer that a duty to defend was owed.

As we noted previously, the burden of proof in a rescission case rests on the insurer.   Questions on the application are important evidence of materiality to support a request for rescission.  However, those questions must be straight-forward and unambiguous.  The Duarte case demonstrates that questions with subparts and difficult syntax can easily be the downfall of a rescission claim, even when the facts are otherwise clear.