California Appeals Court Rules that Insurer Not Entitled to Rescind Policy Based on Material Misrepresentation Due to Ambiguity of Application Questions

In Duarte v. Pacific Specialty Insurance Company, a California appeals court found that an insurer was not entitled to rescind an insurance policy due to material misrepresentation and/or concealment of material facts as a matter of law. The court held that the insurer could not prove that the insured had made misrepresentations when he applied for the policy because the application questions at issue were ambiguous.

Victor Duarte bought a tenant-occupied rental property in 2001. Sometime thereafter, the daughter of the tenant moved into the rental property with her father, and continued to reside there after her father’s death in 2010. In February 2012, Duarte served the daughter with an eviction notice. The daughter did not leave the rental property and Duarte did not take any further action to remove her.

In April 2012, Duarte electronically submitted an application for a landlord insurance policy with defendant Pacific. Pacific issued a policy to Duarte covering the rental property the same day.

In June 2012, the tenant/daughter filed a lawsuit against Duarte for habitability defects at the rental property which allegedly existed since 2009. The lawsuit alleged that Duarte had been notified of these defects, and sought various damages arising from the defects. In August 2012, Duarte tendered defense of the lawsuit to Pacific which denied coverage and any duty to defend. Duarte then sued Pacific for breach of contract and other claims on the grounds that Pacific not only failed to defend the tenant lawsuit but also wrongfully cancelled his policy. In responding to the lawsuit, Pacific asserted a right to rescind the policy due to material misrepresentations on the application.

In cross-motions for summary judgment/adjudication, Pacific argued that it was entitled to rescind the policy because Duarte made material misrepresentations when he answered “no” to two questions on the application: (1) whether he knew of any disputes concerning the property; and (2) whether there were any businesses conducted on the property. In support of its position, Pacific submitted records regarding a March 2012 complaint filed by the tenant/daughter against Duarte with a public agency. Pacific also submitted a transcript of Duarte’s deposition in which he testified about his understanding about the complaint filed against him by the tenant/daughter. The trial court granted Pacific’s motion and denied Duarte’s motion. Duarte appealed, and the appeals court reversed.

The court held that Pacific did not meet its initial burden of proving that Duarte made misrepresentations on the insurance application. The court noted that the first application question at issue – “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuit?” – had “garbled syntax” and was “utterly ambiguous.” The court found that the evidence submitted by Pacific showed that Duarte knew of claims and/or disputes concerning the property. However, the court rejected Pacific’s position that the question required the answer, “yes” if there was unrepaired damage, any open or pending claims, potential defect, property disputes, or potential lawsuits. Given the question’s ambiguity, the court found that Duarte properly answered, “no” because he reasonably interpreted the question to ask whether the property had unrepaired damage associated in some way with previous or pending claims, defects, claims disputes, property disputes or potential lawsuits.

With regard to the second application question – “Is there any type of business conducted on the premises?” – the court noted that Pacific submitted evidence that showed that Duarte knew the tenant and tenant/daughter occasionally sold motorcycle parts from the rental property. Nonetheless, the court held that Duarte properly answered, “no,” because he reasonably interpreted the question as referring to “regular and ongoing business activity,” of which there was none to his knowledge.

Medical Insurer Waived Its Right To Rescind Policy By Electing To Cancel And Retaining Premiums

In DuBeck v. California Physicians’ Service, 2015 Cal. App. LEXIS 203 (March 5, 2015), California’s Second Appellate District held that California Physicians’ Service dba Blue Shield of California (“Blue Shield”) waived its right to rescind a health insurance policy by taking actions wholly inconsistent with rescission.

In October 2004, Bonnie DuBeck (“DuBeck”) was involved in an accident and developed a lump in her left breast. On February 11, 2005, DuBeck visited the UCLA Breast Center for tests in the affected area.  Later that month, additional tests revealed the lump was malignant.

On February 16, 2005, DuBeck applied for health insurance with Blue Shield. DuBeck failed to disclose her recent medical issues and treatment. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck that covered pre-existing conditions only after six months of continuous coverage. DuBeck underwent breast cancer surgery on April 6, 2005, less than a week after the policy was issued, and her medical providers submitted bills for her treatment to Blue Shield. In its June 2005 explanation of benefits, Blue Shield stated the breast cancer “may have existed prior to [DuBeck’s] enrollment” and that processing of the claim was suspended “pending receipt of additional information requested.”

On September 8, 2006, seventeen months into coverage, Blue Shield wrote to DuBeck cancelling the policy based on her earlier misrepresentations. The letter stated: “[A]t this time[,] Blue Shield has determined that, rather than rescind the coverage completely, your coverage was terminated prospectively and ended effective today, September 8, 2006.” It advised Dubeck that “[a]ny claims for covered services incurred before this date will be covered,” and that “at this time Blue Shield will not seek refund of any claims payments made on your behalf.” Blue Shield had not reimbursed DuBeck for her breast cancer surgeries but had made payment for other health care costs.

Two years later, DuBeck filed a complaint against Blue Shield challenging the cancellation of the policy and asserting claims for breach of contract, violation of the covenant of good faith and fair dealing and intentional infliction of emotional distress. DuBeck alleged that Blue Shield had previously denied her claims for medical treatment in April and May 2005 under the pre-existing condition exclusion in the policy. Therefore, Blue Shield knew or should have known that she had received treatment for her malignancy in February 2005. By delaying the cancellation, Blue Shield was able to collect more in premiums than it paid in benefits. In December 2008, Blue Shield answered the complaint and asserted rescission of the policy as a defense. Blue Shield moved for summary judgment on rescission which the trial court granted. The Court of Appeal reversed.

The Court of Appeal held Blue Shield had waived its right to rescind the policy. First, the Court found Blue Shield was aware of all pertinent information which would have allowed it to rescind when it elected to cancel DuBeck’s coverage two years prior in September 2006. However, instead of rescinding the policy, Blue Shield “cancelled” the policy which allowed it to keep the policy premiums.

Second, Blue Shield was aware of Dubeck’s medical condition as early as five days into coverage when she underwent breast surgery. In fact, Blue Shield refused to pay for the surgery because the breast cancer may have existed prior to the policy. The Court concluded that Blue Shield’s delay in investigating the misrepresentation resulted in DuBeck incurring substantial medical expenses and impeded her ability to timely investigate the availability of government assistance for her medical needs. These actions were entirely inconsistent with rescission. Accordingly, Blue Shield waived its right to rescind the policy.

As this decision shows, there is no middle-ground between acknowledging coverage and rescission. Blue Shield may have had several reasons for cancelling rather than rescinding. Blue Shield was able to keep policy premiums and its cancellation allowed DuBeck to keep benefits for treatment received prior to the cancellation. However, Blue Shield’s approach was fatal to its rescission claim.

First Circuit Finds Mutual Rescission of Life Insurance Policy

On June 28, the U.S. Court of Appeals for the First Circuit found that a mutual rescission of a life insurance policy had occurred where a company, which had been granted the policyholder’s power of attorney, cashed a premium refund check.

INS BLOG_insurancepolicyPaul L’Archevesque bought a life insurance policy from Pruco Life Insurance Co. and set up two trusts: one to take out a premium finance loan and another that ultimately would take control of the life insurance policy. Jay L’Archevesque was the sole trustee of one trust. Jay and Wilmington Trust Co. were co-trustees of the other. Together, Paul and Jay gave power of attorney to Coventry, a premium financing company, for purposes of the life insurance policy.

In obtaining the policy, Paul submitted a number of medical records to Pruco that indicated he suffered from dizziness and depression. However, the records did not include a letter that contained a doctor’s diagnosis that Paul likely had mild Alzheimer’s disease and was taking medication for it. Pruco issued a $15 million policy on Paul’s life.

Subsequently, Coventry contacted Pruco to inform it that Paul intended to sell his life insurance policy. Suspicious, Pruco requested Paul’s updated medical records, which revealed information regarding Paul’s mild Alzheimer’s disease.

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