The Second District of the Court of Appeal reminds us that it pays to keep your facts straight when applying for insurance coverage: Whether they were intentional or not, misrepresentations of "material" facts in an application will warrant cancellation of the policy when the insurer discovers them.
Plaintiff William Mitchell bought insurance on a building in Los Angeles owned by the Mitchell Family Trust. The building was later destroyed in a fire traceable to arson. The arsonist -- "a friend of Mitchell's" -- died in the fire. Investigating the claim, the insurer discovered a number of discrepancies between the statements made in the application for insurance and the truth. It notified Mitchell that it was rescinding the policy, and tendered a full return of the premium Mitchell had paid. Mitchell refused to accept the tender and filed suit against the insurer. The trial court ruled that the insurer was entitled to rescind, and Mitchell appealed. The Court of Appeal catalogs the discrepancies in the application:
Mitchell purchased the building in February 2000 in the name of his trust. On April 11, 2000, Mitchell’s brokers submitted an application for insurance [to United National Insurance]. The application stated that (1) the property to be insured consisted of a 3,420 square foot commercial building; (2) the building was to be used by Mitchell as a “video production studio and offices”; (3) the business to be conducted in the building had $20,000 in payroll and generated $300,000 in receipts; (4) there was no existing insurance on the building; (5) the building had no uncorrected fire code violations; (6) the building had a burglar alarm; and (7) Records & Records & Filmworks, Inc. (later changed to James E. Mitchell) was the purchaser of the building.
In fact, (1) the building was less than 2,000 square feet, (2) the business conducted in the building had no officers or employees, was used only to film a music video for two days in May or June of 2000, and was leased to a tenant who operated a garment business; (3) the business in the building generated approximately $6,500 in receipts from February 2000 to the time of the fire; (4) the building was insured by the California FAIR Plan, an insurer of “last resort”; (5) the building was subject to a City of Los Angeles abatement order stating that the building could not be occupied without a clearance or repaired without a permit and contained such deficiencies as being open to unauthorized entry, littered with combustible debris, excessive dry weeds or vegetation, broken windows, damaged or missing doors, damaged exterior wall covering, damaged interior wall and ceiling covering, and deteriorated flooring (and no permit had been obtained for corrective work on these deficiencies); (6) the building had no burglar alarm; and (7) the building was owned by the Mitchell Family Trust.
In moving for judgment, the insurer submitted a declaration from its underwriter affirming that (1) she believed what was stated in the application and (2) had she known the truth she would not have issued the policy. Mitchell asserted that he believed the truth of his representations when he made them, i.e., that he had made the erroneous representations in good faith, even though they were inaccurate.
Affirming the judgment for the insurer, the appellate court emphasizes that where a misstatement is "material" -- where the fact actually makes a difference in underwriter's decision whether or not to enter into the insurance relationship -- the applicant's intentions are irrelevant: if the insurer entered into the agreement based on a false representation the policy may be rescinded upon discovery of the truth, regardless of the insured's belief in the representation when it was made.
The test for materiality is whether the information would have caused the underwriter to reject the application, charge a higher premium, or amend the policy terms, had the underwriter known the true facts. . . . ‘This is a subjective test; the critical question is the effect truthful answers would have had on [the insurer], not on some “average reasonable” insurer.'
Accordingly, the appellate court concludes, the evidence that Mitchell's misstatements were relied on by the insurer supports the conclusion that the policy could be rescinded, even if it were established that the misstatements were innocent or unintentional.
The decision in Mitchell v. United National Insurance Company (March 8, 2005), Case No. B170364, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]
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