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Contracts Rescission Based on Misrepresentation
(Mitchell v. United Nat. Ins.)

B. Rescission Based on Misrepresentation

1. Insurance Code Sections 331 and 359

United National based its right to rescind the policy on Insurance Code sections 331 and 359. Insurance Code section 331 states: “Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.” Insurance Code section 359 similarly provides: “If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.”

Insurance Code sections 331 and 359 are part of a larger statutory framework that imposes “heavy burdens of disclosure” “upon both parties to a contract of insurance and any material misrepresentation or the failure, whether intentional or unintentional, to provide requested information permits rescission of the policy by the injured party.” (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 179-180 (Imperial).)[2] Insurance Code section 332, for example, requires each party to an insurance contract to disclose, “in good faith, all facts within his knowledge which are or which he believes to be material to the contract . . . .” The disclosure obligations imposed by these statutes are directed specifically at the formation of the insurance contract. Insurance Code section 334 states: “Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.” (Ins. Code, § 334, italics added.) Insurance Code section 356 provides: “The completion of the contract of insurance is the time to which a representation must be presumed to refer.”

Requiring full disclosure at the inception of the insurance contract and granting a statutory right to rescind based on concealment or material misrepresentation at that time safeguard the parties’ freedom to contract. “[An insurance company] has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.” (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.App.2d 581, 586.)

Courts have applied Insurance Code sections 331 and 359 to permit rescission of an insurance policy based on an insured’s negligent or inadvertent failure to disclose a material fact in the application for insurance (see, e.g., Telford v. New York Life Ins. Co. (1937) 9 Cal.2d 103, 105; Dinkins v. American National Ins. Co. (1979) 92 Cal.App.3d 222, 232; Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 915-916; Williamson & Vollmer Engineering, Inc. v. Sequoia Ins. Co. (1976) 64 Cal.App.3d 261, 273), including an application for a policy affording coverage against fire loss. (Imperial, supra, 198 Cal.App.3d at p. 182 [summary judgment affirmed in favor of insurer based on right to rescind fire policy because of insured’s misrepresentations in insurance application].) One authority has noted that under Insurance Code sections 331 and 359, “misstatement or concealment of ‘material’ facts is ground for rescission even if unintentional. The insurer need not prove that the applicant-insured actually intended to deceive the insurer.” (Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2004) (Croskey) ¶ 5:169, p. 5-32.4, original italics; see also Thompson v. Occidental Life Ins. Co., supra, 9 Cal.3d at pp. 915-916.) One court has said that materiality is determined under “a subjective test; the critical question is the effect the truthful answers would have had on [the insurer], not on some ‘average reasonable’ insurer.” (Imperial, supra, 198 Cal.App.3d at p. 181, original italics.)

Mitchell v. United Nat. Ins B170364 3/8/05 CA2/5-Rescission_Misrepresentation

Mar 08 2005

B170364
[PDF] [DOC]

Mitchell v. United Nat. Ins. 3/8/05 CA2/5

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