A federal judge in California handed down an entertaining read of an opinion last week. Although it addresses liability insurance the principles apply to property insurance all the same. The case is Northfield Insurance Company v. Tilted Turtle.1 It presents a cautionary tale for what happens when an insured makes a misrepresentation to their insurer, and what happens when a judge slams the gavel on absurd legal defenses.

Tilted Turtle is a bar and grill. Tilted Turtle was insured for property damage liability through Northfield. Tilted Turtle procured the Northfield policy through the Garcia Insurance Agency. Tilted Turtle missed a payment to its premium financing company, and pursuant to the financing agreement, the Northfield policy was canceled. Six days later, two people were injured in a shooting at the bar and grill. Tilted Turtle’s owner, Magana, called a lawyer for advice. She also called Garcia to generally discuss insurance but did not tell Garcia about the shooting. Garcia told Magana about the missed premium payment and helped Magana reinstate the policy. However, Northfield required a sworn statement there had been no losses in the interim – a typical requirement given that reinstatement provides insurance retroactively back to the date of cancellation. Incredibly, Magana swore she was not aware of any losses, accidents or circumstances that might give rise to a claim! About six months later, the two shooting victims sued Tilted Turtle, and Magana ask Northfield to defend and indemnify.

Not surprisingly, Northfield was less than pleased to learn about the shooting given that Magana swore the retroactive period was uneventful. Northfield sued to rescind the policy based on Magana’s misrepresentation. California law allows a property insurer to rescind a policy when it learns the insured made a “material” representation or omission that impacts the insurer’s estimation of the advantages and disadvantages of insuring the risk.2 Northfield submitted a sworn statement by its underwriter stating that they would not have reinstated the policy if the loss had been reported. No one can be surprised by that, right?

Well, the insured fought back. Magana, clearly in a tough position, tried to argue that the underwriter declaration was not sufficient evidence to prove that Northfield would not have reinstated the policy if it knew the truth. As the court explained, “[I]t is beyond cavil that a shooting that resulted in injury to two people would have a significant impact on an insurer’s estimate of the disadvantages of retroactively providing coverage for the period in which the shooting took place.”

Magana also argued that Northfield waived its right to rescind because it knew or should have known about the shooting itself! Magana’s evidence was that the shooting had made the news, and she was “pretty sure” that Garcia saw it or someone else told him about it. Beside the fact that Garcia was the insured’s broker and his knowledge could not bind the insurer, the court respectfully noted the testimony was “speculative and equivocal.”

It is hard to read an opinion like this and wonder how the strategic choice to make these arguments came about. The insured’s arguments crossed the line from “creative” to absurd, and I would not be surprised to see a follow-up order requiring Magana to pay the insurer’s litigation costs. I hope this story was as entertaining as it was a helpful reminder of the consequences of misrepresentations during the insurance application and reinstatement process.
1 Northfield Ins. Co. v. Tilted Turtle, LLC, 2021 WL 1060361, Case No. 1:19-cv-01583 (E.D. Cal. March 18, 2021).
2 The California Insurance Code requires that “[e]ach party to a contract of insurance communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract ….” Cal. Ins. Code § 332. “Concealment,” which the California Insurance Code defines as “[n]eglect to communicate that which a party knows, and ought to communicate,” Id. § 330, “entitles the injured party to rescind insurance.” Id. § 331. Similarly, “[i]f a representation is false in a material point, … the injured party is entitled to rescind [an insurance] contract from the time the representation becomes false.” Id. § 359.