Although not common, sometimes an insurer takes an aggressive stance after the report of a loss where the insurance company claims the insurance policy should be rescinded. This means the insurance company believes the policy between the insurer and insured should be nullified and each party should be placed back into the position before the insurance contract ever came to being.
However, in order to rescind the insurance contract in California, the insurance company must first:
- provide notice of the recision to the insured, and
- Under California Civil Code Section 1691, return the premium payments received back to the insured.
In California, there are five (5) grounds on which an insurer may rescind a contract. An insurer may rescind a contract of insurance for:
- Material misrepresentation/concealment of information on the insurance application;
- A false or fraudulent insurance claim;
- breach of warranty; or
- concealing of facts that showing false warranty.
When an insurer decides to pursue recision, it’s usually for either a material misrepresentation, or belief that the insured brought a false of fraudulent claim. Under California Statutes any material representation on an insurance policy application, whether intentional or not, may be problematic for an insured. In LA Sound USA v. St. Paul Fire & Marine Insurance Company,1 the court ruled that misstatements or concealments of any material facts in an insurance application, even if it is unintentional, entitles the insurer to rescind the insurance policy. Specifically, an insured is responsible for the errors in an application prepared by a broker. California Insurance Code Sections 331 and 332 support an insurer’s right to recision where intentional or unintentional concealment entitles the "injured party" to rescind. The insurer has a right to know all that the applicant for insurance may know regarding the risk to be assumed, therefore the intent to deceive is not needed if an insurer wants to rescind, so long as the misstatement of material facts exist.
Generally, when an insured applies for insurance, the insured goes through a broker or agent and fills out the application which contains numerous questions about the property, prior claims, etc. Many times agents and brokers go over forms and questions by phone and fill out the insurance application without an insured ever seeing the questionnaire. Although the agent or broker may ask questions, the insured should personally review the application and the answers before being submitted to the insurer. Seeing that any mistake on the application made by the broker will be attributed to the insured if an insurer seeks recision, should give every person purchasing insurance a huge motivation to read the application and everything submitted.
Taking an interest in the purchase of insurance and sitting down with the broker or agent to read the documents being submitted is an insured’s best defense against recision due to an unintentional mistake in the application.