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Concealment in Applying for Insurance: Overview of Insurer's Rights and Insured's Responsibilities
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February 16, 2009
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(This article first appeared in the spring 2007 edition of Risk, Howrey’s insurance coverage newsletter.)
Howrey LLP
When seeking insurance coverage, did you tell your insurer of certain details about your business? Did you wonder if those details were relevant to whether or not the insurer would issue or reissue the policy? It may be that the insurer already was aware of these facts or that it did not deem them pertinent to issuing the policy. Even so, when you are seeking coverage later, the insurance company may try to backtrack and claim you failed to disclose or concealed facts at the time it was underwriting the policy. The insurance company may try to claim that it needed this information to determine whether to issue the policy in the first place, and that if it had known these facts, it would not have issued the policy. By using the defense of concealment, the insurer is attempting to rescind its policy.
Concealment commonly is defined as the “[n]eglect to communicate that which a party knows and ought to communicate.” California Insurance Code §330. When seeking a policy, if you believe certain information is relevant to the policy, you should disclose it then. An insurer relies on an insured’s answers in its policy application to determine whether to issue the insurance, whether to reinsure the policy, at what rate to set the premiums for the policy and whether to include any exclusions in the policy. The information communicated to the insurer should be that which the insured knows of and in good faith believes to be “material” to the policy. California Insurance Code §332. You do not have to disclose every fact, but you do need to inform the insurer of facts material to the policy.
Simply because a fact is not included in the policy does not mean that the insurer can later claim concealment. The relevant question is whether the insured misled the carrier “into accepting a risk, fixing a premium of insurance, estimating the disadvantages of the proposed contract, or making [its] inquiries.” Merced County Mutual Fire Insurance Co. v. State, 233 Cal.App.3d 765 (1991). Materiality is based only on “the probable and reasonable influence of the facts” on the insurer in forming its opinion of the proposed contract or in making further inquiries. California Insurance Code §334. Whether or not the information was material to issuing the policy is determined as of the time the policy was negotiated. Materiality should not be determined with the benefit of hindsight. “Postmortem” assertions that an insurance company would not have issued the policy had it known of the undisclosed facts are suspect and may be disbelieved. Thompson v. Occidental Life Insurance Co., 9 Cal.3d 904; see also, McAuliffe v. John Hancock Mutual Life Insurance Co., 245 Cal.App.2d 855 (1966).
In addition, it is the insurer’s burden to prove that if it had known of the fact, it would not have issued the policy or would have issued it in a different form. The omitted fact must be something material to the policy. If it is a fact that the insured knew about and failed to communicate but the insurer was aware of at the time of policy issuance, the insurer has no right to rescind the policy. California Insurance Code §333 provides that neither party is bound to communicate information of “which in the exercise of ordinary care, the other ought to know, and of which the party has no reason to suppose him ignorant.” That is, the insurance company chose to issue the policy with knowledge of the allegedly material fact and cannot later claim that it would have done anything differently.
Equity allows an insurer to rescind the policy if: 1) it would not have issued the policy in the first place; or 2) it would have charged different premiums; or 3) it would have included particular exclusions in the policy. However, equity does not step in when the insurance company, with full knowledge of the facts it claims are significant to the policy, issued the policy without taking into account the later claimed material fact. Reissuing the same policy in subsequent years with knowledge of the material facts is an indicator that the fact was not material. See, Atmel Corp. v. St. Paul Fire and Marine Insurance Co., 416 F.Supp.2d 802, 811 (N.D. Cal. 2006) [supposed materiality of circumstances that resulted in lawsuit tendered under the policy called into question by fact that “after [insured] had tendered [the lawsuit] to St. Paul, St. Paul renewed [insured’s] insurance policies” without additional inquiry].
Most jurisdictions place a heavy burden on the insurer to ask questions in the application process about matters that it considers material. If the insurer specifically asked direct questions during the underwriting process, the insured must respond truthfully and accurately. But, it is the insurer's responsibility to ask about facts it deems material to issuing and reissuing the policy, and it must do so in a clear and unambiguous manner. The insured, in turn, is not obligated to decipher what the insurer finds material. Likewise, in evaluating whether answers to questions on insurance applications are misstatements, questions posed by the insurer must be so plain and intelligible that any applicant can readily comprehend them; any ambiguities are to be construed in favor of the insured. See, Nadel v. Manhattan Life Insurance Co., 621 N.Y.S.2d 180 (1995).
Insureds cannot reasonably be expected to anticipate every question an insurer may have, and when the insurer does not ask a question or ask for more information, the insured cannot be held accountable for a purported failure to disclose. If a statement is so doubtful and obscure on its face that a prudent underwriter would have inquired further, the insurer – by failing to inquire – will be deemed to have waived its rights concerning the ambiguity or incompleteness of the representation. See, L. Black Co. v. London Guarantee Accident Co., 144 N.Y.S. 424 (1913); rev'd on other grounds, 216 N.Y. 560 (1921).
In assessing whether or not a fact is material, a key indicator is whether the insurer thought the information was significant enough to ask specific questions regarding it at the time of underwriting. See, Maryland Casualty Co. v. National American Insurance Co. of California, 48 Cal.App.4th 1822 (1996); Farmers Automobile Inter-Insurance Exchange v. Calkins, 39 Cal.App.2d 390 (1940) [“the failure to inquire into [a] subject indicates an entire lack of interest in it”]; Reserve Insurance Co. v. Apps, 85 Cal.App.3d 228 (1978) [insurer assumes risk of loss when no specific question is asked]. Insurers reveal their lack of interest by not asking for particular information. They often are barred from doubling back after a claim has been made and arguing for the first time that the information never sought would have been material to their underwriting decisions. See, Reserve Insurance Co. v. Apps, 85 Cal.App.3d at 231; Ashley v. American Mutual Liability Insurance Co., 167 F.Supp. 124, 130 (N.D. Cal. 1958) [“failure to inquire into a subject, with specificity, is held to indicate an entire lack of interest in it.”]; E.A. Boyd Co. v. U.S. Fidelity and Guaranty Co., 35 Cal.App.2d 171, 181-182 (1939) [“If no questions are asked and the insurer possesses facts that should place a reasonably prudent person on inquiry, failure of the insured to voluntarily inform the insurer of those facts is not fraud or concealment that will warrant the rescission or cancellation of the policy.”]
Thus, not every omission in an insurance application warrants rescission by the carrier or even a defense to coverage. The insured should be mindful and provide all material facts in response to questions that are asked when insurance is sought and any other material facts that might affect the underwriting of its policy. While the right to rescind is an equitable remedy, the insurance company is precluded from later asserting that a fact would have been material when the evidence indicates that it would have issued the same policy in the same form even if it had known the fact.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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