What Is Rescission For Misrepresentation?

Recently, the California Court of Appeal held that an insurer was not entitled to summary judgment on its rescission defense based on the insured’s “false” answers to its insurance application questions since the questions were ambiguous.  Duarte v. Pacific Specialty Ins. Co., 2017 WL 2834131 (2017).

In that case, the insured electronically applied for an insurance policy from Pacific Specialty Insurance Company for its rental property. The same day, the insurer issued the insured a yearlong policy. When the insured was sued by his tenants, he asked the insurer to defend him in the suit based on his policy. Instead, Pacific denied the claim and sought to rescind the policy, claiming that the insured had not been truthful when he answered “no” to two questions on the application. The trial court agreed and granted summary judgment in favor of the insurer. On appeal, the insured argued that Pacific was not entitled to rescind the policy as a matter of law because the questions were ambiguously worded.

In an insurance contract, courts interpret an insurance policy based on their ordinary meaning and not in any technical sense, unless otherwise stated in the policy. The policy must be interpreted in light of the contract as a whole, without isolating one particular provision. If the court determines that the language is ambiguous after these considerations, the interpretation is construed against the insurance company.

The two questions at issue in Duarte were (1) whether any damage remained unrepaired from prior claims/and or defects, claim disputes, property disputes or lawsuits, and (2) whether any type of business was conducted on the premises. The court held that the language of the first question subjected it to many reasonable interpretations, and thus any answer would appear untruthful. Although the second question appeared more straightforward, the court also held that the language was reasonably susceptible to an untruthful answer. So, even though the tenant kept parts in the basement and sold them on eBay, the insured’s answer of “no” was reasonable given the question may have meant an “ongoing business.”

It is common for insurance companies to assert the rescission defense to deny coverage of a claim. Any misstatements or oversights in an insurance application can lead to a rescission of an insurance policy and leave an individual without any coverage for a claim. This is an important win for insureds and the denial of their coverage!