United States: Avoiding Arguments Regarding Waiver Of The Right To Rescind: An Examination Of California Law

Although rescission issues most frequently arise in connection with health and life insurance policies, they can appear in virtually any context.  See, e.g., Unionamerica Ins. Co. v. Fort Miller Group, Inc. (N.D. Cal. 2008) 590 F. Supp. 2d 1254 (commercial general liability policy); Blum Collins LLP v. NCG Prof'l Risks, Ltd. (C.D. Cal. Jul. 31, 2014) 2014 U.S. Dist. LEXIS 109915 (professional liability policy).  Thus, it is important to understand the necessary steps for properly rescinding an insurance policy, especially so that arguments over waiver of the right to rescind can be avoided.         

Recently, in DuBeck v. California Physicians' Service (2015) 234 Cal. App. 4th 1254, the California Court of Appeal noted that an insurer can waive its right to rescind an insurance policy if it does not promptly investigate suspicious facts within its knowledge, even if those facts do not, on their face, establish a proper basis for rescission.  Id. at 1267 ("[a]ctual knowledge...is not essential to establish a waiver...[i]t is sufficient that [an] insurer has information which if pursued with reasonable diligence would lead to the discovery of the breach.") (citations omitted).  DuBeck also provides guidance on the steps an insurer should take once it has established that rescission is proper. Accordingly, DuBeck is a case any claims representative considering rescission should be aware of.

In DuBeck, the insured represented that she had never received professional advice or treatment for breast cancer despite being diagnosed with breast cancer five days earlier.  Shortly after the policy went into effect, the insurer began receiving medical bills related to the insured's breast cancer surgery.  Despite the receipt of these invoices, the insurer waited over a year to investigate the insured's medical history and to attempt to rescind the policy.  Under these circumstances, the DuBeck court found that the insurer had waived the right to rescind. 234 Cal. App. 4th at 1267. 

In rare cases, courts have gone further than DuBeck.  For example, in Mao Xiong v. Lincoln Nat'l Life Ins. Co. (E.D. Cal. May 28, 2009) 2009 U.S. Dist. LEXIS 45280, the insurer argued that the insured's concealment of his other policies of insurance was a material misrepresentation because the insurer never would have issued coverage had it known the truth.  Finding that any right to rescind based on the insured's failure to disclose his additional policies was waived even if material, the court emphasized that the insurer had a Medical Index Bureau report in its possession at the time it granted coverage which illustrated that other insurance companies had "information about a person who 'matche[d] the demographics of [the] proposed insured.'" Id. at *26 (citations omitted).  Thus, even though the report arguably did not illustrate that the insured actually had obtained any other insurance policies or that the references in the report necessarily concerned the insured, the court still found that the insurer's failure to further investigate precluded any right to rescind. See also Unionamerica, supra (finding that an insurer waived the right to rescind because it should have known the policy application was inaccurate or incomplete when the insured did not provide information relating to the products sold by one of its subsidiaries).

It should be stressed, however, that cases like DuBeck and Mao are the exception and not the rule.  Generally, an insurer has every right to rely on the information provided by the insured, and an insurer is not required to investigate an insured's representations unless the insurer already has information in its possession demonstrating that the representations are almost certainly false.  See Mitchell v. United National Ins. Co. (2005) 127 Cal. App. 4th 457, 476 ("[a]n insurer does not waive its right to rescind a policy on the ground of false representations if it was unaware of the falsity of those representations"); LA Sound USA, Inc., supra, 156 Cal. App. 4th at 1271 ("'an insurer has the right to rely on the insured's answers to questions in the insurance application without verifying their accuracy'") (citations omitted); Colony Ins. Co. v. Crusader Ins. Co. (2010) 188 Cal. App. 4th 743, 754-55 (finding an insurer's failure to follow its own investigatory guidelines in the underwriting context did not lead to a finding of waiver); West Coast Life Ins. Co. v. Ward (2005) 132 Cal. App. 4th 181, 189-193 (canvassing California law and illustrating that waiver has typically occurred where the insurer possesses an investigatory report at the time it issues the policy, and the contents of the report directly conflict with the insured's representations on the policy application).

Nevertheless, to avoid arguments of waiver, when an insurer comes into possession of information that suggests an insured provided false information with his or her application for insurance, it is advisable for the insurer to begin investigating.  While the scope of that investigation will vary from case to case, often a simple letter to the insured requesting the documents relevant to the representation at issue is the most logical way to begin the investigation and avoid arguments of waiver.  Should the insurer's investigation ultimately uncover evidence that clearly establishes the insured made material misrepresentations when applying for coverage, then the insurer will normally have to make a decision about whether or not to rescind the policy or it may open itself up to arguments that it waived the right to do so.      

Once an insurer decides to rescind the policy, DuBeck instructs that there are at least two additional steps the insurer should take in order to ensure that a court will enforce the rescission.  First, an insurer should refund all policy premiums paid by the insured (less actual costs paid out by the insurer). DuBeck, 234 Cal. App. 4th at 1266, n. 13.  Second, an insurer should not state it is canceling the policy (as opposed to rescinding the policy since its inception), because a cancellation can be construed to mean that coverage once validly existed. See id. at 1264-1265 (implying that a cancellation signals that coverage is only terminated prospectively, which logically is at odds with the effect of a rescission). 

While California courts have repeatedly held that an insurer has every right to rely on the information provided by the insured and that an insurer is not required to investigate an insured's representations if it has no reason to think they may be inaccurate, if the insurer later comes into information that strongly suggests an insured's application contained material misrepresentations, it is advisable to further investigate at that time and avoid potential arguments of waiver.

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