The United States District Court for the Central District of California, applying California law, has held that an insurer could rescind liability insurance policies based on misrepresentations in the application, even though three years earlier the policyholder's predecessor had submitted the information requested in the application to the insurer's parent company. Mt. Vernon Fire Ins. Co. v The Kelemen Co., 2025 WL 1615331 (C.D. Cal. May 9, 2025).
An insurer filed suit in federal court seeking rescission of liability policies based on allegations that the insured provided false representations in the applications. Question 7 asked whether, "[w]ithin the last 5 years, has any employment related, or third party discrimination, or third party harassment injury, complaint, notice of hearing, claim or suit been made against any entity for insurance or any person proposed for insurance in the capacity of either director, officer, member . . . or employee of any entity proposed for insurance?" The insurer alleged that a former employee at an insured officer's prior company had filed a sexual harassment and wrongful termination lawsuit three years earlier. The court granted summary judgment in favor of the insurer because the policyholder falsely answered Question 7, and a truthful answer would have affected the decision to issue the policies.
Meanwhile, the insureds filed suit in state court against their brokers who prepared the applications. Discovery in that case revealed a chain of emails in which the insurer's parent company acknowledged prior allegations against an insured and denied coverage.
The policyholder used this email chain to seek relief in the federal rescission action, arguing that the insurer made fraudulent misrepresentations to the court regarding its prior knowledge of the earlier lawsuit. The insurer argued that it was entitled to rely on the company's response in its applications.
The court denied the insured's motion, holding that the insurer did not commit fraud or misconduct by allegedly misrepresenting that it had no knowledge of the earlier lawsuit, which was the basis for rescinding coverage to the insureds. The court determined that the insureds failed to produce evidence that the insurer should have made the "tenuous" connection between the information relevant to two different companies submitted three years apart to two affiliated insurers. The court also concluded that the email chain failed to demonstrate that the insurer knew of the earlier lawsuit because the emails predated the lawsuit by at least two months.
The court further clarified that it granted summary judgment to the insurer because the insureds had provided a false answer to Question 7 on the applications, which was sufficient to establish materiality as a matter of law. The court also noted that the email chain included an email from the operations manager who signed the applications on behalf of the insured, confirming that the insured was aware of the allegations against the officer.
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