In recent years, asserting a rescission claims has been an increasingly favored defense raised by insurers, often with little or no factual basis. In addition to pursuing rescission claims with no factual support, carriers also try to distort the legal standard, by misstating the “innocent misrepresentation” rule under California law.
Under California law, an insurer need not show that the insured specifically intended to induce reliance in order to prevail on a rescission claim. Insurers characterize this as an “innocent misrepresentation” rule; these insurers ignore the narrow scope of the rule, and act as if the insured’s understanding or state of mind is entirely irrelevant in a rescission claim. To hear insurers tell it, there are only two elements of a rescission claim: 1) that a particular fact was not disclosed; and 2) that the underwriter subjectively believes such a fact would have been material. I have even had an insurer assert in litigation that, since the standard is subjective materiality from the insurer’s point of view, the insured cannot even offer evidence to rebut the self-serving testimony of the underwriter! This position, of course, was rejected by the trial judge. In fact, a recent case makes it abundantly clear that the insured may rebut this showing through any relevant evidence. See Nieto v. Blue Shield of California __ Cal. App. 4th __(2010)("the trier of fact is not required to believe the 'post mortem' testimony of an insurer's agents that insurance would have been refused had the true facts been disclosed"). Testimony from an underwriting expert is often helpful in rebutting this testimony.
Even more importantly, the insurer position completely ignores the first, and critical element of a rescission defense—the requirement that the insurer prove that the insured had a duty to disclose because he understood the fact was material. Section 332 of the California Insurance Code states “Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract . . . .” The California Supreme Court has also emphasized that the duty to disclose is limited to facts the insured understands to be material. Thompson v. Occidental Life Ins. Co., 9 Cal. 3d 904, 916 (1973) (holding that “if the applicant for insurance has no personal knowledge of the facts sought, or failed to appreciate the significance of information related to him, his incorrect or incomplete responses would not constitute grounds for rescission”) (emphasis added); Ransom v. Penn Mutual Life Insurance Co., 43 Cal. 2d 420, 426 (1954) (no misrepresentation when applicant did not disclose “high blood pressure” because he may have failed to understand diagnosis of “mild hypertension”); Rallod Transp. Co. v. Continental Ins. Co., 121 F.2d 851, 853 (9th Cir. 1984) (“Absent such a duty [to disclose] there can be no actionable concealment.”). As the Ninth Circuit remarked, “[i]t would be patently unfair to allow the insurer to avoid its obligations under the policy on the basis of information that the applicant did not know . . . .”
As these authorities make clear, an insurer need not show a subjective intent to defraud, but the insurer still has the burden to show that the insured subjectively understood the information at issue was material.