An insurer who fails to follow its own underwriting guidelines’ investigation requirements, and who as a result does not discover an applicant’s material misrepresentations, may still raise the applicant’s misrepresentations as a defense to coverage. ( Colony Ins. Co. v. Crusader Ins. Co. (2010) 188 Cal. App. 4th 743)
Facts
Positive Investments, Inc. (“PII”) owned a residential apartment building. On three different occasions 2002, PII was cited by the Los Angeles Housing Department for habitability violations.
The following year, PII submitted an application for a general liability policy to Crusader Insurance Company (“Crusader”). Among other things, the application asked whether any governmental department had ever notified PII of any deficiencies or code violations regarding PII’s building. PII answered “No.”
Crusader’s internal guidelines required its underwriters to attempt to verify the existence of any citations against a building through public records. Although the underwriter of the PII policy attempted to check the building’s history through an unofficial website, the website was not current, and the underwriter did not discover the 2002 citations.
In reliance on the representations in the application, Crusader issued a liability policy to PII that covered tenants’ claims of substandard living conditions. Crusader did not know about the 2002 citations at the time it issued the policy; if it had, it would not have issued the policy.
PII was later sued by several tenants. Crusader initially agreed to defend the action under a reservation of rights. However, when Crusader learned of the 2002 citations during the course of the litigation, it denied coverage and withdrew from the defense, citing PII’s material misrepresentations on the application as the basis for denial.
Colony Insurance Company (“Colony”), which insured PII after Crusader, defended PII against the tenants’ lawsuit. Colony then sued Crusader for equitable contribution of defense costs and declaratory relief regarding the materiality of PII’s misrepresentations. Following a bench trial, the trial court found in favor of Crusader.
Holding
The Court of Appeal affirmed, finding that despite Crusader’s failure to follow its own underwriting guidelines, Crusader was not barred by either estoppel or waiver from asserting the misrepresentation defense.
First, the Court held that Crusader was not equitably estopped from raising PII’s material misrepresentation as a defense to coverage because the first element of estoppel — knowledge of the facts — was not met. Crusader did not actually learn of the 2002 citations until midway through the underlying litigation. Further, it was of no consequence that an investigation in compliance with its own guidelines might have uncovered the citations, because Crusader was not legally obligated to follow its internal guidelines. To the contrary, there was no evidence that PII had detrimentally relied on the guidelines, and Crusader’s policy expressly provided that it “embodie[d] all agreements between the insured and the company,” thus reflecting the lack of any enforceable right resulting from the guidelines.
Second, the Court held that Crusader’s failure to follow its guidelines did not result in a waiver of its misrepresentation defense. Waiver requires the intentional relinquishment of a known right, and there was no evidence that Crusader, which did not discover the citations until midway through the litigation, intentionally relinquished any such right. Moreover, the guidelines themselves could not result in a waiver because California’s statutes expressly permit an insurer to rely on an insured’s representations.
Last, the Court rejected Colony’s argument that Crusader had engaged in improper “post-claims underwriting.” Although post-claims underwriting is prohibited in the context of health insurance and in third-party claims against auto insurers, those rules are founded in fact-specific public policy considerations and are not applicable to other types of insurance claims.
Comment
Although not specifically addressed by the Court, this case assumes that an insured’s material misrepresentation on an application submitted to one insurer can give that insurer a complete defense to an equitable contribution claim by another insurer. That, in any event, was the net effect of the Court’s ruling.