The California Court of Appeal has held that a D&O insurer properly rescinded a policy based on the insured’s material misrepresentation in the application. (TIG Insurance Company of Michigan v. Homestore, Inc. (2006) 137 Cal.App.4th 749)
Facts
Homestore, Inc. (Homestore) submitted an application to TIG Insurance Company of Michigan (TIG) for a directors and officers liability policy. As part of the application process, TIG required that Homestore submit a financial statement. After TIG issued the policy, Homestore’s chief financial officer admitted that, on the date he signed the insurance application, he knew the financial statement contained material misrepresentations about Homestore’s true financial condition.
TIG’s policy stated “this Policy in its entirety shall be void and of no effect whatsoever if such [material] misrepresentations were known to be untrue on the inception date of the Policy by one or more of the individuals who signed the Application.” TIG sued to rescind the policy, and sought summary judgment based on the chief financial officer’s admission, and based on an underwriters’ declaration that TIG would not have issued the policy had it known the true facts.
In response, Homestore argued that the TIG policy provision was ambiguous as to whether the rescission applied to officers and directors who did not sign the application and were not aware of the misrepresentations. Homestore also argued that the policy provision was unenforceable because it violated public policy and was not “conspicuous, plain and clear.”
Holding
The Court of Appeal ruled TIG policy provision was consistent with the Insurance Code, which provides insurers the right to rescind coverage based on material misrepresentations in the insurance application. Further, Insurance Code section 650 provides that rescission applies to all insureds unless the policy provides otherwise. The provision was “conspicuous, plain and clear” because it was easily located on a page with double-spacing and used words readily understandable by the average layperson. Under the circumstances, TIG was entitled to rescind the policy.
Comment
A material concealment or misrepresentation on an application—even if unintentional—entitles an insurer to rescind. The insurer may either file an action for rescission or raise the misrepresentation as a defense to coverage. Further, rescission can be based on policy provisions or statute. (See Insurance Code sections 330-361, 650.)