Insurer May Rescind Policy Based On Insured’s Failure to Disclose Prior Loss History

The United States District Court for the Eastern District of California has held that an insurer was entitled to rescind an insurance policy based on the insured’s misrepresentations about its loss history, and that the insurer did not unreasonably delay in seeking rescission. ( Admiral Insurance Company. v. Debber (2006) 2006 WL 2051037)

Facts

Admiral Insurance Company (Admiral) provided Data Control Corporation (DCC) with a quote for an Employment Practices Liability Insurance (EPLI) policy. Admiral then issued DCC a binder which stated that Admiral’s review and acceptance of an original Admiral application was a condition precedent to coverage.

DCC’s insurance broker later provided Admiral with the completed application in which DCC represented that there had been no claims against DCC, its officers or employees for harassment or wrongful discharge within the last five years, and that DCC, its officers and its employees had not been involved in any lawsuit, charges, investigations or other governmental proceedings within the last five years. DCC representatives filled out the application and a renewal application consistent with its broker’s advice that DCC need not disclose two prior lawsuits because the claims were first made more than five years earlier. Based on the application, Admiral issued an EPLI policy to DCC.

Sometime later, Vickie and Scott Altman (the Altmans) sued DCC and its Chief Executive Officer, J. Dale Debber (Debber), for sexual harassment and retaliation. In their complaint the Altmans alleged that DCC and Debber had defended at least three similar sexual harassment and retaliation suits since 1996. Two of the lawsuits were pending within five years of DCC’s application for the Admiral EPLI policy.

DCC and Debber tendered the action Admiral, and Admiral agreed to defend DCC and Debber subject to a reservation of rights. Three months later, Admiral decided to file an action to rescind DCC’s policies based on DCC’s failure to disclose the two prior legal claims against DCC and Debber. Shortly thereafter, Admiral, on behalf of Debber and DCC, settled with the Altmans.

Nine months after receiving notice of the prior legal claims against DCC and Debber, Admiral filed a complaint seeking rescission of the Admiral EPLI policies and reimbursement of defense/indemnity payments it had made pursuant to those policies.

Holding

The United States District Court, applying California law, held that DCC’s failure to disclose prior lawsuits on the policy application was material to the contract and provided Admiral with a sufficient basis for rescinding the policy. DCC’s reliance on the advice of its insurance broker in omitting claims history from an application was not a defense to rescission.

The District Court also held that Admiral’s issuance of a conditional binder before receipt of a policy application did not show lack of reliance on the application in issuing the policy, and that Admiral had no obligation to investigate the veracity of DCC’s responses.

Last, District Court held that Admiral’s nine-month delay in filing a rescission suit was not unreasonable for purposes of a laches defense, and that DCC was not substantially prejudiced when it pursued an “aggressive” litigation strategy.

Comment

Generally speaking, an insured’s misrepresentations about its prior claims history, whether intentional or unintentional, will provide a basis for rescission. As the court noted in this case, “even an unintentional non-disclosure is sufficient to support rescission of an insurance contract, if the non-disclosed information was material to the contract.” According to the court, “DCC’s loss history was material information to the contract” and “non-disclosure of the information merits rescission of the contract.”