Fire Insurance May Be Rescinded for Unintentional Misrepresentation, Court of Appeal Rules

Thursday, March 10, 2005

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Fire Insurance May Be Rescinded for Unintentional Misrepresentation, Court of Appeal Rules

By a MetNews Staff Writer

A fire insurance policy may be rescinded based on an unintentional, material misrepresentation in the application, the Court of Appeal for this district has ruled, even though the standard fire insurance policy required by statute permits the voiding of a policy for misrepresentation only if it is intentional.

Div. Five issued that ruling yesterday in a case that grew out of a November 2000 Los Angeles arson fire in which the arsonist died.

James E. Mitchell owned the building, which he purchased nine months before the fire. Mitchell was in Chicago when the building burned, killing Carl Robinson.

Mitchell said that Robinson represented himself as a business consultant with a prospective buyer for the property, and that he gave him the keys to the property for the purpose of showing it to the prospective buyer.

After the fire, Mitchell’s carrier, United National Insurance Company, rescinded his policy and rejected the claim. The company said that Mitchell made a number of misrepresentations in the application, and that if the true facts had been included, it would not have issued the policy.

The company cited assertions that the building had 3,420 square feet of space, when in fact it was much smaller; that it was to be used as a “video production studio and offices” for a company owned by Mitchell, which it was not; that the business generated $300,000 in receipts, which was nowhere close to accurate; that it had no prior insurance, when in fact it was previously insured by the California FAIR Plan; and that it had no uncorrected code violations and that it had a burglar alarm, neither of which was true.

Mitchell sued. He admitted that the application “contained inaccuracies,” but contented that all of them were unintentional and/or immaterial.

The underwriter filed a declaration, stating that she would have underwritten the policy differently or not written it at all had she been aware of the true facts concerning its size; the fact that little business was being conducted there; the fact that it had previously been insured by the state’s “carrier of last resort,” suggesting that the building was not insurable in the regular market; and the potential risk of fire from hazardous conditions as discovered by city inspectors but omitted from the application.

Los Angeles Superior Court Judge Elizabeth Grimes ruled that the misrepresentations were material as a matter of law, that the company had a legal right to rescind, and that Robinson was acting as agent for Mitchell at the time of the fire and that the arson constituted a “dishonest act” attributable to the principal, excluding coverage.

Justice Richard Mosk, writing for the Court of Appeal, said the trial judge was correct as to the misrepresentation and rescission issues, finding it unnecessary to address the agency question.

Mosk explained that rescission was authorized by Insurance Code Sec. 331, which provides that concealment of a material fact “whether intentional or unintentional, entitles the injured party to rescind insurance,” and Sec. 359,which provides that a material misrepresentation, “whether affirmative or promissory,” entitles the injured party “to rescind the contract from the time the representation becomes false.”

The justice distinguished rescission under those sections from the voiding of a policy under Sec. 2070, which provides that all fire policies must be in the standard form, and Sec. 2071, which sets forth that standard form, including a provision that a policy “shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.”

Mosk explained that the statutes are logically reconciled when the public policies underlying them are applied.

“Freedom of contract and the right of an insurer to make an informed decision whether or not to insure a given risk are strong policy considerations that support more liberal rescission rights for misrepresentations made at the inception of the insurance contract,” Mosk reasoned.

The case is Mitchell v. United National Insurance Company, 05 S.O.S. 1182.