Ambiguous Questions in Insurance Application Prevent Rescissionin Insurance Law by Stephen Raucher
In a decision which softens the normally harsh rules confronting policyholders with respect to rescission of insurance policies, California’s First Appellate District recently reversed a summary judgment of rescission. Duarte v. Pacific Specialty Ins. Co., 13 Cal.App.5th 45 (2017). The basis for doing so was the ambiguity of the questions at issue in the insurance application.
The policyholder, Duarte, obtained liability coverage effective April 19, 2012 for a residential rental property he owned. In June 2012, a tenant at the property filed a habitability lawsuit, which the carrier, Pacific Specialty, refused to defend. Duarte filed an action for declaratory relief to establish the duty to defend. Pacific Specialty asserted a number of affirmative defenses in response, including a right to rescind due to material misrepresentations in the application. The trial court granted summary judgment in favor of Pacific Specialty, but the Court of Appeal reversed.
Pacific Specialty asserted that Duarte untruthfully answered “no” to the following questions: “(4) Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?” and (9) “Is there any type of business conducted on the premises?”
The appellate court began by acknowledging that material misrepresentations or concealments are grounds for rescission of an insurance policy, and actual intent to deceive need not be shown. Moreover, “the fact that the insurer has demanded answers to specific questions in an application for insurance is in itself usually sufficient to establish materiality as a matter of law.” Id. at 53, citing Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904 (1973). However, the court went on to note that, as with the construction of insurance policies generally, ambiguities in the application are construed against the insurer, and that the insurer cannot rely on answers given based on vague or ambiguous questions. Id. at 54.
With respect to Question No. 4, the record did show that the tenant had complained about issues with the property in February 2012, prior to the policy’s inception. However, this was insufficient in light of the “utterly ambiguous” nature of the question. In particular, the court noted that the question did “not include any form of the verb ‘to be,’ and therefore it is not at all clear that it asks, ‘Are there any pending claims?’” Id. at 60 (emphasis in original). Instead, the court agreed with Duarte that the question could reasonably be interpreted as asking “whether the property has unrepaired damage associated in some way with previous or pending claims.” Id. at 61 (emphasis added). Since Pacific Specialty had not shown that the insured knew of any unrepaired damage, it could not meet its burden on summary judgment as to this question.
As to Question No. 9, Pacific Specialty pointed to evidence that Duarte knew that the tenant had sometimes sold motorcycle parts from the basement to show that his answer was inaccurate. However, Duarte argued that he reasonably interpreted the phrase “business [being] conducted on the premises” to refer to “regular and ongoing business activity.” The Court of Appeal agreed that Duarte’s interpretation was reasonable, and that there was accordingly a disputed question of fact as to whether Duarte misrepresented the existence of a business on the premises in the insurance application. Summary judgment was therefore reversed.
The lesson of Duarte for policyholders when confronted with a rescission claim is to pay careful attention not only to the answers provided on the insurance application, but to the questions themselves. Since ambiguities will be interpreted against the insurance company, convoluted, vague or confusing questions may be a policyholder’s best friend.