Zalma on Rescission of Insurance in California

Barry Zalma has produced the only detailed resource on the remedy of rescission of insurance in California. In 832 pages Mr. Zalma has provided the full text of almost every decision of the California courts of appeal and the federal courts that deal with rescission of California insurance policies. It is published as an e-book in Adobe Acrobat pdf format. Any person with a computer, I-Pad, smart phone, or book reader that can read the universal pdf format can read the book and search the entire book for key words using the Adobe Reader search function.

Rescission is an equitable remedy as ancient as the common law of Britain.

When the United States was conceived in 1776 the founders were concerned with protecting their rights under British common law. They adopted it as the law of the new United States of America modified only by the limitations placed on the central government by the U.S. Constitution.

The viability and ability to enforce contracts was recognized as essential to commerce. Courts of law were charged with enforcing legitimate contracts. Courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair.

Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith. Each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured is required to answer all questions about the risk he, she or it are asking the insurer to take and about the person the insurer is asked to insure.

Rescission, since before the U. S. Constitution, became an important remedy for insurers. As a contract of utmost good faith insurers and the courts recognized that the parties to a contract of insurance were more vulnerable than other contracting parties to misrepresentation or concealment of material fact. The remedy is available to either party to the contract and when one determines it was deceived into entering into the contract it may declare the contract void from its inception, return the consideration and treat it as if it never existed.

When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission. In California the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or an innocent misrepresentation of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.

Equitable remedies, like the remedy of rescission, are expected to be fair. California follows the ancient equitable remedies and has codified the right to rescission of insurance contracts because the legislature considered it unfair to make a contracting party abide by a contract that was not obtained fairly. The ancient maxim that "No one can take advantage of his own wrong" is applied when a court is faced with a request to confirm rescission.

California first enacted state statutes relating to insurance and the equitable remedy of rescission since the turn of the 20th Century. Those statutes remain basically unchanged today.

has been available to contracting parties if the contract was entered into as a result of fraud, concealment of material fact or misrepresentation of material fact. The California Supreme Court and courts of appeal have consistently enforced the right of insurers to rescind policies of insurance even if the facts misrepresented or concealed were made innocently and without an intent to deceive.

Rescission of insurance contracts, as an equitable remedy, is alive and well in California regardless of the attempts of the Plaintiffs’ bar to destroy it. To effectively rescind a policy of insurance it is important that the insurer conduct a thorough investigation and apply the facts and law fairly before a decision is made.

Insurers faced with an application that appears to contain false representations that would have been material to the decision to insure or not insure, must protect itself and, before deciding to rescind, complete a thorough investigation.

Insurers must use the rescission remedy with care. Insurers should never assume that the promise to pay indemnity to the insured under a policy of insurance can, with impunity, be broken by advising the insured that the insurer has rescinded the policy. This book provides the insurance professional with the information needed to decide whether to use the remedy.

Rescission without sufficient evidence is wrongful. Rescission without the advice of competent counsel is a tactic fraught with peril. Where no valid ground for rescission exists, the threat or attempt to seek such relief, may constitute a breach of the covenant of good faith and fair dealing which is implied in the policy and expose the insurer to tort damages for that breach, including punitive damages.

California courts have made clear that if an insurer elects rescission without sufficient evidence it will bring the wrath of the courts down on it and will be the basis for allegations, easily proved, of extra-contractual torts.

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