Zalma on Rescission of Insurance in California-2013
by Barry Zalma, Esq., CFE
© 2011, 2012 & 2013
by Barry Zalma, Esq., CFE -- © 2011, 2012 & 2013
Rescission is an Ancient Equitable Remedy
California is the biggest insurance market in the United States. California is, as a result, the home of more insurance fraud than any other state.
Insurers in California have the right to rescind a policy of insurance if the insured misrepresents or conceals a material fact when seeking insurance. California, more than a century ago, adopted, and codified, the ancient Marine Rule with regard to the interpretation of insurance contracts created as a result of misrepresentation or concealment of a material fact allowing rescission even if the concealment or misrepresentation was innocent or unintentional.
The California Court of Appeal stated the basis for rescission:
"An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks." (Emphasis added) Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.App.2d 581, 586.
California lawyer, expert witness and insurance consultant, Barry Zalma, has updated the only detailed resource on the remedy of rescission of insurance in California with the addition of more than 130 pages of new and updated material. In 934 pages Mr. Zalma provides the full text of almost every statute and decision of the California courts of appeal and federal courts that deal with rescission of California insurance policies in his new E-Book Zalma on Rescission of Insurance in California - 2013.
The new E-Book is published 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.
In the U.S., courts of law were charged with enforcing legitimate contracts and 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, was 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, must be fair. 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 at the turn of the 20th Century. Those statutes remain basically unchanged today. 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.
Although the plaintiffs’ bar has tried to emasculate the rescission remedy based on the semi-fiduciary relationship between the insurer and insured, rescission of insurance contracts, as an equitable remedy, is effective and continues to be enforced by California courts when evidence establishes that the insurer was deceived and would not have agreed to the insurance with the same coverage or at the same price had it known the true facts.
To effectively rescind a policy of insurance insurers faced with an application that appears to contain false representations that would have been material to the decision to insure or not insure the insurer, must before deciding to rescind, complete a thorough investigation into the formation of the policy of insurance.
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. Proof, beyond a preponderance of the evidence, must be able to show that the person(s) insured misrepresented or concealed a fact that the insure contends was material to the decision to insure or not insure. The insurer must also prove materiality, a subjective conclusion of the person who agreed to the insurance, that had that person, an underwriter, known the true facts the insurance would not have been issued on the same terms and conditions or for the same premium.
The E-book Zalma on Rescission of Insurance in California – 2013, provides the insurance professional with the information needed to understand why an insurer will decide to use the remedy, how to obtain sufficient facts to exercise the remedy, and what is needed to avoid the need to exercise 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 of extra-contractual torts.
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Last updated September 20, 2012