On March 8, 2005 the California Court of Appeal, Second Appellate District,
Division Five affirmed and enforced California's Marine Rule, enforced the rescission
of an insurance policy because of misrepresentation or concealment of material
fact, and defeated an argument that statutory language in a policy of insurance
changed the law of rescission. In James E. Mitchell,
Individually and as Trustee of the Mitchell Family Trust v. United National
Ins. Co., 127 Cal. App. 4th 457, 25 Cal. Rptr. 3d 627, 2005 Daily Journal
D.A.R., 05 Cal. Daily Op. Serv. 2009, 5 Cal. Daily Op. Serv. 2099, the Court
of Appeal summarized its holding as follows:
[A]n insurer may, under [California] Insurance Code sections 331 and
359, rescind a fire insurance policy based on an insured's negligent or unintentional misrepresentation
of a material fact in an insurance application, notwithstanding the
willful misrepresentation clause included in the required standard form
fire insurance policy (Insurance Code sections 2070 and 2071). [Emphasis
Mitchell individually was the named insured under an insurance policy issued
by United National that provided coverage for a commercial building owned by
the Mitchell Family Trust in Los Angeles. During the policy period, the building
was destroyed by arson. The arsonist, an acquaintance of Mitchell's, perished
in the fire. In the ensuing investigation,1 United
National discovered several purported misrepresentations in Mitchell's application
for insurance, rescinded the policy, and offered to return Mitchell's premium.
United National moved for summary judgment on two alternative grounds:
Material misrepresentations in the application for insurance gave United
National the right, under Insurance Code sections 331 and 359, to rescind
the policy; and
The policy's dishonest act exclusion barred coverage because Mitchell's
representative, to whom Mitchell had entrusted the property, intentionally
set fire to the property.
The trial court granted summary judgment on both grounds.
Mitchell purchased the building in February 2000 in the name of his trust.
On April 11, 2000, Mitchell's brokers submitted an application for insurance
to Debra Messina of Excess & Surplus Lines Insurance Brokers, Inc., an authorized
underwriter for United National. The application made certain material representations
upon which the underwriter, Messina, relied in deciding to insure Mitchell:
the property to be insured consisted of a 3,420 square foot commercial
the building was to be used by Mitchell as a "video production studio
the business to be conducted in the building had $20,000 in payroll and
generated $300,000 in receipts;
there was no existing insurance on the building;
the building had no uncorrected fire code violations;
the building had a burglar alarm; and
Records & Records & Filmworks, Inc. (later changed to James E. Mitchell)
was the purchaser of the building.
In fact, the evidence collected by the insurer established that:
the building was less than 2,000 square feet;
the business conducted in the building had no officers or employees,
was used only to film a music video for two days in May or June of 2000,
and was leased to a tenant who operated a garment business;
the business in the building generated approximately $6,500 in receipts
from February 2000 to the time of the fire;
the building was insured by the California FAIR Plan, an insurer of "last
the building was subject to a City of Los Angeles abatement order stating
that the building could not be occupied without a clearance or repaired
without a permit and contained such deficiencies as being open to unauthorized
entry, littered with combustible debris, excessive dry weeds or vegetation,
broken windows, damaged or missing doors, damaged exterior wall covering,
damaged interior wall and ceiling covering, and deteriorated flooring (and
no permit had been obtained for corrective work on these deficiencies);
the building had no burglar alarm; and
the building was owned by the Mitchell Family Trust.
In addition, it was established by United National's thorough investigation
and the examination under oath of Mr. Mitchell that in July 2000, he rented
the property to a tenant who operated a garment manufacturing business. In August
2000, a city inspector cited the tenant for failure to obtain a certificate
of occupancy, and Mitchell was forced to release the tenant from the lease and
return most of the rent payments. The property was vacant on November 22, 2000,
the date of the fire.
According to Mitchell, before the property was damaged by the fire, he met
Carl Robinson, who represented himself as a business consultant with a prospective
buyer for the property, and gave Robinson the keys to the property for the purpose
of showing it to the prospective buyer. On November 22, 2000, while Mitchell
was in Chicago, Robinson set fire to the building and was killed in the ensuing
In his first amended complaint, Mitchell admitted that the application for
insurance submitted to United National "contained inaccuracies" that caused
United National to rescind the policy, but claimed that those inaccuracies were
not material and were solely the fault of his brokers.
Ms. Messina, the underwriter, stated in an undisputed declaration, that the
size and condition of the building, as well as its proposed use as an owner-occupied
business, were important factors in rating the risk to be insured against and
in deciding whether or not to issue an insurance policy. She further declared
that had she known that there were uncorrected fire code violations, the building
was substantially smaller than had been represented in the insurance application,
and that the property was not to be used as studios and offices for Mitchell's
own music video company, she either would have underwritten the policy differently
or declined to underwrite it altogether. Further, she did not know of the existence
of prior insurance coverage under the California FAIR Plan—an important underwriting
consideration because such coverage indicated past problems in acquiring insurance
The trial court granted summary judgment in United National's favor, finding
"as a matter of law on the undisputed facts that the information sought by United's
underwriter and denied to it by plaintiff's false answers and omissions was
material to United's decision to provide insurance coverage. The uncontradicted
evidence of United's underwriter confirms the importance that United attached
to the information. Under these circumstances, the materiality of plaintiff's
concealment is established as a matter of law." The trial court further concluded,
"in addition, coverage is excluded because the loss was the consequence of the
dishonest act (arson) of plaintiff's authorized representative to whom he entrusted
the property for the purpose of showing it to a potential buyer (Robinson)."
Insurance Code Sections 331 and 359
United National based its right to rescind the policy on Insurance Code sections
331 and 359. Insurance Code section 331 states: "Concealment, whether intentional
or unintentional, entitles the injured party to rescind insurance." Insurance
Code section 359 similarly provides: "If a representation is false in a material
point, whether affirmative or promissory, the injured party is entitled to rescind
the contract from the time the representation becomes false."
The court, recognizing the history of the rescission statutes are part of
a larger statutory framework that imposes "heavy burdens of disclosure" "upon
both parties to a contract of insurance and any material misrepresentation or
the failure, whether intentional or unintentional, to provide requested information
permits rescission of the policy by the injured party." (Imperial
Casualty & Indemnity Co. v. Sogomonian, 198 Cal. App. 3d 169, 179-180
(1988) (Imperial).)2 The statutory scheme created by the California Insurance Code is a codification
of what has become known as the "Marine Rule" first enunciated by Lord Mansfield
in the House of Lords in Britain in 1766 in Carter v.
Boehm, S.C. 1 Bl.593, 3 Burr 1906, 11 May 1766, that held in language
almost identical to that in the California Insurance Code:
The governing principle is applicable to all contracts and dealings.
Good faith forbids either party by concealing what he privately knows, to
draw the other into a bargain, from his ignorance of that fact, and his
believing the contrary.
But either party may be innocently silent, as to grounds open to both,
to exercise their judgment upon. …
This definition of concealment, restrained to the efficient motives
and precise subject of any contract, will generally hold to make it void,
in favour of the party misled by his ignorance of the thing concealed.
There are many matters, as to which the insured may be innocently silent—he
need not mention what the under-writer knows …. An under-writer can not
insist that the policy is void, because the insured did not tell him what
he actually knew; what way soever he came to the knowledge.
The insured need not mention what the under-writer ought to know; what
he takes upon himself the knowledge of; or what he waves being informed
The under-writer needs not be told what lessens the risk agreed and
understood to be run by the express terms of the policy. He needs not to
be told general topics of speculation: as for instance—The under-writer
is bound to know every cause which may occasion natural perils; as, the
difficulty of the voyage—the kind of seasons—the probability of lightning,
the hurricanes, earthquakes, etc. He is bound to know every cause which
may occasion political perils; from the ruptures of States from war, and
the various operations of it. He is bound to know the probability of safety,
from the continuance of return of peace; from the imbecility of the enemy,
through the weakness of their counsels, or their want of strength, etc.
* * *
The reason of the rule which obliges parties
to disclose, is to prevent fraud, and to encourage good faith. It
is adapted to such facts as vary the nature of the contract; which one privately
knows, and the other is ignorant of, and has no reason to suspect. (Emphasis
As the Court of Appeal noted:
Insurance Code section 332, for example, requires each party to an insurance
contract to disclose, "in good faith, all facts within his knowledge which
are or which he believes to be material to the contract. …" The disclosure
obligations imposed by these statutes are directed specifically at the formation
of the insurance contract. Insurance Code section 334 states: "Materiality
is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due,
in forming his estimate of the disadvantages of the proposed contract, or in making his
inquiries." (Ins. Code, § 334, italics added.) Insurance Code section 356
provides: "The completion of the contract of insurance is the time to which
a representation must be presumed to refer."
The Court of Appeal recognized that the reason for the right to rescind is
in support of the parties' freedom to contract.
[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. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586.) (Emphasis added.)
Citing to the history of rescission in California, the Court of Appeal recognized
that it was applying a long line of California decisions, including Telford v. New York Life Ins. Co., 9 Cal. 2d
103, 105 (1937); Dinkins v. American National Ins. Co.,
92 Cal. App. 3d 222, 232 (1979); Thompson v. Occidental
Life Ins. Co., 9 Cal. 3d 904, 915-916 (1973); Williamson & Vollmer Engineering, Inc. v. Sequoia Ins. Co., 64 Cal. App.
3d 261, 273 (1976), and Imperial, supra, 198
Cal. App. 3d at p. 182, Croskey, et al., Cal. Practice Guide: Insurance Litigation,
¶ 5:169, p. 5-32.4 (The Rutter Group, 2004).
Insurance Code Sections 2070 and 2071
Insurance Code Section 2070 requires particular language in all fire insurance
policies issued in California and Section 2071 is the language required. The
standard form policy contains the following provision concerning an insured's
concealment or misrepresentation of a material fact:
Concealment, fraud: This entire 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.
To void a policy based on the insured's violation of the standard form policy's
fraud and concealment provision, "the false statement must have been knowingly
and willfully made with the intent (express or implied) of deceiving the insurer.
The materiality of the statement will be determined by the objective standard of its effect upon a reasonable insurer." (Cummings
v. Fire Ins. Exchange, 202 Cal. App. 3d 1407, 1414-1415, fn.7 (1988),
original italics [voiding fire insurance policy based on insured's fraudulent
claim for policy benefits].)
The court recognized that an insurer's right to void a fire insurance policy
under Insurance Code Section 2071 is more limited than the right to rescind
accorded by Insurance Code sections 331 and 359 because the insurer must prove
an intentional or willful act by the insured or the insured's agents while rescission
can be affirmed when there is merely an innocent misrepresentation of a material
fact. The statutes, however, are not mutually exclusive. An insurer faced with
misrepresentations in an application for insurance may choose to rescind, void,
The Court of Appeal concluded that there is no authority to support Mitchell's
argument that the fraud and concealment provision in Insurance Code Section
2071, and not Insurance Code sections 331 or 359, governs the right to rescind
a fire insurance policy based on misrepresentations in the insurance application.
Different statutes within the same code should be interpreted to be consistent.
The court, applying the rules of statutory interpretation found that the since
standard form policy does not "provide for the consequences of a non-willful
misrepresentation or concealment should not be read to prevent the application
of other Insurance Code provisions that do."
Concluding, importantly, that insurers are entitled to exercise their right
to freedom of contract and the right 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. As one authority has noted: "Despite the significant statutory
prescription of fire insurance policy terms, contracts of this kind are treated
as voluntary contracts rather than legislative enactments, since they derive
their force and efficacy from the consent of the parties." (10
Couch On Insurance (3d ed. 1998) § 149:3, p. 149-10.)
Finding that both Insurance Code Sections 331 and 359 and the fraud and concealment
provisions of the standard form policy prescribed by Insurance Code Section
2071 apply to misrepresentations made at any time the rescission provisions
normally govern the parties' obligations during formation of the insurance contract,
and allow an insurer to rescind a fire insurance
policy based on an insured's negligent or unintentional concealment or misrepresentation
of a material fact.
The standard fraud and concealment provision of the standard fire insurance
policy on the other hand is exercised in connection with a claim for policy
benefits. Importantly, the Court of Appeal refused to accept Mitchell's argument
that the fraud and concealment provision in the standard policy … requiring
the insurer to prove a misrepresentation was willful in order to void the
policy does not affect the application of Insurance Code sections 331 and
359, allowing the insurer to rescind the policy in the event of a negligent
or unintentional misrepresentation.
Misrepresentation of Material Facts
Mitchell's application for insurance contained misstatements of fact concerning
the size and use of the building, the existence of building code violations,
and the existence of insurance coverage for the property. The materiality of
a misrepresentation is determined by its probable and reasonable effect upon
the insurer. When deciding to rescind or not rescind an insurer should consider,
according to the Court of Appeal:
The test for materiality is whether the information would have caused
the underwriter to reject the application, charge a higher premium, or amend
the policy terms, had the underwriter known the true facts. (Old
Line Life Ins. Co. v. Superior Court, 229 Cal. App. 3d 1600, 1604
The misrepresentation need not relate to the loss ultimately claimed
by the insured. (Torbensen v. Family Life Ins. Co.,
163 Cal. App. 2d 401, 405 (1958))
Whether the decision to enter into the contract, in estimating the degree
or character of the risk, or in fixing the premium rate thereon (Holz
Rubber Co., Inc. v. American Star Ins. Co., 14 Cal. 3d 45, 61 (1975))
"Materiality is determined by the probable and reasonable effect that
truthful disclosure would have had upon the insurer in determining the advantages
of the proposed contract. [Citations.] Essentially, we must decide whether
the insurer was misled into accepting the risk or fixing the premium of
insurance. [Citations.]"].) "This is a subjective test; the critical question is the effect truthful answers would have had
on [the insurer], not on some 'average reasonable' insurer." (Imperial,
supra, 198 Cal. App. 3d at p. 181, original italics; see also Cummings v. Fire Ins. Exchange, supra, 202
Cal. App. 3d at pp. 1414-1415, fn. 7; Coca Cola
Bottling Co. v. Columbia Casualty Ins. Co., 11 Cal. App. 4th 1176,
1189, fn. 4 (1992).)
The Court of Appeal recognized, and agreed with Imperial,
supra, 198 Cal. App. 3d at page 179, where the court suggested that the
issue of materiality of a misrepresentation in an insurance application might
be one of law. The Imperial Court stated:
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."
… The court also stated when there is undisputed evidence that false information
was given in an application for insurance and the insurer issued a policy
in reliance upon this information, the materiality of a misrepresentation
or concealment may be established as a matter of law. … The court went on
to say that materiality was established by "the nature of the insurance
coverage which defendant sought, the quality and quantity of the information
which was not disclosed," in addition to the fact that the insurer "specifically
requested the information on its application and therefore relied upon it
in issuing the policy."
The application questions presented to Mitchell plainly impacted the decisions
on whether to insure and the premium to charge. Mitchell admitted that questions
concerning the ownership, size and condition of the building, the nature of
the business to be conducted, and its payroll and receipts, and the existence
of insurance under the FAIR Plan were factors impacting either the underwriting
decision or the amount of the premium and coverage, and that his answers to
these questions may have affected the decision to bind coverage and the amount
of the premium.
Mitchell argued that Messina and United National should have verified the
accuracy of his representations at the time the decision was made to insure
him rather than wait until after a loss. The Court of Appeal disposed of the
argument with ease citing to ancient authority that Ms. Messina had no obligation
to verify the accuracy of the representations, citing to Robinson v. Occidental Life Ins. Co., supra,
131 Cal. App. 2d at 585, which held that in connection with an insurance application
"[i]t was not incumbent upon [insurer] to investigate [insured's] statements
made to the examiner. It was [insured's] duty to divulge fully all he knew.…"
The decision to affirm the rescission was reached because:
the evidence of materiality of the misrepresentations was uncontradicted;
the application was for significant insurance covering the peril of fire;
the information sought went directly to questions of insurability, risk,
the insured admitted that there were misrepresentations on the application,
that the insurer considered the information important to its underwriting
With such overwhelming facts the Court of Appeal concluded, using a double
negative, that a reasonable trier of fact could not find that the representations
in this case were not material.
Since the court's conclusion on rescission resolved the entire case it declined
to discuss the intentional act portion of the case.
Conclusion and Lessons
Every California insured, and every broker representing insureds, must treat
applications for insurance seriously. Answers must be accurate at the time the
application is submitted to the insurer for a decision to insure or not insure.
Misrepresentations or concealment of material facts—whether intentional or innocent—can
leave an insured with a legitimate claim, without coverage.
Although Mitchell was apparently not innocent in his misrepresentations—his
representative burned the building intentionally and so incompetently that he
died in the fire—admission that facts established as material were misrepresented
on the application was sufficient to allow United National to rescind.
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 themselves and, before deciding to rescind, complete a thorough investigation
that includes, at the very least, the items below.
The recorded statement of the insured with a detailed review
of all of the representations made in the application.
The examination under oath of the insured to obtain under-oath
statements of the true facts and why different facts were made on
The recorded statement of the retail broker to determine the
source of the information on the application.
Obtaining a complete copy of the retail broker's file.
Obtaining a complete copy of the underwriting file.
The recorded statement or other interview of the underwriter
to determine—without the use of leading questions—the effect true
statements of fact from the insured would have had on the decision
to insure or not insure.
The sworn declaration of the underwriter establishing the effect
true statements of fact from the insured would have had on the decision
to insure or not insure the risk.
Underwriting manuals or other documents created by the insurer
before the risk was accepted that would have had a bearing on the
decision to insure or not insure—such as an underwriting manual
that limits the risks that an underwriter may accept.
Finally, advice of independent coverage counsel, as to the advisability
© Barry Zalma 2005