Ambiguous Application Questions Preclude Summary Judgment on Rescission Claim

In Duarte v. Pacific Specialty Ins. (No. A143828; filed 6/12/17, ord. pub. 6/29/17) a California appeals court held that an insurer was not entitled to summary judgment on its rescission claim because the disputed questions in the insurance application were ambiguous.

In Duarte, the insured/owner purchased a tenant-occupied property in Oakland. Several years later the tenant’s daughter moved in, and continued living there after the tenant died. The insured/owner served the daughter with an eviction notice and shortly thereafter applied for Owners, Landlords & Tenants (“OLT”) liability coverage. The tenant/daughter responded to the eviction notice by filing a habitability lawsuit, claiming emotional distress and physical injury, among other things.

The insurer denied coverage and a defense, drawing a bad faith lawsuit for failure to defend and “wrongful cancellation” of the policy. The insurer answered and raised rescission as an affirmative defense, based on alleged fraud and misrepresentation in the OLT policy application.

In cross-motions for summary judgment and/or adjudication, the insurer argued that the insured/owner had misrepresented answers to two application questions – whether the applicant knew of a dispute with tenants about the property; and whether there was any business conducted on the property. For evidence, the insurer pointed to complaints the tenant/daughter made to the City of Oakland Department of Housing Rent Adjustment Program, and evidence of testimony and statements by the insured and the tenant/daughter that she had continued to carry on her father’s practice of selling motorcycle parts from the premises.

The insured/owner’s cross-motion sought summary adjudication on the duty to defend. But in granting the insurer’s motion, the court found the insured/owner’s duty to defend motion moot, since the policy was deemed void ab initio. However, the appeals court reversed the insurer’s summary judgment and remanded the case for a ruling on the insured/owner’s summary adjudication motion.

First, the appeals court rejected an argument that the insurer’s rescission claim was procedurally defective. The insured/owner had argued that the insurer could not rescind the policy because it had not complied with the statutory procedural requirements for notice and return of premium. The Duarte court pointed out that Civil Code section 1691, which governs rescission, specifically provides that service of a pleading seeking relief based on rescission constitutes notice. The court held that raising the affirmative defense of rescission in the answer to a complaint is sufficient to meet the requirement. The court also held that it is unnecessary to file a cross-complaint seeking affirmative relief, but that raising rescission as an affirmative defense will support the entry of summary judgment in the answering defendant’s favor.

The Duarte court then addressed the substantive issue of misrepresentation. As to knowledge of prior disputes, the insured/owner had answered “no” to the question: “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?” The court found the question “utterly ambiguous” with “garbled syntax.”

The court rejected the insurer’s effort to rely on an attached “underwriting guideline” for “unacceptable properties” that referred to “pending claims,” “property disputes,” or “lawsuits,” finding instead that the disputed question hinged solely on “unrepaired damage,” i.e., property damage, rather than disputes over possession. Thus, the insured/owner’s claimed interpretation that the question referred only to “unrepaired damage from prior insurance claims” was reasonable. And, consequently, his answer of “no” was not a misrepresentation.

The insured/owner had also answered “no” to the question “Is there any type of business conducted on the premises?” But the insurer’s evidence was insufficient, consisting of hearsay statements from the daughter about continuing her father’s practice of selling motorcycle parts from the premises. The court was also swayed by the fact that the insurer’s own underwriting inspector had reported that that there was no “business, farm or ranch operating on the property.” And in any case, the court agreed with the insured/owner’s argument that “business being conducted on the premises” could reasonably mean “regular and ongoing business activity.” The court offered no further explanation why “business conducted on the premises” might be limited to “regular and ongoing business activity” and again, the answer “no” was deemed not to have been a misrepresentation.

Given its conclusion that the disputed questions were ambiguous, the Duarte court concluded that the insurer had not met its burden for summary judgment, and remanded the case for consideration of the insured/owner’s motion for summary adjudication on the duty to defend.

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July 5, 2017