Court Finds No Bar On Rescinding Workers’ Compensation Insurance, Even After Filing of Claim

In Southern Ins. Co. v. WCAB (No. B278412, filed 5/10/17), a California appeals court, reversing a workers’ compensation arbitrator’s decision, held that a workers’ compensation policy can be rescinded for material misrepresentations in the application, even after a workers’ compensation claim is brought.

Southern issued a workers’ compensation insurance policy based on the express representation that the employer’s employees did not travel out of state. After an employee was injured in another state, Southern notified the employer that it was rescinding the policy because of the misrepresentation, and returned the premium. The issue of insurance coverage went to mandatory arbitration wherein the arbitrator concluded that, as a matter of law, the insurer could not rescind the policy, and the Workers’ Compensation Appeals Board (WCAB) affirmed the arbitrator’s decision.

The arbitrator had cited three reasons for finding there could be no “retroactive rescission” of a workers’ compensation policy. First, Insurance Code section 676.8 (governing cancellation of workers’ compensation insurance) says nothing about rescission. Second, there was no authorization from a judge or the WCAB. Third, a claim was pending and the employee would be left without coverage.

The appeals court disagreed: “Contrary to the arbitrator’s ruling, a workers’ compensation insurance policy may be rescinded. (Ins. Code, § 650.) A rescission is enforced by a civil action for relief based on rescission (Civ. Code, § 1692) or by asserting rescission as a defense. (Resure, Inc. v. Superior Court (1996) 42 Cal.App.4th 156, 165-166 (Resure).) Because the arbitrator and the appeals board did not address and determine whether rescission was a meritorious defense to the employee’s claim, we annul the appeals board’s decision and remand the case with directions to hear and determine whether the insurer was entitled to rescind, and did rescind, the policy.”

To get there, the appeals court first held that the WCAB has jurisdiction to decide rescission, because rescission is in effect a coverage question and the appeals board has specific statutory authorization to decide coverage disputes (Lab. Code, § 5275(a)(1)): “[I]f Southern disputes workers’ compensation insurance coverage because it claims there is no contract, it must submit to the jurisdiction of the appeals board on the issue of coverage even if that entails a ruling on whether the insurance contract is (or was) in effect.”

The appeals court went on to conclude that the Insurance Code’s rescission sections apply to workers’ compensation insurance, like any other insurance. The court pointed out that in contrast to the Insurance Code sections governing cancellation of policies (Ins. Code, § 676.8), the rescission sections are silent on workers’ compensation (Ins. Code, §§ 650, 651). The court found no indication in any of the applicable statutes of an intent to limit the right to rescind workers’ compensation insurance.

The appeals court then explained the Insurance Code’s “somewhat peculiar” limitation of rescission to the period prior to the filing of an “action on the policy,” saying: “[T]he former equitable suit for rescission, now abolished, could not be brought if there was an adequate remedy at law. The adequate remedy at law was an action on the insurance contract. That is, if the policy holder brought an action on the contract, the carrier could assert rescission as a defense in that action. [] Thus, section 650 is an echo of the past reality that an equitable suit for rescission could not be brought in the face of a pending action at law. . . . [S]ection 650 does not affect the current state of the law which is that rescission can always be asserted as a defense to the action on the contract.”

In any case, the court said that a workers’ compensation claim is not the functional equivalent of an “action on the policy” and thus does not preclude rescission despite the existence of a pending claim. The court also rejected the arbitrator’s criticism of “unilateral” action by the insurer, saying “rescission is routinely a unilateral act.”

The appeals court did send the insurer a warning that merely announcing a rescission and returning the premium did not, in and of itself, discharge the insurer’s obligations, finding a distinction between “effecting” rescission and “enforcing” it. The court pointed out that under the general rescission of contracts sections of the Civil Code, a contracting party who rescinds is provided a variety of options for relief, such as an action for declaratory relief. (Civ. Code, § 1692.) Likewise, the insurer can raise rescission as a defense in the workers’ compensation proceeding. But in any case, the insurer is not discharged until there is a ruling on the rescission.

Having concluded that rescission was available to the insurer, the appeals court found numerous fact questions and remanded the matter to the WCAB for a determination on the merits.

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May 23, 2017