Insurer May Rescind Policy and Recoup Defense Costs Based on Insured’s Failure to Disclose Known Potential Claim

A California federal district court, applying California law, allowed an insurer to rescind an elder care facility’s policy based on material misrepresentations in the application regarding known circumstances that could reasonably result in a claim.  Kinsale Ins. Co. v. Golden Beginnings, LLC, 2021 WL 4205059 (C.D. Cal. Sept. 15, 2021).  The court also held that the insurer did not have a duty to defend the facility against a wrongful death lawsuit because the policy’s prior knowledge condition precedent was not satisfied, and a prior knowledge exclusion applied.  Because the insurer never had a duty to defend the lawsuit and because the policy was voided, the insurer was entitled to reimbursement of amounts incurred in defending the insured under a reservation of rights.

The family of a former resident of the insured elder care facility sued the facility for damages arising out of the resident’s fall and subsequent death.  The facility was insured under a professional and general liability policy, which contained a condition precedent to coverage that no insured knew of any incident that could reasonably give rise to a claim before the inception of the policy, as well as a similar prior knowledge exclusion.  It was undisputed that the general manager of the facility knew that the resident had fallen and subsequently died before the policy incepted.  However, despite questions in the application for the policy about resident falls during the past two years or circumstances that might result in a claim, the facility did not disclose the resident’s fall or subsequent death.  The insurer agreed to defend the lawsuit subject to a reservation of rights and filed a declaratory judgment action.

The court granted the insurer’s unopposed motion for summary judgment.   First, the court held that the elder care facility’s failure to disclose the resident’s fall and death constituted misrepresentations.  These misrepresentations were material based on the fact that the insurer asked specific questions about falls and potential claims in the application, as well as undisputed testimony that the insurer would not have issued the policy on the same terms if the facility had accurately answered these questions. Therefore, the insurer was entitled to rescind the policy. 

Second, the court held that a reasonable person would have foreseen a suit before the policy incepted.  The court emphasized that, even if the general manager himself did not realize the events giving rise to the lawsuit might give rise to a claim, his subjective expectation was not relevant because whether a claim was reasonably foreseeable is an objective question.  Therefore, the condition precedent was not satisfied, and the prior knowledge exclusion also barred any possibility of coverage. 

Third, the insurer was entitled to reimbursement of amounts incurred in defending the elder care facility because there was never a duty to defend, and the material misrepresentations in the application rendered the policy void.

Wiley Executive Summary

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