California Court Allows Insurer to Rescind Policy Based on Insured’s Failure to Affirmatively Disclose Material Facts Not Requested in Application

The California Court of Appeal, applying California law, has held that an aircraft owner’s failure to disclose that an aircraft’s purchase was financed with embezzled funds entitled an insurer to rescind an aircraft policy even though the insurer did not ask about the source of the funds in the application. Passport 420, LLC v. Starr Indem. & Liab. Co., 2026 WL 2948480 (Cal. Ct. App. Oct. 1, 2026). The court found that the insured had a statutory duty to disclose all material facts that the insurer did not have the means to ascertain.

A limited liability company purchased a private jet with contributions from its two members. One of the members, who was also the company’s manager, contributed nearly $2 million he had previously embezzled from a client of his law firm to fund the purchase. The company subsequently purchased an aircraft policy that included coverage for physical loss of the aircraft due to “seizure . . . by, or under the order of any government, public or local authority, whether civil, military or de facto[.]” The application for the policy did not request information regarding the source of funds used to purchase the aircraft. After federal authorities seized the aircraft in connection with the manager’s criminal prosecution, the company’s remaining member made a claim under the policy for the value of the aircraft. Following the manager’s conviction, the insurer denied coverage and rescinded the policy based on the company’s concealment of material facts in the underwriting process. In the ensuing coverage litigation, a jury found that the insurer was not entitled to equitable rescission of the policy.

The Court of Appeal reversed. The court held that California Insurance Code section 332 imposes an affirmative duty to disclose all material facts known by an applicant for an insurance policy that the insurer does not have the means of ascertaining—regardless of whether the application specifically inquires about those facts. The court also found that the embezzlement was material as a matter of law because no rational insurer would agree to insure against government seizure of property if it knew the property was purchased with embezzled funds.