Court Refuses to Stay Rescission Action Pending Outcome of Underlying Proceeding

A California federal court has declined to stay a rescission action pending the outcome of the underlying indemnity proceeding.  Century Sur. Co. v. Cal-Regent Ins. Servs. Corp., 2014 WL 3534907 (S.D. Cal. July 16, 2014).  The court noted that the issues in the rescission action—whether the insured made a material misrepresentation on its application for insurance—were separate and distinct from the issues in the underlying litigation, and therefore held that there was no prejudice arising from parallel litigation.

After a single-vehicle accident in Mexico, a passenger in the vehicle and his parents brought a personal injury suit against the driver and owner of the vehicle.  The driver and owner sought coverage from their CGL insurer, which denied coverage on the ground that the policy provided coverage only within the United States.  The driver and owner subsequently settled with the claimants for a judgment in excess of the policy limits, and the driver and owner assigned all claims under the policy to the claimants.  The claimants and the CGL insurer eventually settled the ensuing coverage action.

The CGL insurer then brought an arbitration proceeding against its managing agent, which prepared the insurance policy.  The CGL insurer sought indemnification for the underlying personal injury suit on the ground that the managing agent should have formatted the policy to exclude coverage outside the United States, but actually formatted the policy in a manner that provided worldwide coverage.  The managing agent tendered the arbitration claim to its E&O insurer.  Prior to tendering the arbitration claim, the managing agent knew of the underlying personal injury suit when it applied for the relevant E&O insurance policy, but did not report the claim.  The E&O insurer sought rescission of the policy on the ground that the managing agent should have reported the claim, but did not do so.  The managing agent moved to stay the rescission action pending resolution of the arbitration claim.

The court overseeing the rescission action declined to stay the suit pending resolution of the arbitration claim.  The court noted that stay of a rescission action was appropriate if the insurer’s proof will prejudice its insured in the underlying litigation.  In this regard, the court stated that whether the managing agent “was aware of a potential claim within the meaning of the Application is a separate and distinct issue from whether [the CGL insurer] is entitled to indemnity from [the managing agent],” and that the formatting issues raised in the underlying indemnity proceeding did not overlap with the issues raised in the rescission action.  Accordingly, the court found that there was no prejudice to the managing agent arising out of parallel litigation.


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