Insurer Entitled to Rescind Due to Misrepresentations on Application

The United States District Court for the Central District of California, applying California law, has ruled that an insurer could rescind a policy issued after a homeowners association falsely claimed in its application that it had not had any claims against it in the prior five years.  Atain Specialty Ins. Co. v. Lake Lindero Homeowners Ass’n, 2020 WL 7416169 (C.D. Cal. Nov. 25, 2020).  The Court concluded that the information withheld was material to the insurer’s decision whether to issue the policy.

In the five years before the homeowners association applied for coverage, it had at least two brushes with the law.  First, in 2015, the liquor control board discovered that the concessionaire who ran the association’s country club had used the association’s liquor license to buy extra liquor and resell it.  Second, in 2017, the local water board had cited the association for misusing the waters of a lake near which the community was located, necessitating costly infrastructure maintenance.  The association stated in its application for insurance that it was not aware of any “inquir[ies], complaint[s], notice[s] of hearing, claims[s], or suit[s]” made against it in the prior five years.

After learning of the insured’s failure to disclose the incidents, the insurer filed an action for rescission.  The association defeated the insurer’s summary judgment motion as it related to the liquor control board issue through an affidavit of the association’s treasurer, who swore that the concessionaire’s misfeasance had not come to the attention of the association until after the application was submitted.  The association did not deny knowledge of the water board action; it may have intended to argue that the action was not a “complaint,” “claim,” etc., and thus was not required to be disclosed, but the Court concluded that this argument was undeveloped and did not consider it.

Instead, the Court focused on whether the failure to disclose the water board action was material.  Under California law, materiality is determined “solely by the probable and reasonable effect which truthful answers would have had upon the insurer.”  The insurer submitted an affidavit from an underwriter asserting that the insurer would not have issued the policy if the water board action had been disclosed.  The insured did not provide any rebuttal evidence.  The Court observed that, although affidavits from an insurer do not automatically establish materiality, such affidavits are given great weight when uncontested.  The Court therefore granted summary judgment on the insurer’s rescission claim.  The homeowners association has filed an appeal.

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