Warranty Exclusion Bars Coverage Where Start-Up Made Material Misrepresentations in Application about Potential Acquisitions

The U.S. District Court for the Central District of California, applying California law, held that a warranty exclusion barred coverage where a start-up company made material misrepresentations regarding contemplated acquisitions in its policy application.  Scottsdale Ins. Co. v. CSC Agility Platform, Inc., 2019 WL 1452910 (C.D. Cal. Feb. 4, 2019).  The court further held that the insurer did not waive its right to enforce the warranty exclusion, nor was it estopped from doing so.

In its application for a business and management liability policy, a technology start-up company answered “No” to a question asking whether it “contemplate[d] transacting any mergers or acquisitions within the next 12 months.”  At the time the application was signed, the company had been having discussions with a business partner regarding a possible acquisition for several months.  However, the company had not received a formal acquisition offer.

Shortly after the policy incepted, the company was acquired and ultimately faced litigation and government investigations arising out of alleged misrepresentations made in connection with the acquisition.  The insurer agreed to provisionally reimburse defense costs while explicitly reserving its right to deny coverage and seek reimbursement.  The insurer ultimately filed suit to recoup the amounts paid under the policy based on its warranty exclusion, which provided, in relevant part, that:

in the event the Application . . . contains any misrepresentation or omission made with the intent to deceive, or contains any misrepresentation or omission which materially affects either the acceptance of the risk or the hazard assumed by [the insurer], this Policy . . . shall be void ab inito with respect to any Insureds who had knowledge of such misrepresentation or omission.

On cross-motions for summary judgment, the court ruled in favor of the insurer.  First, the court concluded that the company’s answer to the application question was inaccurate because the question was susceptible to only one reasonable interpretation, which encompassed more than formal acquisition offers.  Further, the court concluded the misrepresentation was material because the insurer was entitled to a presumption of materiality since it had requested the information in the application, and the company had not successfully rebutted that presumption.

Finally, the court rejected the company’s argument that the insurer had waived its right to rely on the warranty exclusion because it was put on inquiry notice of a merger when the insured asked for the policy to go into runoff but had not immediately rescinded the policy or that the insurer was estopped from relying on the warranty exclusion.

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