24th Feb 2016

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Rescission – prompt notice of rescission must be given

Rescission is governed by Civil Code § 1691 and § 1693.  To effect a rescission, a party must promptly upon discovering the facts which entitle one to rescind give notice of rescission to the other party and restore or offer to restore everything of value which he or she has received from the other party under the contract.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1264 (health policy; insurer discovered after the policy was issued misrepresentations or concealed facts within the application; insurer elected to cancel, not rescind the policy thereby keeping all premiums paid which were more than the benefits paid; court held that rescission attempted 17 months after the policy was issued, after the insured sued for benefits, was waived;  reversed and remanded)]

Actual knowledge of a breach not essential to establish waiver

Actual knowledge of a breach of a policy provision is not essential to establish a waiver of a policy provision.  It is sufficient if the insurer has information which if pursued with reasonable diligence would lead to the discovery of the breach.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1267 (misrepresentations and omissions regarding health in the application discovered after the policy was issued; the insurer waited approximately 2 years before attempting to rescind)]  See § C87 CONSTRUCTIVE NOTICE [§ C87:1 In general]

Equivalent to knowledge

The Supreme Court has observed:  “The rule is well established that the means of knowledge is equivalent to knowledge, and that a party who has the opportunity of knowing the facts constituting the fraud of which he complains cannot be supine and inactive, and afterwards allege a want of knowledge that arose by reason of its own laches or negligence.”  [Barrera v. State Farm (1969) 71 Cal. 2d 769, fn. 7 (insurer failed to investigate auto application; rescission attempted after an accident by the insurer not permitted)]  See § I81 INVESTIGATE: DUTY OF INSURER – FIRST PARTY [§ I81:2.2.1].

Facts in application contradicted by other information

An insurer cannot rely on misrepresentations in an insurance application where the misrepresentations are contradicted by other information known to the insurer when it issued the policy.  [Rutherford v. Prudential (1965) 234 Cal. App. 2d 719, 733-734]  Facts known to an insurer puts the underwriter on notice that the application form is incomplete and inaccurate in material respects.  The right to information of material facts may be waived by neglect of the insurer to make inquiries as to such facts, where they are distinctly implied in other facts which information is communicated.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1268, discussing Rutherford]  See § A78 APPLICATION [§ A78:13.2].

After policy issued; lack of diligence

An insurer by ignoring information that will resolve the truthfulness of representation in an insured’s application at an early state is evidence of lack of diligence and thereby denying to the insurer the remedy of rescission.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1268 (insurer’s lack of diligence allowed appellant to incur substantial medical expense and dissuaded her from investigating availability of other insurance or government assistance)]  See § D41.03 DILIGENT SEARCH; DUTY OF INSURER [§ D41.03:1 In general]; § W1 WAIVER; § C87 CONSTRUCTIVE NOTICE; § A78 APPLICATION [§ A78:13.2].

Rescission and cancellation distinguished

Rescission

If an insurer elects to rescind, the rescission is governed by Civil Code §§ 1691, 1693 requiring the insurer to promptly upon discovery of facts entitling rescission to (1) give notice of rescission and (2) promptly restore or offer to restore everything of value received under the contract.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1264-1265]  See generally § U11 UNDERWRITING [§ U11:2 Post-claims underwriting health insurance].  Failure to do so can give rise to a waiver by the insurer of the right to rescind.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1265-1266]

Cancellation

A cancellation can occur when the health insurer discovers misrepresentations and/or concealment of facts and decides not to seek a refund of any claims paid.  By doing so, the insurer does not restore or offer to restore premiums paid up to the date of cancellation.  [Dubeck v. California Physicians (2015) 234 Cal. App. 4th 1254, 1266]  Dubeck describes this distinction as follows:

“Had Blue Shield rescinded the policy it would have been required to return [to the insured] the premiums she had paid – which at the time exceeded the payment Blue Shield had expended for her medical care.  Instead it elected to cancel the policy, retaining the profit.”  See § C4.01 CANCELLATION OF HEALTH POLICY.

References in bold are to Mr. Cornblum’s legal text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (2015, 2016), published by ThomsonReuters (1-800-344-5008 to order 2015 3-Volume text – 2016 Edition available June 2016).

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