Misrepresentation In The Application– Incorrect Answers About Prior Losses And Rental Use Doom Recovery

Policyholders must provide accurate answers to questions in insurance applications or face the possibility of no recovery. Prior losses and use of the property as a business or as rental property are often inquired about before an insurer will agree to insure the property. The answers need to be accurate or a policyholder will jeopardize coverage long before a loss occurs.

A California misrepresentation in the application case was decided against a policyholder last week and highlights these principles.1 After winning at the trial level,2 the insurer argued the following on appeal:

The district court correctly concluded there was no genuine issue of material fact regarding whether Hughes misrepresented both the use of the Property as a business and the prior losses on her application for the Limited Property Policy.

First, it is undisputed that Hughes told her insurance agent there was no business use on the Property when completing the application by phone, and it is undisputed that this question is material for FNICA. Ample evidence—including reservation statements, rental confirmations, and screenshots of advertisements for the property on rental platforms—demonstrated that Hughes in fact frequently used the Property for short-term rentals. Hughes confirmed this in her EUO. Hughes now purports to have misunderstood the question in the application, but even if true, that would not undermine the district court’s summary judgment order. That is because even unintentional misrepresentations give rise to a right by the insurer to rescind the policy.

Second, it is also undisputed that (i) Hughes told her insurance agent there were no prior losses when completing the application by phone, (ii) there were in fact prior losses, and (iii) the claims history is material for FNICA. Hughes purports to have misunderstood this question as well, but even a mistaken misrepresentation still gives rise to a right by the insurer to rescind the policy.3

The appellate court agreed with the insurer. First, the court noted that the misrepresentations were material:

Hughes does not dispute the materiality of either representation. In any event, they are material because FNICA and GICA would have automatically rejected her applications had she disclosed that her property was used as a short-term rental or that she suffered prior losses. See Mitchell v. United Nat’l Ins. Co., 25 Cal. Rptr. 3d 627, 640 (Ct. App. 2005) (reasoning information is material if it could affect the insurer’s decision to provide insurance coverage, estimate the degree of risk, or fix the premium rate).

The court dismissed the allegations that the policyholder did not understand the questions in the application:

Hughes also claims she did not understand the applications because of a language barrier, and that the agents who finalized her insurance applications did not seek her approval before sending them to FNICA and GICA. Under California law, however, ‘a material misrepresentation or concealment in an insurance application, whether intentional or unintentional, entitles the insurer to rescind the insurance policy ab initio.’ W. Coast Life Ins. Co. v. Ward, 33 Cal. Rptr. 3d 319, 323 (Ct. App. 2005); Cal. Ins. Code § 331. Hughes’s subjective understanding or intentions were thus immaterial to whether she misrepresented the use of her property. Even so, the evidence shows that Hughes understands, reads, and writes English, and that she received and signed the applications before they were sent to FNICA and GICA.

The appellate court affirmed the district court’s findings, which stated:

Under California law, ‘a material misrepresentation or concealment in an insurance application, whether intentional or unintentional, entitles the insurer to rescind the insurance policy ab initio.’ West Coast Life Ins. Co. v. Ward, 132 Cal. App. 4th 181, 186–187, 33 Cal. Rptr. 3d 319 (2005)…see Cal. Ins. Code § 331 (‘Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.’); Cal. Ins. Code § 359 (materially false representation may result in rescission of insurance policy). Therefore, ‘an insurer may, under Insurance Code sections 331 and 359, rescind a fire insurance policy based on an insured’s negligent or unintentional misrepresentation of a material fact in an insurance application, notwithstanding the willful misrepresentation clause included in the required standard form insurance policy (Ins. Code §§ 2070 and 2071).’ Mitchell v. United Nat’l Ins. Co., 127 Cal. App. 4th 457, 463, 25 Cal. Rptr. 3d 627 (2005); see Star Ins. Co. v. Sunwest Metals, Inc.,…(Mitchell’s holding provides the correct legal standard in action claiming misrepresentation in fire insurance application).

…

Accordingly, Hughes’ failure to disclose the use of the Property as a short-term rental constitutes a material misrepresentation that supports FNICA’s claim for rescission.

The district court also noted that insurers are not required to search for a policyholder’s loss history and can rely upon the application:

Hughes’ additional defense of her omission on the ground that her lawsuit with Lexington was public does not help her. Insurers do not have a duty to search for an insured’s prior claims and may rely on an applicant’s answers without verifying their accuracy. See Mitchell, 127 Cal. App. 4th at 476 (underwriter has no obligation to verify the accuracy of the representations made by applicant).

FNICA contends without dispute that Hughes’ loss history was highly material to FNICA’s decision to issue coverage. (Motion at 24). FNICA explains that an accurate loss history is essential to underwriting a particular risk because FNICA needs the information to assess the nature of potential claims that may rise, the circumstances that could give rise to claims, and what FNICA may face with respect to future losses. (Id.). California courts have recognized that an applicant’s loss history can be a fact material to insurance risk. See Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal. App. 3d 169, 181, 243 Cal. Rptr. 639 (1988) (insureds’ failure to disclose that (1) another insurer had refused to renew their previous homeowner’s policy; and (2) that insureds suffered damages in landslide with resulting litigation with downhill neighbor were material nondisclosures which entitled insurer to rescind policy). Hughes does not dispute that her prior loss history was a material fact to insurance risk. Hughes also does not contest that the disclosure of her three prior losses would have caused FNICA’s online rating platform to automatically reject and deny her application.

Applications for insurance are important. After a loss occurs, many insurers will then check the application to determine if the answers given were accurate. Providing accurate information in an application is crucial for policyholders long before a loss ever happens.

Thought For The Day

If you tell the truth, you don’t have to remember anything.
—Mark Twain

1 Hughes v. First National Ins. Co., No. 23-55338, 2024 WL 1191142 (9th Cir. Mar. 20, 2024).
2 Hughes v. First National Ins. Co., No. 2:22-cv-01759 [Order Granting Defendant’s Motion for Summary Judgment] (C.D. Cal. Mar. 15, 2023).
3 Hughes v. First National Ins. Co., No. 23-55338 [Appellee’s Answering Brief] (9th Cir.).