You Oughta Know – Insurer Fails to Create New Standard for Application Disclosures in California

Whenever homeowners and business owners contact the Merlin Law Group’s Los Angeles office about selecting a new insurer, I always remind them that the doctrine of uberrimae fidei imposes a duty of utmost good faith to tell the truth when they fill out their new insurance policy application. This is especially important for potential insureds who have a claim history. If you fail to disclose material information when directly asked in the application, be prepared to swallow the insurance company’s Jagged Little Pill.

Failing to provide accurate information on your application is never Forgiven: If an insured omits claim history or other information material to the risk, they risk having a carrier deny the claim based on the misrepresentation. Most carriers will even rescind the policy completely. In cases where carriers suspect a misrepresentation on the policy, they will likely hire outside counsel to engage in the lengthy and time-consuming process of an Examination Under Oath to determine the basis of the representation on the application. Failing to comply with this process will violate the policy’s cooperation clause and end up with a denied claim.

A recent unpublished opinion from the Ninth Circuit Court of Appeals discussed uberrimae fidei.1 The appellate court reversed the trial court’s grant summary judgment in favor of Great Lakes Insurance against its insured, Tamara Lee Smith, holding that the You Oughta Know standard may not apply when preparing a joint insurance application in California.

The facts of the case are fairly straightforward: Great Lakes Insurance denied Mrs. Smith’s boat loss claim after the boat struck rocks and sank in the Chahue Bay in Mexico in December 2019. The denial was because Great Lakes claimed Mrs. Smith made a material misrepresentation on her insurance application because she did not disclose that the boat’s co-operator and her paramour – John Jay Kerchelich – was previously convicted of a misdemeanor violation of California’s Water Code §13387(c) for improper dredging of a shoreline in an unrelated incident on Lake Elsinore.

Mrs. Smith did not disclose Mr. Kerchelich’s prior misdemeanor simply because she was unaware of it. However, she was not forgiven by the Honorable André Birotte Jr., of the United States District Court for the Central District of California, who agreed with Great Lakes Insurance that Mrs. Smith made a material representation when she did not disclose facts – even though it was undisputed she did not know of Mr. Kerchelich’s conviction.

In reversing and remanding the grant of summary judgment, the appellate judges noted that Great Lakes failed to show that Mrs. Smith knew about the misdemeanor conviction or that she should have known about it because of her prior relationship. In other words, the appellate court did not agree with facts to support the You Oughta Know standard:

Great Lakes relies on out-of-circuit cases to argue that the duty of good faith requires the disclosure of material facts that the applicant ought to have known. See Quintero v. Geico Marine Ins. Co., 983 F.3d 1264, 1271 (11th Cir. 2020) (stating that uberrimae fidei requires the disclosure of ‘all material facts that are ‘within or ought to be within, the knowledge of one party, and of which the other party has no actual or presumptive knowledge’’ (quoting Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir. 1984), reh’g granted in part, denied in part, 779 F.2d 1485 (11th Cir. 1986))).

Ironically, it was Great Lakes Insurance that filed a lawsuit first – ab initio – to void the policy in its entirety, only to have the appellate court deny their arguments. Case law in California generally protects an “innocent insured” even if they are head over feet with the not so innocent insured. Because there was no indication that Mrs. Smith knew of the conviction or that she intentionally failed to disclose it, the appellate court concluded that there was no evidence presented that Mrs. Smith violated the duty of utmost good faith – uberrimae fidei.

While this unpublished opinion provides valuable insight into how a carrier acquires information after a claim and reacts, it is not a perfect opinion for the insured. Upon remand, the appellate court noted:

And there has thus far been no factfinding by the district court as to whether Smith ought to have known about the information, or whether she failed to make a reasonable inquiry into whether Kerchelich was telling the truth. In the absence of such factfinding or further development of the record, we cannot say that Smith violated the duty of utmost good faith in completing the insurance application.

Once the case is back in the District Court, it could be Great Lakes Insurance arguing to Mrs. Smith “You Learn” and have an affirmative obligation to ask Kerchelich – the boat’s co-operator – about his criminal history and affirmatively disclose the information under the doctrine of uberrimae fidei. The bottom line is that Great Lakes likely would have issued the policy to her with this disclosure but at a higher premium.
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1 Great Lakes Ins. SE v. Smith, No. 21-56231, 2022 U.S. App. LEXIS 23468 (9th Cir. Aug. 22, 2022).