United States District Court,E.D. California.
CLARENDON NATIONAL INSURANCE COMPANY, a New Jersey Corporation, Plaintiff,
v.
INSURANCE COMPANY OF the WEST, a Texas Corporation, et al., Defendants.
Insurance Company of the West, Counter-Claimant,
v.
Clarendon National Insurance Company, Counter-Defendant.
No. 1:99-cv-5461-SMS.
July 7, 2006.
Andrew Karonis, Schindel Farman And Lipsius, New York, NY, Michael John Czeshinski, Wilkins Drolshagen and Czeshinski, Fresno, CA, for Plaintiff.
James Patrick Wagoner, McCormick BarstowSheppard Wayte and Carruth, Fresno, CA, for Defendants.
Andrew Karonis, Ira S. Lipsius, Lorienton Palmer, Schindel Farman and Lipsius, New York, NY, Michael John Czeshinski, Wilkins Drolshagen and Czeshinski, Fresno, CA, for Counter-Defendant.
James Patrick Wagoner, McCormick BarstowSheppard Wayte And Carruth, Fresno, CA, for Counter-Claimant.
MEMORANDUM OF LAW, FINDINGS OF FACT, AND CONCLUSIONS OF LAW FOLLOWING COURT TRIAL
SANDRA M. SNYDER, Magistrate Judge.
This matter was tried to the Court on September 20 and 21, 2004. Ira S. Lipsius and Andrew Karonis of Shindel, Farman & Lipsius, LLP, appeared and argued on behalf of Plaintiff Clarendon National Insurance Company (Clarendon); and James P. Wagoner and Dana E. Denno of McCormick, Barstow, Sheppard, Wayte & Carruth, LLP, appeared and argued on behalf of Defendant Insurance Company of the West (ICW). The joint pretrial statement filed on May 14, 2004, was adopted in place of the earlier pretrial order as the order governing the trial. (R.T. at 6.) Transcripts of the trial were filed in this Court on November 2, 2004; by February 8, 2005, the parties had submitted Defendant’s post-trial brief, both parties’ proposed findings of fact and conclusions of law and replies thereto, and Defendant’s reply to Plaintiff’s Appendix. On August 23, 2005, each party filed supplemental briefing as directed by the Court. The Court has considered these matters as well as all the briefing submitted before the trial, and the matter has been submitted to the Court. The matter has been referred to the Magistrate Judge for all proceedings, including the entry of final judgment, pursuant to 28 U.S.C. § 636(c), Fed.R.Civ.P. 73(b), and Local Rule 73-301.
ISSUES TRIED
The parties have stipulated that all legal issues resolved by the Court’s order of June 30, 2000, with the sole exception of the Court’s determination regarding the materiality of G & P’s alleged misrepresentation which is set forth at II.C. of the June 30, 2000 order, are deemed the law of the case. (Joint Pretrial Statement and Pretrial Order filed May 14, 2004 at 28.)
In the order of June 30, 2000, Judge Coyle determined that the ICW policy’s coverage of G & P under the base policy is primary over the Clarendon policy; the Clarendon policy’s MCS-90 endorsement provides no coverage for purposes of disputes among insurers over ultimate liability and thus provides no coverage as against ICW; and Clarendon is entitled to indemnity/reimbursement of legal fees Clarendon paid in defending H & G because Clarendon’s liability arises only from the MCS-90, a governmentally required filing.
In the order of January 16, 2001, Judge Coyle granted Defendant’s motion for a new trial or to alter and amend judgment, determining that there was a dispute of material fact regarding whether G & P engaged in material misrepresentation and/or concealment in applying for the ICW policy which had not been waived or lost by estoppel because neither waiver nor estoppel had been established on the evidence submitted by Clarendon, the subrogee of G & P, ICW’s insured.
At the trial, the Court determined that Judge Coyle had thus already decided that the ICW base policy covering G & P was primary and that the truck, which included the trailer, was a specifically described auto. (R.T. at 10-11.) The Court further concluded that in addition to the misrepresentation defense to ICW’s coverage, the trial would also cover the issues of waiver and/or estoppel against denying coverage on the ground of misrepresentation. (Id. at 11-12.)
The parties reserved the right to stipulate to the amounts expended by the parties in defending underlying legal actions that were filed as a result of the accident in which the insured was involved. (Id. at 18-19.)
Therefore, the issues tried at the bench trial in September 2004 are whether or not material misrepresentation or concealment rendered the ICW insurance contract void or otherwise provided a defense to ICW, and whether or not this defense was waived, or ICW is estopped to raise it.
MEMORANDUM OF LAW
I. Governing Law
In his order of June 30, 2000, Judge Coyle determined that the law governing the interpretation of the policies and the insurer’s obligations was the substantive law of California. Id. at 10-12. Neither party seeks to reopen that issue or argues that any other law should govern the issues remaining in dispute. Thus, California law governs.
II. Burden of Proof, Persuasion; Defense
Defendant has the burden of proof by a preponderance of the evidence of each fact the existence or nonexistence of which is essential to the affirmative defense of misrepresentation. Cal. Evid.Code § § 115, 500; Thompson v. Occidental Life Ins. Co. of California, 9 Cal.3d 904, 915-916, 919 (1973); see, Liodas v. Sahadi, 19 Cal.3d 278, 286-90 (1977). The elements in the present case are intentionally false material misrepresentation or concealment of facts with the intent to defraud and in order to obtain insurance coverage; a mere mistake or negligence is not sufficient. Leasure v. MSI Insurance Co., 65 Cal.App.4th 244, 247-48 (1998); Hyland v. Millers Nat. Ins. Co. 91 F.2d 735, 743 (9th Cir.1937), rehg. denied, 92 F.2d 462, cert. denied, 303 U.S. 645. “Preponderance of the evidence” means that the trier of fact is only required to believe that the existence of a fact is more probable or reasonable than its nonexistence, Kennedy v. Southern California Edison Co., 268 F.3d 763, 770 (9th Cir.2001) (applying California law), and that in terms of the probability of truth of evidence, when weighed with that opposed to it, the evidence has more convincing force and greater probability of truth, Leslie G. v. Perry & Associates, 43 Cal.App.4th 472, 482-83 (1996).
As is later discussed, the parties’ contract provided that it would be void if there were fraud or intentional concealment or misrepresentation; thus, a higher standard (i.e., requiring intentional misrepresentation or concealment as to a material matter) than that otherwise provided for by statute is operative in the instant case.
III. Intentional or Negligent Concealment or Misrepresentation
A. California Statutory Law
Under California statutory law, neglect to communicate that which a party knows, and ought to communicate, is concealment. Cal. Ins.Code § 330. Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract as to which he makes no warranty, and which the other has not the means of ascertaining. Cal. Ins.Code § 332.
California statutory law provides that concealment, whether intentional or unintentional, entitles the injured party to rescind the contract. Cal. Ins.Code § 331. Thus, under the statute, negligent or even innocent concealment warrants rescission. Barrera v. State Farm Mut. Auto Ins. Co., 71 Cal.2d 659, 666 n. 4 (1969); Mirich v. Underwriters at Lloyd’s London, 64 Cal.App.2d 522, 529-30 (1944).
The completion of the contract of insurance is the time to which a representation must be presumed to refer. Cal. Ins.Code § 356.
B. Contractual Interpretation
The provisions of the contract before the Court must be considered.
Unless it turns on the credibility of conflicting extrinsic evidence or on underlying facts that are in dispute, the interpretation of an insurance policy is solely a question of law. Waller v. Truck Ins. Inc., 11 Cal.4th 1, 18 (1995); Parsons v.. Bristol Development Co., 62 Cal.2d 861, 865-66 (1965); Merced Mutual Ins. Co. v. Mendez, 213 Cal.App.3d 41, 45 (1989).
Pursuant to California law, the first consideration is to look at the language of the contract in order to ascertain the plain meaning or the meaning that a layperson would ordinarily attach to the language. Waller v. Ins. Exchange, Inc., 11 Cal.4th at 18. This is in furtherance of the general principle that the mutual intent of the parties at the time of contracting is to be given effect, Cal. Civ.Code § 1636, and is to be inferred, if possible, solely from the words of the contract, Waller, 11 Cal.4th at 18. It is the clear and explicit meaning of the contractual provisions, interpreted in their ordinary and popular sense, that is to govern unless words are used by the parties in a technical sense or are given a special meaning by usage. Id.; Cal. Civ.Code § § 1636, 1638-39, 1644. Dictionary meanings, the context of the entire policy, and a commonsense view to avoiding absurd results may be useful to put the Court in the position of a layperson and understand how he or she might reasonably interpret the exclusionary language. MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 649-50 (2003).
C. The Contract
1. Two References to Fraud
The principal contractual provision in question, and the only one adverted to by the parties, is as follows:
2. CONCEALMENT, MISREPRESENTATION OR FRAUD
This Coverage Form is void in any case of fraud by you at any time as it relates to this Coverage Form. It is also void if you or any other “insured,” at any time, intentionally conceal or misrepresent a material fact concerning:
a. This Coverage Form;
b. The covered “auto”;
c. Your interest in the covered “auto”, or
d. A claim under this Coverage Form.
(Jt. Ex. 1 at 21.) Review of the policy (Jt.Ex.1) reveals that this provision appears in Section V of the policy, entitled, “Truckers Conditions,” which begins with the statement, “The following conditions apply in addition to the Common Policy Conditions.” Id. at 20. The Common Policy Conditions constitute a separate part of the policy, (id. at 31), which is not entitled as an endorsement, but appears within a series of endorsements (id. at 26-39). The Common Policy Conditions section begins, “All Coverage Parts included in this policy are subject to the following conditions.” (Id. at 31.) Thus, the Truckers Conditions, which apply in addition to the Common Policy Conditions, appear to be intended to apply to all coverage parts of the contract. The Truckers Conditions include Loss Conditions (at 20-21), and General Conditions (at 21-22), of which the fraud provision is one.
The Common Policy Conditions refer to matters such as cancellation, changes, examination of the insured’s books and records, inspections and surveys, premiums, and transfer of rights and duties.
Terms and provisions must be read in their ordinary and popular sense, but each must be interpreted in the context of the contract as a whole and the circumstances of the case. Bay Cities Paving & Grading, Inc. v. Lawyers Mut. Ins. Co., 5 Cal.4th 854, 867 (1993).
There are no definitions in the policy pertaining to the pertinent contract terms of “concealment,” “misrepresentation,” “fraud,” or “intentionally.” (Id. at 22-24.) However, one other reference to fraud and misrepresentation appears in the policy’s “CALIFORNIA CHANGES-CANCELLATION AND NONRENEWAL” endorsement, which is prefaced by following instructions:
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
(Id. at 28.) The endorsement adds provisions to the Cancellation Common Policy Condition and “modifies insurance provided under,” among other types, business owners policy, commercial auto coverage part, and pollution liability coverage part. Id. It is not clear that it applies to any particular coverage form in the instant policy; there is no reference to the truckers coverage form pursuant to which coverage was provided in the policy. However, it is an endorsement checked as applying to the instant policy. (Id. at 2.) With respect to “All Policies in Effect For More Than 60 Days,” it provides:
The cancellation provision in the Common Policy Conditions section states that all coverage parts are subject to cancellation by the insurer by delivery of ten days’ or thirty days’ notice, depending on the reason for cancellation; specifies the contents, effective date, and address for delivery of notice of cancellation; and provides for refund of premiums. (Jt. Ex. 1 at 31.)
… [W]e may cancel this policy only upon the occurrence, after the effective date of the policy, of one or more of the following:
….
(2) Discovery of fraud or material misrepresentation by
(a) any insured or his or her representative in obtaining this insurance; or
(b) You or your representative in pursuing a claim under this policy.
(Id. at 29.)
It might be argued that the cancellation and nonrenewal endorsement directly affects or modifies the provision regarding the policy being void for concealment, misrepresentation, or fraud that appears in the Truckers Conditions section. (Jt. Ex. 1 at 21). However, the cancellation and nonrenewal change endorsement does not state that it modifies the Truckers Conditions, the Truckers Coverage Form, or even the Common Policy Conditions in general. Instead, it expressly adds provisions to the Cancellation Common Policy Condition. (Id. at 28.) The pertinent Common Policy Condition (Jt. Ex. at 31) is the one for cancellation, which does not purport to define when the policy is void or when the insurer may seek retroactively to avoid the obligations of a policy that was never cancelled; instead, it relates only to the process of cancellation itself after the policy has been in effect for sixty days. Cancellation is a prospective phenomenon; rescission is retroactive. See Fireman’s Fund American Insurance Co. v. Escobedo, 80 Cal.App.3d 610, 619 (1978). The clear linking of the two provisions indicates that the two provisions permitting cancellation should be read together. The plain meaning of the two cancellation provisions read together is that after sixty days, the policy may be cancelled for various stated grounds, which include fraud or material misrepresentation.
The Court concludes that the endorsement regarding grounds and procedures for cancellation does not directly affect the provision in the Truckers Conditions section of the Truckers Coverage Form that concerns when the policy may be declared void.
2. Inconsistency between the Policy and California Statutory Law
Insurers and insureds are generally free to enter into contracts that provide for coverage more favorable to the insured than those permitted by statute. Utah Property & Casualty Ins. etc. Assn. v. United Services Auto. Assn., 230 Cal.App.3d 1010, 1023-24 (1991). It must be determined if by mentioning intentional conduct in the contract as a basis for voiding the contract, the parties intended to limit the rescission remedy to intentional conduct and impose a stricter standard than that permitted by statute, or whether the broad, statutory provision was intended to remain in effect despite the contractual language.
The contract does not expressly refer to the inconsistent statutes noted hereinabove.
In other respects, the contract does refer to provisions of law. In the liability coverage section of the Truckers Coverage Form, there are “Out-of-State Coverage Extensions” that increase the limit of insurance and provide for minimum amounts and types of other coverages required by laws of the jurisdiction where a covered auto is being used (Jt. Ex. 1 at 15), and there are coverage exclusions for any obligation of the insured pursuant to workers’ compensation, disability benefits, or unemployment compensation laws, (id. at 16). Endorsements also reflect “CALIFORNIA CHANGES” regarding primary coverage in cases involving insureds in the auto-related businesses, (id. at 26); cancellation and nonrenewal, (id. at 28-30); and California uninsured motorists coverage-bodily injury, (id. at 37-39). The policy also refers to uninsured motorist coverage in connection with a California Uninsured and Underinsured Motorist Coverage Selection Form and an election form concerning Uninsured Motorist-Property Damage Coverage. (Id. at 40-41.)
The Court will first consider the contractual language. The contractual provision clearly and unambiguously states that the coverage form is void in any case of fraud by the insured relating to the coverage form, and it is also void if an insured intentionally conceals or misrepresents a material fact concerning the coverage form or other specific matters. Common usage would indicate, and a reasonable layperson would understand, that “void” means of no legal force or effect; the reference to “fraud” denotes deceit or trickery; the use of “intentional” means having an intention or purpose; the reference to “concealment” denotes conscious prevention or avoidance of disclosure; and the use of “misrepresentation” means a misleading or untrue representation. See Webster’s Third New International Dictionary of the English Language, Unabridged (1986) at 2562, 904, 1176, 469, and 1445. The plain meaning of “fraud” would not include an unintentional or negligent misrepresentation. Further, a reasonable layperson would understand that the adjective “intentional” modifies both “concealment” and “misrepresentation.” See, Ward General Services, Inc. v. Employers Fire Ins. Co., 114 Cal.App.4th 548, 554 (2003); Tri-State Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d 1203, 1217 (D.Kan.2001) (construing a provision virtually identical with the one in the instant policy, and noting that the goal of avoiding unreasonable results also supports this construction). The plain meaning of the provision, then, is that the coverage form is void if an insured engages in fraud (trickery or deceit), intentional concealment, or intentional misrepresentation.
A s noted, the policy states that it is void in any case of “fraud … as it relates to this Coverage Form,” and it is also void if an insured at any time “intentionally conceal[s] or misrepresent[s] a material fact concerning:
a. This Coverage Form;
b. The covered “auto”;
c. Your interest in the covered “auto”, or
d. A claim under this Coverage Form.” (Jt. Ex. 1 at 21.)
Defendant argues that the policy does not state that it is void “only” where the insured has intentionally concealed or misrepresented material facts, and such a meaning is not necessarily implied; further, the policy provision speaks to when the policy is void, whereas an insurer may defend against a claim on the basis of concealment or misrepresentation without declaring the entire policy void.
It is true that the policy does not expressly state that it is void “only” in cases of intentional misrepresentation or concealment; further, it does not address “rescission,” the distinction between void and voidable contracts, or the interrelationship of the various legal remedial concepts potentially involved in a formal legal analysis of these issues. However, the question to be determined is whether the policy is ambiguous in light of the context of the underlying California law. Arguably, the meaning of the provision is clear, and no further analysis should be required. Cf. Tri-State Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d at 1217.
Whether a contract is ambiguous is a question of law for the Court. Airborne Freight Corp. v. McPherson, 427 F.2d 1283, 1285 (9th Cir.1970); Winet v. Price, 4 Cal.App.4th 1159, 1164-65 (1992).
A policy is ambiguous when it is capable of two or more constructions, both of which are reasonable. Bay Cities Paving & Grading, Inc. v. Lawyers Mut. Ins. Co., 5 Cal.4th at 867. Defendant argues that a reasonable person could contend that even though the policy itself sets forth only one type of fraud as sufficient to avoid the contract, and thus to avoid coverage, the insurer nevertheless may in effect avoid the contract on lesser grounds not mentioned in the contract, or at least avoid any legal effect of the contract based on misrepresentation of a lesser type.
Even if it is assumed that an ambiguity is present, the goal of interpreting a contract of insurance in California is effectuating the intent of the parties. Cal. Civ.Code, § § 1636, 1641. To that end, all parts of a contract are considered with reference to each other and to the contract as a whole as well as with reference to the subject of the contract and the circumstances of contracting. Cal. Civ.Code § § 1641, 1647.
If the policy provision is considered ambiguous, then it must be interpreted in the sense that the promisor reasonably believed that the promisee understood it at the time the policy was issued, that is, whether the meaning is consistent with the insured’s objectively reasonable expectations. Bank of the West v. Superior Court (Industrial Indemnity Co.), 2 Cal.4th 1254, 1264-65 (1992). It is not reasonable to conclude that the insured would expect from the policy language that unmentioned, lesser species of nondisclosure or misrepresentation would nevertheless permit the insurer, under the rubric of a defense to specific coverage as distinct from a wholesale avoidance of the contract, nevertheless to argue that the contract was of no legal effect as to the insured. This is not within the objectively reasonable expectation of an insured layperson, who would understand from the policy language that for the contract not to be binding, the conduct would have to fraudulent or intentional.
It is established that insurance policies are subject to the rule of construction applicable to all contracts, namely, to construe them so as to give effect to all terms and not to render them surplusage. ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 17 Cal.App.4th 1773, 1785-86 (1993). The fraud provision states that the policy is void if the insured intentionally conceals or misrepresents a material matter. To interpret it to mean that unintentional, or negligent, misrepresentations also render the policy ineffectual would remove any limiting effect of the provision and render the specification of intentionality mere surplusage, a result not only precluded by the pertinent canon of construction, but also not within an insured’s reasonable expectation.
This result is consistent with decisions in other jurisdictions that have considered similar issues of construction of policy provisions that set standards that were inconsistent with, and more favorable to the insured than, analogous statutory provisions. It has been held that where statutes permit rescission or avoidance of liability under a policy on the ground of innocent or negligent misrepresentations, a policy term providing that the policy is void for fraud or intentional misrepresentation or concealment will be given effect such that intentional or fraudulent conduct is required for the insurer to rescind or defend on the basis of nondisclosure or misrepresentation. See State Farm General Insurance Co. v. Oliver, 658 F.Supp. 1546, 1550 (N.D.Ala.1987), aff’d. 854 F.2d 416, 419-20 (11th Cir.1988) (a statute that provided that misrepresentation, concealment, or omissions and incorrect statements shall not prevent recovery under the policy or contract unless either material to acceptance of the risk or the hazard, or the insurer in good faith would not have issued the policy or would not have issued it at the premium rate in question if the true facts had been known to the insurer as required either by the application or contract or otherwise, was held not to determine the meaning of the contract, where the contract by its terms provided that if an insured intentionally concealed or misrepresented a material fact, the policy was void as to the insured; the court reasoned that the insurer had contracted for something different and had contractually excused innocent misrepresentations in the application); Gainsco v. ECS/Choicepoint Services, Inc., 853 So.2d 491, 492-3 (Fla.2003) (the policy provided that it was voidable for intentional concealment or misrepresentation, whereas the statute voided a policy without regard to the whether omission or concealment was intentional); Tri-State Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d 1203, 1216-17 (D.Kan.2001) (holding that a policy provision that the coverage form was void in case of fraud or intentional concealment or misrepresentation of a material fact unambiguously required intentional conduct to render the policy void such that inconsistent statutes would not be considered, but noting that the result would be the same if it were considered ambiguous because the language should be construed against the drafter); see also, Green v. Life & Health of Am., 704 So.2d 1386 (Fla.1998) (policy concerned representations made to the best of the insured’s knowledge and belief); Hauser v. Life General Security Ins. Co., 56 F.3d 1330 (11th Cir.1995) (ERISA case, policy provision that concerned the insured’s knowledge and belief); Simmons v. Conseco Life Ins. Co., 170 F.Supp.2d 1215, 1222 (M.D.Fla.2001) (unintentional misrepresentation by applicant regarding grade of prior convictions was held insufficient to permit the insurer to void the policy despite a statute permitting avoidance for innocent material misrepresentations because the policy affirmation regarding the truth of the representation was in terms of “best of the applicant’s knowledge and belief” pursuant to the insurer’s choice to draft a standard of truthfulness of representations that was less rigid than the statutory language).
The fact that many of the cases cited by Plaintiff rely on law other than California law does not render them inapplicable. It is understood that California law governs the construction of the instant contract. However, the out-of-jurisdiction cases involve issues of construction of statutes and contractual provisions that are analogous in varying degrees to those involved in the present case. The decisions show that various courts, applying rules of contractual construction similar to those of California, have concluded that insurers may choose to require less rigid standards of disclosure or representation in connection with the contracts in question, and that when they do so, their drafting choices will be construed in light of the reasonable expectations of the applicant for insurance and in furtherance of the principles that all language in a contract should be given effect and that ambiguous terms will be construed against the insurer who drafted them and in favor of coverage. The Court does not read these decisions as requiring insurers affirmatively to put statutory language in their contracts in order to avail themselves of statutory rights; rather, they pertain to situations in which the insurer has included in the contracts in question language which is inconsistent with statutory provisions.
Defendant relies on Mitchell v. United National Insurance Company, 127 Cal.App.4th 457 (2005), in which the intermediate appellate court was faced with reconciling two conflicting statutes, both of which were applicable to a fire insurance policy. Cal. Ins.Code § § 331 and 359, which are applicable to the type of policy involved in the present case, declare the injured party is entitled to rescind insurance by “[c]oncealment, whether intentional or unintentional,” (§ 331), or for a materially false representation (§ 359).
Two other statutes were involved in Mitchell. One was Cal. Ins.Code § 2070, which provided that all fire policies “shall be on the standard form” and shall not contain additions, and that any peril coverage must be substantially equivalent to or more favorable to the insured than that contained in the standard fire insurance policy form. Cal. Ins.Code § 2080 stated that except as provided in that article, clauses imposing specified duties and obligations upon the insured and limiting the liability of the insurer may be attached to the standard form as riders. Section 2071, the standard fire insurance policy form, stated:
“Concealment, fraud: This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.”
California case law established that in order to void a policy based on the insured’s violation of this fraud and concealment provision, the false statement must have been knowingly and willfully made with the intent (express or implied) of deceiving the insurer, and the materiality of the statement would be determined by an objective standard of its effect upon a reasonable insurer. Mitchell, 127 Cal.App.4th at 634-35. Thus, the insurer’s right to void a fire insurance policy under § 2071 was more limited than the right to rescind accorded by § § 331 and 359.
In Mitchell, the court ruled that § § 2070 and 2071 did not preclude rescission by the insurer for unintentional misrepresentation under the more liberal standard of rescission set forth in § § 331 and 359 1) because of legislative intent, 2) because § § 2070 and 2071 did not expressly exclude application of other statutory provisions; 3) it made no sense to exclude a fire insurance contract from the terms afforded by other statutes; 4) the canon of statutory construction that different statutes within the same code should be interpreted to be consistent; 5) freedom of contract and the right of an insurer to make an informed decision whether or not to insure a given risk were strong policy considerations that support more liberal rescission rights for misrepresentations made at the inception of the insurance contract; and 6) § § 331 and 359 apply to misrepresentations made at any time but normally govern parties’ obligations during formation of the contract, whereas the standard fire insurance fraud and concealment provisions typically was exercised in connection with a claim for policy benefits. Id. at 471-473. The court in Mitchell relied on cases indicating a similar reconciling of two New York state statutes permitting rescission by the insurer for material misrepresentations on the one hand but otherwise voiding fire policies in the event of the insured’s willful concealment or misrepresentation of a material fact.
In contrast, in the present case, the issue is not reconciling two conflicting statutes; rather, it is determining the appropriate construction of a contract in light of its terms. The governing object is not to attempt to reconcile inconsistent statutes, but rather to give effect to the expressed intent of the parties, and to consider statutory limitations on coverage only as appropriate in the course of construction of the contractual language.
Review by the California Supreme Court was not sought in Mitchell.
Mitchell was followed in Atmel Corporation v. St. Paul fire & Marine, 426 F.Supp.2d 1039 (N.D.Cal.2005), where an errors and omissions policy stated that the policy was void if specified persons hid important information or attempted to defraud or lie; the policy stated that everyone made mistakes and that unintentional errors or omissions would not affect the insured’s rights under the policy. The insured, who allegedly had provided inaccurate information in the application process, argued that the insurer had waived its statutory right to rescind for anything but intentional fraud. The court concluded that it was not a waiver of a statutory right to material information because the insurer asked specific questions in the application. The court relied on Mitchell as holding similar language inapplicable to rescission of a policy based on misrepresentation and concealment in a policy application. The Court followed Mitchell because even though Mitchell was different because it concerned language from two statutes, as distinct from contractual language and statutory language, there was “nevertheless no persuasive or logical reason to arrive at a different interpretation of a very similar clause in this case.” 426 F.Supp.2d at 1050. The Court also stated that common sense dictated that the fraud and misrepresentation clause, which was contained in the policy issued after the application had been approved, did not apply to misrepresentation or concealment in an insurance application. Id.
The Atmel decision is not persuasive because it really did not analyze the different canons of construction applicable in the two types of cases (construction of a contract which conflicted with statutory language, versus construction of language in a contract which was based on and required by statutes). In Mitchell, the California legislature had directed that the pertinent portion of the contract be included. In the present situation, private parties wrote the contract, which is to be construed in light of the intent of the parties as reasonably manifested in contractual language; statutory language here was not mandated as part of a contract, but rather was merely background which the parties were free to supercede by the use of contractual terms.
Mitchell has been criticized. Although Mitchell succeeded in avoiding different rescission standards for fire insurance than for other coverages in the same policy, the result may be contrary to settled rules of statutory construction because the specific provision of § 2071 dealing with fire insurance should control over contrary provisions in § § 331 and 339 dealing with insurance generally, Miller v. Superior Court, 21 Cal.4th 883, 895 (1999); and § 2071 should have controlled over the earlier enacted sections 331 and 359, see, Croskey and Kaufman, California Practice Guide: Insurance Litigation at 5:172 (Rutter, 2005).
Defendant argues that as in Mitchell, it is appropriate to give effect to the statutes giving the insurer a broader right to void a contract to the application process. However, despite the statutory policy in favor of disclosure at the inception of the contract identified in Mitchell, Mitchell also recognized the policy supporting the freedom of contracting. Here, the insurer freely chose to include language more favorable to the insured that is reasonably understood as limiting the circumstances under which the insurer may assert that the contract is of no effect based on nondisclosure or misrepresentation.
When contracting parties use terms that provide for broader coverage than that otherwise provided by reference to statute, those terms are regularly interpreted to provide broader coverage. Mission v. Coachella, 210 Cal.App.3d 484 (interpreting “efficient proximate cause” in a coverage clause as referring to a predominating cause, which resulted in broader coverage, as distinct from a triggering cause, which would have resulted in a more restrictive scope of coverage consistent with judicial interpretations of Ins.Code § 530 and 532); State Farm Casualty Co. v. Martin, 872 F.2d 319, 321 (9th Cir.1989) (interpreting a contractual term that excluded losses from concurrent causes more strictly than the statute, Ins.Code § 530, which the court noted would correctly have been implied as the meaning of the policy only in the absence of contractual language to the contrary). It is established that in the absence of any general declaration of public policy, there is no reason to interfere with the parties’ full freedom to contract for coverage on any terms not specifically prohibited by statute. National Insurance Underwriters v. Carter, 17 Cal.3d 380, 387-88 (1976).
Although statutory terms may be incorporated into a contract, this is applied to find coverage required by statutes where insurance policies otherwise do not afford coverage. Utah Property and Casualty Insurance Guaranty Association v. United Services Automobile Association, 230 Cal.App.3d 1010, 1019-20 (1991) (collecting cases). A limitation on coverage contained in a statute will not be implied into a policy that lacks such a limitation where a layperson reading the policy would have no reason to suspect the limitation would apply. Utah Property and Casualty Insurance Guaranty Association v. United Services Automobile Association, 230 Cal.App.3d 1010, 1015-16 (not implying a statutory one-year time limit for uninsured carriers to become insolvent into a policy providing for coverage of insolvent insurers’ responsibilities). Where statutory provisions set a minimum or floor amount of coverage, statutory exclusions or limitations intended to provide a ceiling must be expressly, clearly, and plainly incorporated into a policy. Utah Property, 230 Cal.App.3d at 1017. Less favorable coverage provisions of a statute will not be read into the policy to the insured’s detriment. Id. at 1018. A policy or its endorsements cannot be so interpreted as to become meaningless, or to withhold coverage normally expected by a layperson with an ordinary mind. Continental Casualty Co. v. Phoenix Construction Co ., 46 Cal.2d 423, 437-38 (1956).
Laypersons cannot be expected to know of statutory limitations or exclusions on coverage not contained in their insurance policies; a rule invalidating lay persons’ trust in the language of their policies would result in unanticipated gaps in coverage at the least. Utah Property, 230 Cal.App.3d at 1021. Insurers, who are fully capable of knowing about statutory restrictions on coverage and of incorporating those statutory restrictions in the language of their policies, may fairly be expected to use clear and express language incorporating statutory restrictions. Id. Even where a statute expressly purports to limit express contractual provisions contrary to its own terms, any limit upon freedom of contract is narrowly construed. Henricks v. Metropolitan Life Ins. Co., 7 Cal.2d 619, 632 (1936) (upholding the validity of a construction of a contract that provided an alternative different from and in addition to, but not contrary to, statute which prohibited terms “contrary to” the statute).
Focusing on the use of the word “void” in the contract, and the reference to rescinding in § 331, Defendant argues that the provision specifying that the policy is void does not impliedly negate ICW’s right under the law alternatively to rescind, or defend on grounds that the risk was misrepresented.
Defendant’s argument rests on two prongs. Defendant asserts that the statutory and decisional law in force at the time a policy is issued must be read into each policy with full binding effect. Defendant cites to Interinsurance Exchange v. Ohio Cas. Ins. Co., 58 Cal.2d 142, 147-48 (1962), in which a customer of an insured car dealer who was involved in an accident was excluded under the terms of the dealer’s policy, a policy written at a time when the applicable statutory law, public policy, and decisional law required coverage of permissive users. At the time of the accident for which coverage was sought, the statute had been amended. It was held that even if it were assumed that the amendment had changed the public policy, it could not have retroactively validated an agreement that was either void, or unenforceable, pursuant to the statutory law in effect when it was written. Id. at 146-47. The permissive user coverage discussed in Interinsurance Exchange v. Ohio Cas. Ins. Co. was minimum coverage required as a matter of public policy for the protection of insured parties and their permittees. In contrast, in the present case, the policy provision limiting the circumstances in which policies were void did not violate any public policy requiring that insurers be given enumerated rights or privileges, but rather was within the realm of matters subject to the parties’ bargaining and prerogatives to agree on coverage more favorable to the insured. Cf. National Ins. Underwriters v. Carter, 17 Cal.3d 380, 388 (1976), in which it was stated, “[I]n the absence of any general declaration of public policy … we discern no reason to interfere with the parties’ full freedom to contract for coverage on any terms not specifically prohibited by statute”; Utah Property & Casualty Ins. etc. Assn. v. United Services Auto. Assn., 230 Cal.App.3d 1010, 1023-24 (collecting cases, considering a policy that did not limit a period of insolvency protection and an uninsured motorists statute that limited it to a one-year period, and concluding that as reasonably anticipated by a layperson and consonant with public policy, the policy provided greater coverage than that required by law and did not incorporate an exclusion or limitation not stated in the policy).
Defendant does not cite, and the Court is unaware of, any authority either requiring a lay person in the position of the insured to read into a policy a statutory provision that would put more restrictive limits on coverage than those stated in a policy, or recognizing a public policy that would preclude a condition that was more favorable to the insured and provided coverage except with respect to intentional concealment in circumstances such as those in the present case. Such a position would be contrary to established principles that a policy should be interpreted in light of the expectations of a reasonable insured person, not a reasonable attorney or insurance expert, Crane v. State Farm Fire & Cas. Co., 5 Cal.3d 112, 115 (1971), and not necessarily one with knowledge of subtle legal distinctions, Safeco Ins. Co. of America v. Robert S., 26 Cal.4th 758, 765-66 (2001) (declining to conclude that an insured’s reasonable expectations would include understanding of the distinction between gross and ordinary negligence).
Defendant also argues that because the policy provision voids the policy for intentional concealment or misrepresentation, and because an insurer need not rescind for misrepresentation or concealment but may take advantage of an alternate remedy of defending against a claim on the policy on the basis of misrepresentation or concealment, the policy provision should be interpreted only to affect the remedy of rescission and not the alternate remedy of defending against a claim on the policy. Defendant cites De Campos v. State Comp. Ins. Fund, 122 Cal.App.2d 519, 528 (1954). In De Campos, the court upheld a judgment for an insurer against an insured employer. The insurer had previously unsuccessfully litigated a worker’s compensation action against heirs of an employee who died in the scope of employment. The insurer had refused to defend the insured employer in the worker’s compensation action, but no issue of fraud or misrepresentation by the insured employer had been raised in the worker’s compensation case. When the insured employer brought an action against the insurer for the employer’s costs of defending itself in the worker’s compensation action, the insurer took the position that coverage for the decedent had been excluded by various policy provisions, and that the policy had issued based on material concealment by the insured employer of 1) the decedent’s status as an excluded partner (which was found to have been an ambiguous exclusion and was resolved against the insurer), and 2) the decedent’s compensation, which was a basis for assessment of the risk and should have been figured into the premium cost. When the insured employer sued the insurer on the policy for the costs of its defense, the insurer defended because 1) the policy was not in effect because of fraud (of the intentional variety), 2) the employer waived its contractual right to a defense under the policy and was estopped to seek it because of the fraud and breach of warranty, and 3) the employer was in breach and default, and thus could not seek performance of the contract. The insurer also claimed damages from the employer for the fraud. In upholding the trial court’s judgment for the insurer based on fraud, the Court noted that the insurer had alternate, inconsistent remedies for damages or rescission; the court characterized the damages action as one on the contract for breach of contract, and it relied on the fact that insurer there had not argued that there was no contract, but in fact had argued that the contract was in effect, but that the decedent had been excluded based on his status. (Id. at 525-27.)
In the present case, the Defendant insurer is not defending against a claim brought by a policy holder; rather, it is resisting a third party insurer’s claim for reimbursement or contribution. The basis of Defendant’s resistance is that Defendant’s obligation under the policy, or policy coverage, may be avoided because of the insured’s concealment or misrepresentation of a material matter; Defendant is not seeking damages on the contract. To the extent that Defendant is relying on the contract, it is resorting to the provision that permits the policy to be declared void for fraud or intentional concealment or misrepresentation.
In any event, under the pertinent California law, the intricacies of the terminology and substance of the law of remedies do not necessarily determine the interpretation of the policy provision according to the reasonable expectations of a lay insured, who is not in the position to recognize and appreciate fine distinctions pertaining to alternate legal remedies not referred to in the contract. A reasonable insured would understand the provision to exclude coverage on the basis of fraud, and not to constitute a partial reference to one of a multitude of legal remedies. Likewise, a reasonable insured layperson would not expect the provision to describe situations in which the contract is void, as distinct from voidable or subject to rescission, or to distinguish among remedies which are based on the invalidity of the contract due to fraud but which arise in different procedural contexts or differ in some manner with regard to legal scope or effect.
Finally, if there is ambiguity with respect to coverage, a contract may be interpreted most strongly against the party who caused the uncertainty to exist, Cal. Civ.Code § 1654, and specifically against the insurer, in order to protect the insured’s reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the policy. Accordingly, coverage language is interpreted in its most inclusive sense, and exclusions in a policy are narrowly interpreted. Mission National Insurance Co. v. Coachella Valley Water District, 210 Cal.App.3d 484, 496-7 (1989). An insurer has an obligation to use such language as to make the conditions, exceptions and provisions of a policy clear to the ordinary mind engaging in a plain, commonsense reading of the terms; if the insurer’s language should fail, any ambiguity or reasonable doubt must be resolved in favor of the insured and against the insurer. It is established that ambiguous terms are resolved in the insured’s favor, consistent with the insured’s reasonable expectations. Safeco Ins. Co. of America v. Robert S., 26 Cal.4th 758, 763 (2001); Pacific Heating and Ventilating Co. v. Williasmburgh City Fire Ins. Co. of Brooklyn, 158 Cal. 367, 370 (1910); Paramount Properties Co. v. Transamerica Title Ins. Co., 1 Cal.3d 562, 569 (1970).
Applying these canons, Plaintiff’s construction, namely, that the contract provided for the insurer to avoid coverage on the basis of concealment or misrepresentation only for intentional or fraudulent conduct, should be adopted because Defendant drafted, or was responsible for the wording of, the contract, and the Defendant is the insurer. Had Defendant wanted to have a broader ground upon which to avoid the contract for merely negligent or fully innocent conduct, Defendant could have said nothing, or Defendant insurer could have specifically provided that all forms of nondisclosure and misrepresentation would have been a basis for voiding the contract.
The Court concludes that in order to prevail on its defense, Defendant must show that the insured engaged in intentional concealment or intentional misrepresentation with respect to the coverage form.
IV. Intentional Concealment or Misrepresentation
The Defendant asserts that G & P misrepresented that Pannu was the only driver and concealed the fact that Inderjit was also a driver.
Plaintiff argues that the intentional element of intentional misrepresentation or concealment is defined by California Jury Instructions, Civil, Book of Approved Jury Instructions [BAJI], January 2005 Edition, § 12.31, which defines the essential elements of a claim of fraud by an intentional misrepresentation as including a false representation with respect to which:
3. The defendant (here G & P) must have known that the representation was false when made [or must have made the representation recklessly without knowing whether it was true or false];
4. The defendant (here G & P) made the representation with an intent to defraud the plaintiff, that is, [he][she] (here G & P) must have made the representation for the purpose of inducing the plaintiff to rely upon it and to act or to refrain from acting in reliance thereon….
Id., BAJI 12.31. The Court notes that BAJI 12.35 states that the essential elements of a claim of fraud by concealment include concealment or suppression of a material fact that the defendant was under a duty to disclose to the plaintiff and as to which:3. The defendant (here G & P) intentionally concealed or suppressed the fact with the intent to defraud the plaintiff.
The Court further notes that California Jury Instructions, Civil, January 2005 Edition, CACI 335 governs the affirmative defense of fraud that vitiates consent and prevents formation of a contract. It states in pertinent part that to succeed in the defense, the defendant must prove with respect to the plaintiff’s representation:
2. That [G & P] knew that the representation was not true;
3. That [G & P] made the representation to persuade [ICW] to agree to the contract;
4. That [ICW] reasonably relied on this representation; and
5. That [ICW] would not have entered into the contract if [it] had known that the representation was not true.
Plaintiff also cites to Kentucky Cent. Life Ins. Co. v. Marin Bay Park Trust, 958 F.2d 377 (9th Cir.1992) (unpublished disposition) (TABLE, TEXT IN WESTLAW, NO. 91-15004, 91-15276), to the effect that although an insured must read the contract and report any misrepresentations or omissions, a contract may not be rescinded by an insurer if the insured in good faith gives answers that are truthful but, owing to the fraud, mistake, or negligence of the insurance company’s agent filling out the application, are incorrectly transcribed, or if the agent gave the insured the impression that additional responses were unnecessary.
Here, there does not appear to be evidence that Mirko was the insurer’s agent; rather, she was the insured’s agent.
Defendant argues that the requirements for making out the defense should be governed by California Jury Instructions, Civil, January 2005 Edition, CACI 2308 (revised October 2004), rescission for misrepresentation or concealment in an insurance application, which does not necessarily require intentional misrepresentation or concealment. Defendant also criticizes Plaintiff’s citation of an unpublished case (Kentucky Cent. Life Ins. Co. v. Marin Bay Park Trust ), and Defendant notes that the case involved life and disability insurance, which by statute (Cal. Ins.Code § 10380) requires intentional falsity in an insurance application. However, these points are based on an assumption that Cal. Ins.Code § 331 governs the Defendant’s right to rescind, and it is untenable in light of the Court’s previously discussed construction of the contract to provide more favorable insurance coverage than that provided by Cal. Ins.Code § 331.
The BAJI and CACI instructions regarding intentional misrepresentations or concealment accurately reflect California law, namely, that a representation or concealment must be accomplished “with intent to deceive another party thereto, or to induce him to enter into the contract”; and the action may be either “[t]he suggestion, as a fact, of that which is not true, by one who does not believe it to be true … or “[t]he suppression of that which is true, by one having knowledge or belief of the fact….” Cal. Civ.Code § 1572. A fraudulent misrepresentation is one made with the knowledge that it is or may be untrue. Seeger v. Odell, 18 Cal.2d 409, 414 (1941).
V. Materiality of Misrepresentation or Concealment
The materiality of a representation is determined by the same rule as the materiality of a concealment. Cal. Ins.Code § 360.
Materiality is a question of law. Merced County Mut. Fire Ins. Co. v.State of California, 233 Cal.App.3d 765, 772 (1991).
The California Insurance Code contains multiple provisions regarding disclosures that are required. Cal. Ins.Code § 332 provides:
Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.
Cal. Ins.Code § 333 provides that absent inquiry, neither party is bound to communicate things that are waived or which pertain to risks excluded by warranty, or which the other knows or ought to know and of which the party has not reason to suppose the other ignorant.
Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries. Cal. Ins.Code § 334. The question is whether or not the matter misstated or concealed could reasonably be considered in affecting the insurer’s decision as to whether or not to enter into the contract, in estimating the degree or character of the risk, or in fixing the premium. Holz Rubber Co. Inc. v. American Star Ins. Co ., 14 Cal.3d 45, 61 n. 16 (1975). Materiality has been found where had the true facts been disclosed, the insurer would not have provided coverage without an exclusion of the misrepresented matter. Williamson & Vollmer Engineering, Inc. v. Sequoia Ins. Co., 64 Cal.App.3d 261, 272-74 (1976) (materiality established where a professional liability insurer demonstrated that a policy that had issued based on concealment of a pending claim would have contained an exclusion for the concealed claim).
The test is subjective in the sense that the critical question is the effect truthful answers would have had on ICW, not on some average reasonable insurer. Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d 169, 181 (1988).
It has been held in California that if an insurer asks specific questions on an application, this is usually sufficient to establish that the answer is material as a matter of law because the insurer asked for the information. Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904, 916 (1973) (quoting Cohen v. Penn Mutual Life Ins. Co., 48 Cal.2d 720, 726 (1957)(where the insured, in applying for a life insurance policy, had misrepresented his history of a heart condition, and where the insurer had asked specific questions regarding not only diagnosed conditions, but also suspicious circumstances or symptoms)). However, it does not appear that the single circumstance of the insurer’s having asked a question on an application is sufficient to determine the materiality issue because courts have undertaken further analysis of additional pertinent circumstances. Ransom v. Penn. Mutual Life Ins. Co. 43 Cal.2d 420, 426-27 (1954); Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d at 180-81.
Even where lip service is given to the determinative character of the factor of asking for information, the California courts nevertheless complete a more thorough analysis of the materiality question, Cohen, 48 Cal.2d at 726-28 (focusing on the nature of the misrepresentation); Thompson, 9 Cal.3d at 916-918 (considering the questions, the testimony of medical witnesses, and all inferences).
It is acknowledged that an incorrect answer on an insurance application does not alone give rise to the defense of fraud where the true facts, if known, would not have made the contract less desirable to the insurer. Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904, 916 (1973); California-Western States Life Ins. Co. v. Feinstein, 15 Cal.2d 413, 423-24 (1940); Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d at 181.
It has also been emphasized in connection with such analysis that the trier of fact is not required to believe the “post mortem” testimony of an insurer’s agents that insurance would have been refused had the true facts been disclosed. Thompson at 916.
Thus, the more reasoned view is that the fact that information was solicited on an application for insurance is a factor to be considered in determining materiality, but it is not the sole factor; determination of materiality remains a question to be determined based on a multitude of factors.
A misrepresentation of loss history or drivers’ qualifications may be material. Certain Underwriters at Lloyd’s v. Montford, 52 F.3d 219, 222 (9th Cir.1995) (concealment of history of a previous total loss claim in application for marine insurance); Civil Service Employees Ins. Co. v. Blake, 245 Cal.App.2d 196, 198 (1966) (casualty policy, driver’s health history and history of driver’s license revocation and denial); Allstate Ins. Co. v. Golden, 187 Cal.App.2d 506, 512 (1960) (auto policy, concealment of prior suspension of driver’s license for speeding).
If the applicant for insurance had no present knowledge of the facts sought or failed to appreciate the significance of information related to him that formed the basis of his answers, his incorrect or incomplete responses would not constitute grounds for rescission. Thompson, 9 Cal.3d at 916.
As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought,
