Policyholders purchase insurance policies as a safety net, promising financial protection in times of need. However, that safety net can disappear when an insurer rescinds a policy—a devastating consequence for potentially innocent policyholders. We recently published a post following a Fourth Circuit decision addressing this issue. The Ninth Circuit has also addressed this issue, most recently in the decision discussed below.

Policy rescission generally occurs when an insurer retroactively cancels a policy, usually citing a material misrepresentation or omission by a policyholder in its insurance application. California law allows rescission even when the misrepresentations or omissions are purportedly innocent. This means that even unintentional errors or omissions on an insurance application can lead to the cancellation of coverage, leaving policyholders without the protection they thought they had. One may think they can rely on their broker to handle the application for them, but doing so might not excuse the policyholder from issues in their application.

The Ninth Circuit Court of Appeals Reaffirms California Law That Innocent Mistakes May Not Excuse Material Misrepresentations or Omissions on an Insurance Application

In Hughes v. First National Insurance Company of America, et al., No. 23-55338, at *1 (9th Cir. Mar. 20, 2024), a policyholder secured homeowners insurance for her Malibu house with First National Insurance Company of America (“FNIC”) and General Insurance Company of America (“GNIC”). Hughes was required to complete an insurance application that asked her (1) whether she used her home for business purposes and (2) whether there were losses on the property in the last five years. She responded that it was not used for business and there were no losses.

Hughes sought coverage under the insurance policies for a fire at the property, which was denied, and brought suit against FNIC and GNIC. Both insurers sought to rescind their policies based on material misrepresentations and omissions, asserting that Hughes used the property for commercial purposes as a short-term rental and there had been at least three prior losses on the property. The District Court granted the insurers’ summary judgment motions, allowing them to rescind the policies.

On appeal to the Ninth Circuit, the Court agreed with the District Court’s decision. Hughes tried to argue that she did not understand the applications because of a language barrier and relied on her broker to finalize the applications and submit them to the insurers. The Court, applying California precedent, found her arguments immaterial, recognizing that “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, 132 Cal.App.4th 181, 187 (2005); Cal. Ins. Code § 331. The Court also found evidence contradicting Hughes’ arguments, including that she could understand, read, and write English, which may have potentially impacted the Court’s decision. Regardless, rescission was appropriate because there was a material misrepresentation—innocent or not.

Key Takeaway

This court found the policyholder bore the responsibility to provide accurate and complete answers during the application process. While insurance brokers play a valuable role in guiding clients through the process, policyholders may not be able to absolve themselves of this responsibility by relying on their broker.

Brokers might be knowledgeable about insurance products and can offer guidance, but they may not have detailed knowledge of every aspect of a policyholder’s circumstances. In the event of a claim, insurers may scrutinize the application for any discrepancies or inaccuracies. If material facts were misrepresented or omitted, the insurer could rescind the policy, leaving the policyholder unprotected. Ultimately, policyholders may be legally responsible for the accuracy of the information provided on the insurance application. Relying solely on a broker without verifying the information submitted may have serious consequences in the event of a dispute or claim denial.

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