When The Insured Has Lied Like Pinochio: New Case Authority Helps Guide The Insurer When It Discovers Material Misrepresentations In The Coverage Application

By Robert A. Crook, Esq.

The scenario is familiar. An insurance carrier receives an application to insure a single family home. No leaks. No pets. No business. No hazardous conditions. Only after the policy is in place – and a plaintiff sues the homeowner for injuries – does the insurer learn that the home is a rundown shack with a leaky roof, four pit bulls and a toxic chemical spill oozing over what’s left of a backyard lawn. 

When an insurer is called upon to defend the insured, it must do so, or risk an insurance bad faith claim.  However, in egregious situations, the insurer may refuse to defend and indemnify on the grounds that the insured made material misrepresentations in filling out the insurance application. The issue then becomes what a carrier must do to protect itself when it believes that misrepresentations have been made, particularly where those misrepresentations relate to the claim which the landowner is seeking indemnity and defense.

Duarte v Pacific Specialty Insurance Co. (2017) 13 Cal.App.5 ^th 45 recently provided guidance as to California insurers’ duties to protect themselves and their insureds. In reversing a trial court’s granting of the defendant’s Motion for Summary Judgment that voided the relevant insurance policy on rescission grounds – and thus ended Plaintiff’s bad faith claim -- the Court of Appeal made two important rulings. 

First, the court rejected the landowner’s argument that notice of rescission can only be provided by a Cross-Complaint filed by the insurance carrier. Notice requirements are adequately satisfied when the insurer pleads rescission and misrepresentation as an affirmative defense in its Answer. Thus, the filing of a Cross-Complaint by the insurer is unnecessary, making it easier for the insurer to raise the issue and avoid a Demurrer.

Second, the court affirmed that the insured’s responses to the application, and the language of the policy, must be construed in the insured’s favor. Application questions seeking whether there was any “prior unrepaired damage” and “business being conducted” out of the property were found to be ambiguous. Policy language relating to unrepaired damage and business operating off of the property were similarly found to be unenforceable (even where the occupier of the property was occasionally selling motorcycle parts out of the basement; the court found such business activity as being occasional and not ongoing.)

Note that the Duarte court specifically found that (1) the insurer is not required to show a causal relationship between the material misrepresentation or concealment of material fact and the nature of the claim; (2) the misrepresentation need not be intentional for an insurer to be entitled to rescind a policy "based on an insured's negligent or unintentional concealment or misrepresentation of a material fact;" (3) the focus of the inquiry is not on the state of mind of the insured or applicant, but on "the probable and reasonable effect which truthful answers would have had upon the insurer." The seemingly contradictory language of the decision underscores an important truth – insurers must second-guess themselves as to the language of their policies, giving any benefit of a doubt to their insureds before denying coverage. Any ambiguities in either the application, or the policy itself, risks a finding that the provisions are void.

Robert Asa Crook is the author of the above article. He graduated magna cum laude from UCLA ( B.A., 1987) and obtained his Juris Doctor at the University of California, Hastings College of the Law ( J.D., 1991).

                 

Mr. Crook's extensive legal experience includes Property Disputes, Construction Defect Litigation, General Civil Litigation Breach of Contract and Products Liability. In addition to having published appellate cases, he is also the author of several legal articles published in a variety of publications.

As part of his commitment to provide quality legal services to the community, Mr. Crook volunteers his time as an arbitrator and judge pro tem for the Los Angeles Superior Court. He is also on the Board of Directors for the Pasadena Society of Artists. 

Mr. Crook is admitted to practice in the State of California, the United States District Court, Eastern, Southern, and Central Districts, and the United States Court of Appeals (Ninth Circuit).          

John K. Flock, Esq.

Darren P. Salute, Esq.

Congratulations to John K. Flock and Darren P. Salute for their successful motion for summary judgment for our client, a security guard company. This incident arose when the plaintiff exited the Emergency Room of a major Hospital where she worked. As she left the building and turned the corner, she tripped on a rolled up mat that was leaning against the wall. The mat had been left there in the morning. The hospital’s security plan required our client, the security guard company, to report any dangerous conditions that existed. Prior to our involvement, the security officer working that day, was deposed and testified that an unattended rolled up mat was a dangerous condition. He also admitted that he did not observe the rolled up mat while performing his rounds. Likewise, the security supervisor testified that the rolled up mat leaning against a wall was a dangerous condition that should be reported.  Therefore, our client did not identify this alleged dangerous condition on the property that existed for nearly four hours. 

 

As a result of the incident, plaintiff sustained a fractured skull and epidural hematoma. She has not worked since the incident. Following the court ordered mandatory settlement conference, plaintiff made a demand of $4,000,000.00 to our client. In December of 2017, the Court granted our clients Motion for Summary Judgment as to plaintiff’s Complaint on the grounds that defendant did not owe a duty to report a mat leaning against a wall since the hospital did not consider the mat to be a dangerous condition, there was no evidence that the security officer had an opportunity to see the mat before the incident occurred, and there was no evidence establishing that the alleged dangerous condition existed for any appreciable period of time.  

Congratulations John and Darren for writing a successful Motion for Summary Judgment!

Ten Years and Going Strong!

Jaimee K. Wellerstein, Esq.

Carmen Alvarez

Congratulations to Partner, Jaimee K. Wellerstein and Accounting Clerk, Carmen Alvarez on celebrating ten years at Bradley & Gmelich LLP!

WHY FORM A CORPORATION OR LLC?

By: Harold A. Laufer, Esq.

If you’re thinking of starting a business, one of the first things you’ll have to decide is if you want to operate as a corporation or as a limited liability company. Whichever you choose, having one of these entities will create a barrier between you and your assets, and claims made against you by injured or damaged persons or companies. The entity is responsible for handling the problem, not you personally.

What this means is that if someone is injured on your premises or by a product you make, or if your business can’t pay its bills for any reason, the corporation or LLC is responsible, not you. The corporation or LLC will get sued, not you. And this means your home, your savings and your other personal assets can’t be touched and aren’t at risk.

(And it’s important to know that if you operate as a partnership, you and your partner will still each be personally responsible for the company’s problems and for the acts of each other. A partnership will not give you the protection of a corporation or a LLC).

So unless there are very unusual circumstances, you should always form a corporation or LLC for your new business. It’s easy and inexpensive and well worth the protection.

Harold Laufer, Esq. is a highly experienced corporate transactional lawyer. He spent much of his career practicing corporate law as an equity partner at a major Midwest law firm, where he headed the Mergers and Acquisitions Practice Group. He has represented companies of all sizes, from start-ups to Fortune 500 companies, along with their owners and managers, as a Trusted Advisor. Mr. Laufer has handled a wide variety of transactions for corporate clients, with experience in all aspects of a business’ life cycle, starting with deal structuring and entity formation, and continuing through Founder’s documentation, initial HR, IP, rights and licensing issues, financing, growth, corporate governance and eventually ending in liquidity events and exits. As a transactional lawyer, he negotiated client contracts for several high end events such as the Super Bowl and the Olympics. His first position after moving to California was as interim General Counsel to a public international technology company located in Newport Beach.

Additionally, Mr. Laufer has extensive deal and mergers and acquisitions experience. He has lead deal teams for many acquisitions, sales and mergers, including the sale of a SoCal $60 Million dollar plumbing contractor, the spin off a subsidiary of a US avionics company, the US launch of the UK’s largest weight loss company, venture capital financing for a Swiss technology company, and a strategic purchase in the US of a competitor by a Swedish industrial group. Mr. Laufer has represented clients in entertainment, OTT and new media, start-ups and emerging companies, manufacturing, distribution and supply chains, real estate, technology, services, and banking.

For several years, Mr. Laufer was the Chair of one of the 7th Circuit Bar Committees in Chicago. He has published and lectured on mergers and acquisitions, negotiation strategies and skills, and corporate governance. He has taught graduate level business courses on family offices, contract drafting and enforcement, and entrepreneurship. He is affiliated with UCLA’s Anderson’s MBA and entrepreneurial programs.

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Bradley & Gmelich LLP partners and staff enjoyed a magical night at the La Canada Flintridge Country Club in La Canada on December 9th, where they enjoyed the annual B&G talent show, fine dining and a dance floor where they boogied the night away!

All of us here at Bradley & Gmelich LLP join together in wishing all of you a very happy and healthy New Year!!!