News - March 2008

• Insured’s “Unintentional” But “Material” Misrepresentations in Application Give Marine Insurer Right to Rescind
• Insured Only Required to Exhaust Tortfeasor’s Motor Vehicle or Automobile Bodily Injury Liability Coverage Before Seeking Underinsured Motorist Coverage
• California Supreme Court Watch: Property and casualty insurance cases currently pending in the California Supreme Court

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Insured’s "Unintentional" But "Material" Misrepresentations in Application Give Marine Insurer Right to Rescind

The Ninth Circuit Court of Appeals has held that even if an insured only “unintentionally” makes “material” misrepresentations in an application for a marine insurance policy, the insurer is entitled to rescind the policy. (New Hampshire Ins. Co. v. C’Est Moi, Inc. (2008) WL 732487)

Facts

In 1986, Lawrence O’Rourke (O’Rourke) purchased all the stock of C’Est Moi, Inc. (C’Est Moi). As part of the purchase, O’Rourke paid $300,000 for a yacht owned by C’Est Moi. O’Rourke subsequently insured the yacht through Washington International Insurance Company (Washington International).

In 1992, a fire destroyed the yacht and Washington International paid O’Rourke $450,000 for the loss. O’Rourke reacquired the yacht from Washington International at salvage, paid off a loan and began restoring it. Washington International stopped insuring the yacht after the fire, and it remained uninsured until 2001 (a period of nine years).

In 2001 C’Est Moi applied for a yacht policy through New Hampshire Insurance Company (NHIC). In the application, C’Est Moi listed the purchase price as “$450,000” even though O’Rourke had only paid $300,000 for the yacht in 1986. C’Est Moi also listed the “present marine insurer” as “Wash Int.,” even though the yacht was not insured when the application was filled out in 2001. After reviewing the application, NHIC issued a policy to C’Est Moi covering the yacht.

In 2004, the yacht sank in calm waters while docked at Newport Beach, California. O’Rourke, on behalf of C’Est Moi, filed an insurance claim. NHIC investigated and determined that the likely cause was a malfunctioning bilge pump.

NHIC then sued C’Est Moi in federal district court to rescind the insurance policy. The district court granted summary judgment in favor of NHIC, holding that the doctrine of uberrimae fidei applied and that C’Est Moi misrepresented material facts on its insurance application. C’Est Moi appealed.

Holding

The Ninth Circuit Court of Appeals affirmed the judgment in favor of NHIC.

The appellate court first noted that under the federal maritime doctrine of uberrimae fidei, an applicant for marine insurance owes the insurer a “duty of utmost good faith,” and is “bound to reveal every fact within his knowledge that is material to the risk.” Under this doctrine, if an insured misrepresents a material fact in the application, the insurer may rescind the policy, even if the misrepresentation was “unintentional.” The court acknowledged that the NHIC policy contained a provision stating that the policy would be void if the insured “intentionally” concealed or misrepresented any material fact or circumstance relating to the insurance application. However, according to the court, this provision was not sufficient to modify or eliminate the insured’s uberrimae fide obligation. Thus, NHIC was entitled to rescind even if C’Est Moi’s misrepresentations were merely “unintentional.”

The court next held that C’Est Moi’s misrepresentations in the application were “material.” The court reiterated the rule that if insurer demands answers to specific questions in an application for insurance, that fact is in itself usually sufficient to establish “materiality” as a matter of law.” Here, NHIC’s insurance application asked for the yacht’s purchase price and present insurer, and C’Est Moi misrepresented both facts. Both facts were facts which NHIC would naturally want to know in determining whether to issue a policy to C’Est Moi and, if so, on what terms. Thus, as a matter of law, C’Est Moi’s misrepresentations were “material” and NHIC was entitled to rescind.

Comment

Note that the Court of Appeals did not hold that the parties to a marine insurance policy can never contract around the doctrine of uberrimae fidei. Rather, the court held that if it is possible at all to contract around the doctrine, it must be done by “very clear policy language, unequivocally disclosing a mutual intent to supersede the insured’s common law obligation.” Here, according to the court, the language in NHIC’s policy did not disclose a clear intent to supersede the insured’s common law duty of disclosure. Because the common law duty remained in place, the insurer could rescind based on either the insured's intentional or unintentional misrepresentation.

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Insured Only Required to Exhaust Tortfeasor’s Motor Vehicle or Automobile Bodily Injury Liability Coverage Before Seeking Underinsured Motorist Coverage

The California Court of Appeal has held that that an insured is only obligated to exhaust the tortfeasor’s motor vehicle or automobile bodily injury liability coverage before the insured can trigger the insured’s underinsured motorist coverage. (Wedemeyer v. Safeco Insurance Company of America (2008) WL 660651)

Facts

Lowell Wedemeyer (Wedemeyer) had an auto policy through Safeco Insurance Company of America (Safeco) with uninsured and underinsured motorist coverage limits of $500,000 per person.

Wedemeyer was seriously injured when his car was struck from behind by a car driven by Bradley Groscost (Groscost). Groscost had an auto policy through Coast National Insurance Company (Coast National) with bodily injury liability limits of $15,000 per person. Wedemeyer filed a personal injury lawsuit against Groscost. Coast National offered its $15,000 limit on behalf of Groscost in exchange for a release of Wedemeyer’s claims. Wedemeyer notified Safeco of the lawsuit and of Coast National’s offer of Groscost’s $15,000 policy limits.

In the course of discovery in the personal injury lawsuit, Wedemeyer learned that Groscost was employed by Skyline Management Group (Skyline). Skyline had a general liability policy through Hartford Insurance Company (Hartford) which included hired auto and non-owned auto liability coverage of $1 million. However, Hartford refused to admit coverage under its policy for the accident involving Groscost and Wedemeyer.

At that point, Wedemeyer demanded that Safeco pay him $485,000 (i.e., Safeco’s UIM limit of $500,000, minus Coast National’s liability limit of $15,000). Safeco refused, insisting that Wedemeyer exhaust the $1 million limit of Skyline’s general liability policy through Hartford.

Wedemeyer pursued his litigation against Groscost. Eventually, Wedemeyer entered into a settlement with Groscost, Coast National, Skyline and Hartford. Pursuant to the settlement, Wedemeyer received a total of $515,000 (consisting of Coast National’s $15,000 policy limit, plus $500,000 under the Hartford policy).

Wedemeyer then filed a breach of contract / bad faith against Safeco based on Safeco’s failure to pay its UIM coverage. However, the trial court dismissed Wedemeyer’s claims, ruling that Wedemeyer was required to exhaust the liability limits of the Coast National auto policy and the Hartford general liability before seeking benefits under Safeco’s UIM coverage. According to the trial court, since Wedemeyer had already recovered from Coast National and Hartford an amount in excess of Safeco’s UIM limits, Safeco was not liable for UIM coverage.  Wedemeyer appealed.

Holding

The California Court of Appeal reversed. California Insurance Code section 11580.2(p)(3) provides that underinsured motorist coverage “does not apply to any bodily injury until the limits of bodily injury liability policies applicable to all insured motor vehicles causing the bodily injury have been exhausted by payment of judgments or settlements.” The appellate court ruled that, read in context, the phrase “bodily injury liability policies” means a motor vehicle or automobile liability policy (such as the Coast National policy), and does not refer to a general liability policy with hired auto and non-owned auto liability coverage (such as the Hartford policy). Thus, according to the appellate court, after Coast National tendered the limits of its auto policy to Wedemeyer, Safeco should have paid the balance of its UIM limits to Wedemeyer. Because Safeco failed to do so, Wedemeyer stated a claim against Safeco for breach of contract.

The appellate court observed that if Safeco had paid its UIM limits to Wedemeyer and Wedemeyer had later recovered more money under the Hartford general liability policy, then, pursuant to the reimbursement / credit provisions of Insurance Code section 11580.2(p)(5), Wedemeyer would have been obligated to reimburse Safeco for any payments received under the Hartford policy. However, the possibility that Safeco might later be entitled to reimbursement of monies paid under the Hartford general liability did not relieve Safeco of the duty to tender its UIM limits once Coast National exhausted its auto liability limits.

Comment

Since the total amount Wedemeyer recovered under the Coast National and Hartford liability policies ($515,000) exceeded the amount of Wedemeyer’s UIM coverage through Safeco ($500,000), it might be difficult to see how Wedemeyer was damaged by Safeco’s alleged breach of contract. However, according to the appellate court, Wedemeyer could seek as contract damages the amount he spent in the underlying litigation in his attempt to exhaust the Hartford general liability policy after Safeco wrongfully refused to pay its UIM coverage following exhaustion of the Coast National policy.

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California Supreme Court Watch

Set forth below is a list of property and casualty insurance cases currently pending in the California Supreme Court, along with a summary of the primary issue(s) to be decided in each case. As the Supreme Court decides these cases in upcoming months, we will keep our readers informed.

Ameron Internat. Corp. v. Insurance Co. of the State of Pennsylvania (case no. S153852) - Does a proceeding before the United States Department of the Interior Board of Contract Appeals constitute a “suit” such as to trigger insurance coverage under a commercial general liability policy?

Bouton v. USAA Casualty Ins. Co. (case no. S149851) - Does the arbitrator or the court decide whether a claimant is an insured under an underinsured motorist insurance policy when both the policy and Insurance Code section 11580.2 require arbitration of (a) whether the insured is entitled to collect damages from the driver of the underinsured vehicle and (b) if so, the amount?

Delgado v. Interinsurance Exchange of the Automobile Club (case no. S155129) - When a liability policy covers injury arising from an “occurrence,” which is defined as an “accident,” does the insurer have a duty to defend an action for assault if the complaint alleges the insured was acting under an unreasonable and negligent belief that he was acting in self-defense?

Sentry Select Ins. Co. v. Fidelity & Guaranty (case no. S145087) - What is the appropriate test for determining whether an insured is “engaged in the business of renting or leasing motor vehicles without operators” under California Insurance Code section 11580.9(b)?

State of California v. Underwriters at Lloyd’s London (case no. S149988) - (1) Does application of the pollution exclusion clause of the comprehensive general liability excess insurance policies at issue in this case turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site? (2) If pollution is caused by both uncovered intentional actions and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is an uncovered act?

21st Century Ins. Co. v. Superior Court (case no. S154790) - Should an insured’s attorney fees and costs incurred to obtain compensation from a third party tortfeasor be taken into account when applying the rule that an insurer cannot seek reimbursement from the insured unless the insured has been “made whole” by the recovery from the tortfeasor and other sources?

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