When is a Misrepresentation Material for the Purpose of Insurance Coverage in California?

In the recent California case, Duarte v. Pacific Specialty Insurance Company, the appellate court examined an insured’s “misrepresentations” when applying for an insurance policy and concluded that the insurer had wrongfully denied coverage.¹

Mr. Duarte applied for landlord-tenant insurance and received a policy with Pacific Specialty Insurance Company (Pacific). During that time, Duarte was renting the property out. Shortly thereafter, Mr. Duarte was sued by his tenants for various causes of action related to habitability defects. He then tendered the defense of the tenant suit to Pacific. Subsequently, Pacific refused to defend him against the claims, arguing that Duarte made material misrepresentations and/or concealed material facts when he applied for the policy. Pacific further argued that rescission rendered the policy unenforceable from the outset and therefore, there was never any coverage and Duarte wasn’t entitled to policy benefits. Pacific claimed that the “misrepresentations” in the instant cause were his responses of “no” to two questions in the insurance application, the questions being: “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?” and “Is there any type of business conducted on the premises?”

Pacific brought a motion for summary judgment which was granted by the trial court. Duarte appealed, arguing that Pacific did not establish as a matter of law it was entitled to rescind the policy.

On appeal the court noted that with respect to misrepresentations, the insurer is not required to show a causal relationship between the material misrepresentation or concealment of a material fact and the nature of the claim.² Also of significance, the misrepresentation need not be intentional; an insurer may rescind a policy based on an insured’s negligent or unintentional concealment or misrepresentation of a material fact.³ This is because 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.”⁴

Therefore, the issue at hand was not whether Duarte made a misrepresentation or not, but whether Pacific would have issued the policy if Duarte had not made the misrepresentation. The appellate court then examined whether Pacific had met its burden regarding such misrepresentations, finding the first question Duarte purportedly misrepresented ambiguous and finding that Duarte reasonably interpreted the second question when answering no.

While the Court of Appeal ultimately ruled in Duarte’s favor, it is important to note the perils of misrepresentations throughout the insurance application process—even if unintentional—and how that can affect coverage.
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¹ Duarte v. Pacific Specialty Ins. Co., 13 Cal.App.5th 45 (Cal. app. 2017).
² Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d 169 (1988).
³ Mitchell v. United Nat. Ins. Co., 127 Cal.App.4th 457, 473 (2005).
⁴ Merced County Mut. Fire Ins. Co. v. State of California, 233 Cal.App.3d 765, 772 (1991).