In its recent decision in Tudor Ins. Co. v. Hellickson Real Estate, 2012 U.S. App. LEXIS 19904 (9th Cir. Sept. 21, 2012), the United States Court of Appeals for the Ninth Circuit, applying Washington law, examined whether an insurer was entitled to rescission of a professional liability policy based on the insured's failure to have disclosed several pending administrative complaints in the policy application.
Tudor Insurance Company successfully obtained summary judgment on its claim for rescission of a professional liability policy it had issued to Hellickson Real Estate. Tudor demonstrated that at the time the policy was issued, Hellickson had been notified by state authorities of at least ten complaints filed against it with the Washington Department of Licensing. Hellickson, however, failed to disclose these complaints in its application. Tudor learned of these misrepresentations when during the policy period, Hellickson sought coverage for a disciplinary proceeding brought by the Department of Licensing. After learning of these prior complaints, Tudor advised that it was rescinding the policy and it also advised that it would not be providing Hellickson with a defense in connection with the disciplinary proceeding.
On appeal, the Ninth Circuit began its decision by observing that under Washington law, an insured is presumed to have intended to have deceive the insurance company if it knowingly makes a false statement. See, Ki Sin Kim v. Allstate Ins. Co., 153 Wn. App. 339, 223 P.3d 1180 (Wash. Ct. App. 2009). It is the insured's burden to prove it had no intention to deceive. The court agreed that all elements necessary for rescission were present. First, it concluded that Hellickson had knowingly misrepresented the existence of the pending administrative complaints. In this regard, the court held that the insured's "professed misinterpretation" of the application, in and of itself, was insufficient to raise a question of fact as to whether its false statement was made knowingly, particularly since the application language was clear and unambiguous. The court also agreed that that the insured failed to rebut the presumption of its intention to deceive Tudor, since it failed to present "more than a scintilla of evidence" regarding its intention. Finally, the court agreed that Hellickson's misrepresentations were material in nature and that Hellickson. At most, explained the court, Hellickson raised an argument that there was no misrepresentation. The court readily dismissed this argument, noting:
... the Hellicksons revealed nothing to Tudor about the existence of the DOL investigations, but instead disclosed only a listing agency fine that they averred had been "handled through appeal" and "reduced or dropped" with "no claims made." As the district court discerned, Tudor's failure to investigate that incident does not create a factual question about whether numerous and ongoing disciplinary investigations by the state licensing authority prompted by a slew of complaints against the Hellicksons for misrepresentation, negligence, incompetence, and malpractice were material to Tudor's risk.
Hellickson argued in the alternative that even if Tudor was otherwise entitled to rescind the policies, it was estopped from doing so as a result of having wrongfully denied coverage for the Department of Licensing proceeding. Specifically, Hellickson claimed that under Washington law, if an insurer wrongfully denies coverage, then it is estopped from relying on coverage defenses, which necessarily includes the right to rescind a policy. The court disagreed with this assessment of the law, explaining:
This argument is untethered from Washington state case law, which establishes only that an insurer who refuses to defend a policyholder in bad faith may be estopped from disputing the scope of coverage provided by a valid contract. See Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693, 696 (Wash. 2010). The Washington courts have never held that such an insurer may be estopped from disputing the very legitimacy of the contract. To the contrary, the courts have consistently ruled that policyholders who render their contracts void by their own fraud may not pursue claims of bad faith against the insurer. See Ki Sin Kim, 223 P.3d at 1189 (citing, inter alia, Mutual of Enumclaw Ins. Co. v. Cox, 110 Wn.2d 643, 757 P.2d 499, 504 (Wash. 1988)).
Lexis.com subscribers can access Lexis enhanced versions of the Tudor Ins. Co. v. Hellickson Real Estate, 2012 U.S. App. LEXIS 19904 (9th Cir. Wash. Sept. 21, 2012),Ki Sin Kim v. Allstate Ins. Co., 153 Wn. App. 339 (Wash. Ct. App. 2009), Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398 (Wash. 2010), and Mut. of Enumclaw Ins. Co. v. Cox, 110 Wn.2d 643 (Wash. 1988) decisions with summaries, headnotes, and Shepard's.
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I see. I have read similar cases from other blogs. I didn't understand at first but this blog somehow made it clear a little.
I didn't know that there was such cases as policyholders committing such form of fraud to jeopardize insurers. I guess this is also a good thing to protect the rights of insurance companies when they are in a pinch.
Another interesting case which holds a conflict between the insurer and the insured. I am for the insurers here because they have done nothing wrong in the whole process. It may be good though to have a conflict resolution which will not end up in vain for both parties.