The United States Court of Appeals recently addressed an appeal from a grant of Summary Judgment in favor of an insurance carrier on the issue of the homeowners association’s nondisclosure of potential claims resulting in concealment under Cal. Ins. Code § 331. See Atain Specialty Ins. Co. v. Lake Lindero HOA, No. 21-55319, 2022 U.S. App. LEXIS 3313, at *1 (9th Cir. Feb. 7, 2022). The Court determined that the insurance carrier was entitled to rescind the policy and had no duty to defend or indemnify the homeowners association in litigation.
In Atain, the California homeowners association, Lake Lindero Homeowners Association obtained liability insurance from Atain Specialty Insurance Company. During the application process, the Association was required to complete an application that asked the Association to disclosure any fact, circumstance, or situation that may result in an action or claim against the corporation, or any of its directors or officers. The application specifically asked (1) “within the last five (5) years, has any inquiry, complaint, notice of hearing, claim or suit been made…against the organization, or any person proposed for Insurance in the capacity of etither Director, Officer, Trustee, Employee or Volunteer organization?” and (2) “Is any person proposed for this insurance aware of any fact, circumstance or situation, which may result in a claim against the organization, or any of its Directors…?”. The Association answered “No.” to both questions. The Association was later sued and sought to file a claim with Atain to defend the Association in suit.
The Insurance Carrier filed Motion for Summary Judgment and argued that, as a matter of law, it is entitled to rescind the policy due to material misrepresentations and concealments made by the Association in the application. The Trial Court determined that a material misrepresentation or concealment in an insurance application, whether it be intentional or unintentional, entitles the insurer to rescind the insurance policy. However, the Trial Court also asserts that if an application had no present knowledge of the facts sought, or failed to appreciate the significance of information related to him, the incorrect or incomplete responses would not be grounds for rescission. Ultimately, the Trial Court concluded that the Association concealed or misrepresented a material fact, that a claim would likely be brought against them, and consequently, the Insurance Carrier was entitled to rescind their policy and granted Summary Judgment in favor of Atain.
On Appeal, the Appeals Court upheld the Trial Court’s grant of Summary Judgment in favor of Atain. The Appeals Court determined that the Association had knowledge of potential claims against it, despite the fact that they had yet to develop into a pending claim, and that such information clearly presented a risk that Atain needed to assess in its underwriting process in the application process.
From a defense perspective, Atain teaches us that even mere knowledge of circumstances that may lead to litigation could lead to an insurer’s right to rescind their policy and end their duty to defend and indemnify. Atain shows the importance of an honesty during the application process for an insurance policy because a dishonest or incorrect answer may have lead the insurance company to deny coverage or later disclaim coverage. Further, even an unintentional failure to disclose could lead to the insurer’s right to rescind coverage. Thus, it is best practice to disclose all material information and provide an honest and accurate representation.