In 2003, the building owner applied for insurance from Crusader. The applications specifically asked whether the building had been inspected by any governmental department, and the building owner answered that the building had been inspected several years past but did not mention the most recent inspections causing the Notices to Comply. In addition, in response to a question whether the building owner had been notified of building deficiencies or code violations, the building owner responded that it had not. Further, in response to a question whether the building had been cited for code violations or cited by a regulatory body within the last three years, the building owner responded “No.”
Crusader issued a special multi-peril liability policy that covered claims by tenants of substandard or uninhabitable living conditions. Crusader did not have knowledge of the building’s multiple code violations and the omissions that the building owner failed to mention in the policy application. In 2005, the tenants in the building filed a lawsuit against the building owner. In the tenants’ amended complaint, the multiple citations from 2002 were cited. Crusader denied coverage for the claim based upon material misrepresentations and/or concealments in the insurance application.
Colony sued Crusader for declaratory relief and equitable contribution because Colony argued that Crusader should have provided coverage for the lawsuit. Crusader argued that it had an internal policy to access public records to determine if there were citations on the building; however, it had failed to do so properly and did not discover the most recent code violations.
The trial court found that the building owner had failed to provide information that was asked for in the application and that Crusader reasonably relied upon those statements. It also found that Crusader would not have insured the building if it had known of the violations. Colony argued that Crusader waived its rights to deny coverage or was estopped from denying coverage because it failed to follow its own internal guidelines to investigate the application. In response, Colony appealed the trial court’s decision.
According to the Insurance Code, concealment of facts, whether intentional or unintentional, entitles an insurance company to rescind insurance in addition to other remedies.[2] However, Colony argued that Crusader could not rescind the insurance because it had not followed its own guidelines and that it was estopped to argue that it relied on the building owner’s concealment of facts. Further, it argued that Crusader had waived its rights to deny coverage because it did not properly investigate the application.
The Court found that Crusader did not have knowledge of the 2002 citations. In response, Colony argued that Crusader should have known of the violations if it had followed its own internal guidelines. However, the Court found that the application stated, “By acceptance of this policy, the insured agrees . . . that this policy embodies all agreements existing between the insured and the company or any of its agents relating to this insurance.” Therefore, the Court agreed with Crusader that there is no requirement that an insurance company follow its own internal guidelines to investigate an application because the applicant must not conceal facts in the application.
Additionally, the Insurance Code allows an insurer to rely upon an insured’s representation, so there is no statutory authority that requires an insurance company to thoroughly investigate an application pursuant to its internal guidelines.[3]
Therefore, it is important when completing an application for insurance to be thorough and honest because one’s insurance carrier may deny coverage if it discovers an applicant lied or concealed facts. In this situation, concealing facts is similar to making misrepresentations and can lead to serious consequences.
Alvarez-Glasman & Colvin serves as legal counsel to business and property owners throughout California and is at the forefront of legal issues involving small businesses and real property transactions. Please contact Anthony Marinaccio at anthony@agclawfirm.com or (562) 699-5500 for more information regarding legal issues that affect small businesses and property owners.
[1] Colony Insurance v. Crusader Insurance 2010 DJDAR 14792 Cal. Cts. of Appeal 2d (September 20, 2010).
[2] Insurance Code §§ 330, 331, 359.
[3] Insurance Code § 331; Robinson v. Occidental Life Ins. (1955) 131 Cal. 2d 581, 585.