In Superior Dispatch, Inc. v. Ins. Corp. of N.Y., 2010 Cal. App. LEXIS 58, the California Court of Appeals recently established that section 2695.4(a) of the California Code of Regulations, title 10, requires an insurer to notify its insured claimant of contractual limitations provisions that may apply to a claim. And, this remains true even where the insured claimant is represented on the claim by counsel, notwithstanding section 2695.7(f). The decision also provides a cautionary tale for insureds as it held that Superior Dispatch’s policy was void based on a misrepresentation in the policy application.
In Superior Dispatch, a trucking company (“Superior”) obtained a Cargo Coverage insurance policy through its broker that provided liability coverage for damage to cargo while in transit. The policy contained a contractual one-year limitations provisions stating, “No suit or action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months next after discovery by the Insured of the occurrence which gives rise to the claim.” After incurring liability to one of its customers for damage to cargo, Superior submitted a claim. The insurer’s claims adjusters responded with a letter denying the claim based on the policy terms, but the letter did not notify Superior of the contractual limitations provision. Superior retained an attorney who wrote back to the insurers. A response letter from the insurers’ attorney likewise failed to notify Superior of the contractual limitations provision. Superior filed a lawsuit outside of the one-year limit, and the trial court granted summary judgment for the insurer based on the one year limit. The insurer argued that section 2695.4(a) was not applicable, and that under section 2695.7(f), it had no obligation to notify Superior of the provision because Superior had retained counsel.
On appeal, Superior argued that equitable estoppel barred its insurer from asserting the contractual limitations provision. In this regard, the court found that section 2695.4(a) was applicable, irrespective of the somewhat overlapping section 2695.7(f).
Section 2695.4(a) requires an insurer to notify the insured of contractual limitations provisions and other policy provisions that may apply to the claim. According to the definitions pertaining to that section, this duty extends to insureds making claims under both first party policies, and under third party liability policies. In addition, Section 2695.7(f) requires the insurer to notify a claimant of any statute of limitations and any other time period requirement upon which a claim may be denied, not less than sixty days prior to the expiration date (or immediately if the claim is received within the sixty day window). However, that section by its terms does not apply to a claimant represented by counsel on the claim (as stated above, this limitation was the insurer’s hook). Section 2695.7(f) applies not only to insureds under first party and third party policies, as does section 2695.4(a), but also to third party claimants asserting claims against the insured. The court found that although the regulations overlap to a certain degree, an insurer can comply with both, and they have a different scope. Therefore, neither regulation was meant to supplant the other and both apply. Thus, despite the fact that Superior was represented by counsel, the insurer’s failure to provide notice of the contractual limitations provision violated section 2695.4(a).
However, the violation of that regulation was not sufficient, in this case at least, to prevent the insurer from attempting to rely on the contractual limit. Superior had asserted equitable estoppel as its ground, as did the plaintiff in a prior section 2695.4(a) case, Spray v. Associated Internat. Ins. Co., 71 Cal. App. 4th 1260 (1999), and the Court went on to analyze whether the facts supported equitable estoppel. One could argue that a violation of section 2965.4(a) alone should prevent the insurer from raising the contractual limit provision, regardless of whether the facts supported equitable estoppel. See, e.g., Spray, 71 Cal. App. 4th at 1272-73 (Section 2695.4 designed to ensure all insured claimants receive actual notice of any contractual limitations provision). There is no indication, however, that Superior made this argument. Regarding equitable estoppel, the court set forth the traditional standard that a defendant may be equitably estopped from asserting a contractual (or statutory) limitations period if the defendant’s act, omission, or improper silence regarding a material fact (rather than law) caused the plaintiff to delay filing suit, and the plaintiff’s reliance was reasonable. Reasonable reliance here required that the plaintiff’s failure to discover the concealed fact was reasonable in light of the plaintiff’s knowledge and experience. Reasonableness of reliance is factual question for the trier of fact. (Whether the plaintiff was represented by counsel, as well as the scope of that representation, is relevant evidence.) On the record before it, the Superior Dispatch court held that summary judgment could not properly be granted because the evidence on the reasonableness of Superior’s reliance was contested.
Superior would have, therefore, gotten its case to a jury on the issue of equitable estoppel. However, the court affirmed summary judgment for the insurer based on a misrepresentation in Superior’s policy. Misrepresentation or concealment of a material fact in connection with an application for insurance may be grounds for rescission pursuant to Insurance Code sections 331 and 359, and also a complete defense to the policy, even where the insured had no intent to deceive. The materiality test for rescission (or misrepresentation defense) is subjective, viewed from the standpoint of the insurer. In Superior Dispatch, Superior’s broker submitted an application describing the goods hauled by Superior by percentage, with such categories of goods adding up to 100%. The application did not disclose that Superior also regularly hauled autos (which were the subject of the claim). The court also rejected the argument that Superior was off the hook because its broker submitted the application. The insurer presented evidence of materiality, to the court’s satisfaction, with an underwriter’s affidavit claiming that the type of goods hauled would have affected its underwriting decision. That evidence was not controverted. Thus, the court affirmed a grant of summary judgment in favor of the insurer.
Numerous lessons can be learned here: first, insureds must carefully review their insurance applications for accuracy, and not simply rely on a broker. Moreover, there are numerous potential responses to a rescission claim. Many insureds overlook the fact that the first element is whether there was a duty to disclose in the first instance. There is a duty to disclose only if the insured subjectively understands the information is material. (We discussed this issue in detail in a recent blog post, click here.) There is no indication in the record whether the insurer offered any proof on that issue or whether the insured could have raised a triable issue on it. On its face, there is no reason to think the insured would have considered that fact particularly material. Second, insurer testimony of materiality is often self-serving hindsight. An insured can challenge the insurer’s evidence of materiality by deposing the underwriter, presenting contrary expert testimony, and/or conducting written and document discovery to test the assertion of materiality, including discovery of other policy applications and whether a premium was raised or a policy denied for a similarly situated insured.