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Comp policy can be rescinded for material misrepresentations

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An insurer may retroactively rescind a workers compensation policy because the insured misrepresented employee activities on its application for a policy, a California appeals court ruled.

Dallas-based Southern Insurance Co. issued a workers comp insurance policy effective Jan. 1, 2009, to California-based concession trucking company EJ Distribution Corp. based on an application that indicated covered employees would not travel out of California or outside of a 200-miled radius. In April 2009, David Berrios-Segovia injured his back while lifting a latch to his truck during a trip to Tennessee for the employer. He filed a workers comp claim in May 2009, according to court documents in Southern Insurance Co. vs. Workers’ Compensation Appeals Board, EJ Distribution Corp. et al.

In June 2009, Southern notified the company that it was rescinding its comp policy based on material misrepresentation or concealment of material facts, saying it would not have issued the policy if the application had indicated employees would be involved in long-haul trucking, and it returned premiums to EJ Distribution of $19,743.03, court documents show.

During mandatory arbitration, the arbitrator found that the policy could not be retroactively rescinded based on ambiguity about rescission in the state’s insurance code, lack of authorization from the workers comp appeals board or a judge, and because a claim was pending. The arbitrator determined instead that the policy was prospectively cancelled as of June 2009 and that Mr. Berrios-Segovia’s injury was covered by the policy.

After the arbitrator denied Southern’s petition for reconsideration and the Workers’ Compensation Board adopted the arbitrator’s report, the insurer petitioned the court for a writ of review, which was granted in January 2017. Southern raised four questions: whether the appeals board had jurisdiction over rescission of a comp policy; whether rescission of a comp policy is permitted; whether California insurance code statutes control or prevent recession of comp policies; and whether statutes or public policy considerations warrant preclusion of contract rescission in comp claims.

A three-judge panel of the second district court of appeals in California in Los Angeles determined that the workers comp appeals board has jurisdiction over issues of coverage, although it said the insurer is free to litigate contractual disputes in court. However, the court said the issue of whether Southern’s rescission was legally effective remains factually open and unresolved.  

“Contrary to the arbitrator’s ruling, a workers’ compensation insurance policy may be rescinded,” the court said in its ruling published Monday. “A recession is enforced by a civil action for relief based on recession or by asserting recession as a defense. Because the arbitrator and the appeals board did not address and determine whether rescission was a meritorious defense to the employee’s claim, we annul the appeals board’s decision and remand the case with directions to hear and determine whether the insurer was entitled to rescind, and did rescind, the policy.”