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Insurer can rescind D&O policy despite confusing application form


A federal appeals court has upheld a lower court ruling and held an insurer was entitled to rescind a directors and officers liability policy based on a “material misrepresentation” in its application form.

But a dissenting opinion in the case says a confusingly worded question in the policy form means the insurer should not have been allowed to rescind the policy, even though both the insurer and insured apparently misinterpreted the question.

In August 2013, FBI agents executed a search warrant at the offices of Culver City, California-based Professional Collection Consultants and over the next several months subpoenaed several PCC employees, with the firm producing thousands of documents, according to Tuesday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Western World Insurance Co. v. Professional Collection Consultants.

In February 2014, PCC applied for D&O liability insurance from Parsippany-Troy Hills, New Jersey-based Western World, according to the ruling.

One of the questions on the application form was: “None of the individuals to be insured under any Coverage Part (the ‘Insured Persons’) have a basis to believe that any wrongful act … might reasonably be expected to result in or be the basis of a future claim?”

The applicant was to answer “yes” or “no,” and PCC responded “no.”

In 2015, Western World filed suit in U.S. District Court in Pasadena, California, to rescind the policy on the basis that PCC had made a material misrepresentation in its application in response to this question. The District Court granted Western World’s summary judgment motion for rescission and denied PCC’s request for additional discovery.

The 2-1 ruling upheld the District Court ruling. “PCC’s answer was a material misrepresentation because it was aware of existing circumstances — the federal investigation that could lead to a claim covered by the policy,” said the ruling.

“Under California law, a party may rescind an insurance contract if the other party made representations ‘false in a material point,’ said the ruling, in quoting the statute.

The dissenting opinion, however, states the “no” answer amounted to, in effect, a double negative. “As a matter of English grammar, the answer checked — ‘no’ — was accurate,” said the dissent. “‘No’ signified that it was not true that one of the Insured Persons had reasons to expect a claim — in other words, that some Insured persons did have reason to expect a claim.

“I recognize that neither Western World nor PCC so read the question initially. But the rules of grammar do not bend because of inaccurate reading, or because of inattention to those rules when drafting an application. Whatever the parties’ impressions or intentions, the answer was correct,” the ruling said.