Recycler’s breach of contract claim against fire insurer upheld

A Meadowbrook Insurance Group unit should have investigated a broker-submitted fire insurance application that had “material misrepresentations,” says a federal appeals court, in upholding a breach of contract claim filed by a policyholder in connection with the insurer’s rescission of the policy following a fire.

Anaheim, California-based Sunwest Metals Inc. operated a recycling facility that processed various commodities including metals, plastics paper and glass, according to Thursday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Star Insurance Co. v. Sunwest Metals Inc.

Beginning in 2011, Sunwest had fire coverage through a scrap dealers program operated by Meadowbrook Insurance Group unit Star Insurance Co., based in Southfield, Michigan. To be eligible for the program, no more than 15% of a prospective policyholder’s revenue may come from paper and plastics processing.

Sunwest Metals’ broker, Tristan, California-based Thomas Dunlap Insurance Agency, unbeknownst to Sunwest, represented that nearly all of Sunwest’s revenues came from metal processing, when in fact paper processing comprised nearly 66% of its revenue, according to the ruling.

In April 2013, Sunwest suffered a catastrophic fire and filed a claim under its policy. Instead of honoring the policy, however, Star rescinded it, based on the application’s misrepresentations. 

Sunwest filed suit against Star in U.S. District Court in Santa Ana, California, charging breach of contract. After a five-day bench trial, the District Court granted judgment in Sunwest’s favor, finding it was owed nearly $978,000 under the policy. The court determined Star had waived its right to rescind by failing to investigate evidence of misrepresentation.

On appeal, a three-judge appeals court panel unanimously agreed with the lower court.

“The District Court identified numerous pieces of evidence spanning nearly two years” that implied the falsity of information in Sunwest’s insurance applications, said the ruling.

“The District Court did not clearly err in finding that Star had before it information that ‘distinctly implied’ material misrepresentations, and that if failed to satisfy its duty to investigate such evidence,” the ruling said. 

“The duty of inquiry requires an insurer to not only ask questions, but also to investigate answers … Here, Star made inquiries, but then ignored the inadequacy of the answers it received. 

“Having turned a blind eye for nearly two years, Star waives its right to rescind when Sunwest filed a claim,” said the panel, in affirming the lower court ruling.