When applying for insurance, prospective (or existing) insureds are frequently asked to confirm, either in a formal application or in a side letter, that they are not aware of any circumstances, incidents or events that could result in a claim being made against it. If the insured identifies any potential claim, the insurer will either decline coverage or exclude the identified, potential claim from coverage.
But if the insured answers “no,” which is typically the case, the insurer issues the policy and collects the premium. If a claim is eventually made under the policy, the insurer will often review the insured’s application answers to determine if the claim should have been disclosed and whether there is a basis for denying coverage based on misrepresentation or concealment. But does an insured’s application answer truly justify such a defense? In answering application questions, is the insured supposed to speculate about future events? Maybe not, at least in some states.
California Civil Code Section 339 rejects subjective judgments as a basis for misrepresentation defenses
In California, for example, application answers that are based on an insured’s opinion cannot be the basis for rescission. California Insurance Code § 339 states: “Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question.” In other words, questions in an insurance application that require an insured’s subjective judgment cannot be the grounds for a claim of misrepresentation or concealment.
Insurance application questions that ask the insured to identify circumstances that it believes may result in a future claim, or ask the insured to opine on the likelihood that it could be held liable in the future, seek the insured’s subjective opinion. That type of judgment call cannot justify a defense of misrepresentation or concealment in California under Section 339. What a party believes or does not believe is not objective factual information.
The Ninth Circuit agrees that statements of opinion cannot support a misrepresentation defense
The Ninth Circuit is in accord. It has reviewed the same issue with respect to an insured’s answers in a professional liability insurance policy application. In James River Ins. Co. v. Schenk, 523 F.3d 915 (9th Cir. 2008), the insurance application at issue read:
After inquiry, are any [lawyers within the firm] aware of any circumstances, allegations, Tolling [sic] agreements or contentions as to any incident which may result in a claim being made against the Applicant or any if [sic] its past or present Owners, Partners, Shareholders, Corporate Officers, Associates, Employed Lawyers, Contract Lawyers or Employees or its predecessor in business?
Id. at 918 (emphasis added).
The question sought the insured’s subjective assessment as to whether past occurrences might give rise to future claims. The Ninth Circuit found that a reasonable person could conclude that the question “elicited a statement of opinion” and held that a statement of opinion could not be the basis of a claim for legal fraud. Id. at 922. The James River court found that questions asking the insured as to whether an incident “may result” denotes something more than a purely theoretical possibility of a lawsuit. The court reasoned: “Whether the factual circumstances concerning any individual client gave rise to a sufficient probability of legal action was a judgment call reflecting an analysis of those circumstances.” Id. at 921-22 (emphasis added).