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Navigating the complex landscape of California’s insurance regulations, particularly when dealing with non-admitted insurers, is a challenge many policyholders face. At the heart of the non-admitted insurer challenge lies a powerful but underutilized tool: The Unauthorized Insurers Process Act, codified at California Insurance Code Section 1610, et seq. Section 1616, is a key component of the Act and yet is often overlooked by policyholders faced with a coverage dispute involving a non-admitted insurer.  

Admitted versus non-admitted insurers in California

An “admitted” or “licensed” insurer is an insurance company that must file its rates with the Department of Insurance (“DOI”) and is required to participate in the California Insurance Guarantee Association (“CIGA”). In the event that an admitted insurer becomes insolvent, CIGA is supposed to step in and pay covered claims, subject to various statutory limitations. 

Conversely, a “non-admitted” or “surplus lines” insurer is allowed to conduct business in California but is not required to file its rates with the DOI and is not a member of CIGA. By not filing rates with the DOI, non-admitted insurers sometimes have more flexibility in the coverage offered and the prices charged.  The DOI maintains a List of Approved Surplus Lines Insurers (“LASLI”) that has met certain capitalization requirements, but the DOI also permits non-U.S. domiciled alien insurers to issue coverage in California that has not met those standards. Thus, the financial strength and stability of a non-admitted insurer can sometimes be significant issues.Continue Reading Empowering policyholders: Forcing non-admitted insurers to post a bond before answering a complaint

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). Continue Reading Insurance applications seeking an insured’s subjective opinions cannot support insurer defenses of misrepresentation or concealment