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The Ninth Circuit ruled that an insurer was entitled to rescind a policy based on the policyholder’s misrepresentation in the application, notwithstanding that the application question at issue was grammatically confusing.  Western World Ins. Co. v. Professional Collection Consultants, 2018 WL 259309 (9^th Cir. Jan. 2, 2018).

In 2013, FBI agents executed a search warrant at the offices of Professional Collection Consultants (“PCC”) and issued subpoenas to several PCC employees.  In 2014, PCC applied for and obtained D&O insurance from Western World Insurance.  In 2015, Western sought to rescind the policy based on a material misrepresentation relating to the following question:  “None of the individuals to be insured under any Coverage Part (the ‘Insured Persons’) have a basis to believe that any wrongful act, event, matter, fact, circumstance, situation, or transaction, might reasonably be expected to result in or be the basis of a future claim?”  PCC answered “no” to this question.  A California federal district court granted Western’s summary judgment motion for rescission and the Ninth Circuit affirmed.

The Ninth Circuit held that rescission was appropriate because PCC’s answer was a material misrepresentation in light of the prior FBI investigation.  The court rejected PCC’s contention that the response was not a misrepresentation because when read literally, the negative response was grammatically accurate (i.e., PCC was aware of circumstances that could lead to a claim).  The court reasoned that the overall context of the question indicated that the question was asking about possible claims, even though it was inartfully worded.  In particular, the court noted that the application instructions indicated that a “yes” response would require additional information and could affect the terms and conditions offered.  The court also rejected PCC’s assertion that the answer was immaterial because the question was only required for applicants seeking increased policy limits.  Given the relevance of the FBI investigation to the insurer’s assumption of risk, the court deemed the information material as a matter of law.