Rescission of insurance contracts
Rescission
Rescission is the legal cancellation of an insurance contract that restores both parties to the position they were in before the contract was made. In practical terms, it’s treated as if the policy never existed. This remedy is available when a party - most often the insured - fails to meet legal duties of honesty and disclosure.
When is rescission allowed?
Under the California Insurance Code, insurers may rescind a contract in several situations:
Intentional and fraudulent omission - CIC §338
- If an applicant intentionally leaves out information that is material to the risk, the insurer may rescind the contract.
Example: An applicant for life insurance fails to disclose a known heart condition.
False material representation - CIC §359
- If an insured makes a false statement about a material fact in the application, the contract may be rescinded.
Example: Stating you are a non-smoker when you smoke a pack a day.
Violation of a material warranty or provision - CIC §447
- A warranty is a statement or promise in the policy that must be strictly true and complied with. If the insured violates a material warranty, rescission is permitted.
Example: A commercial property policy requires the insured to maintain a sprinkler system, but the insured disables it.
Concealment - CIC §331
- Concealment is the failure to disclose material facts, whether intentional or unintentional.
- CIC §331 specifically states: “Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.”
Example: Forgetting to disclose a past DUI conviction on an auto insurance application.
Key considerations
- Rescission is retroactive. The contract is void from the beginning, and both parties are released from their obligations. Typically, the insurer returns any premiums paid, and the insured gives up any right to claim benefits under the policy.
- Materiality is critical. The misstatement, omission, or concealment must be material, meaning it would have influenced the insurer’s decision to issue the policy, set the premium, or exclude certain risks.
- Fraud vs. innocent mistake. Fraud almost always supports rescission. But even an innocent (unintentional) concealment can justify rescission if it involves a material fact.
Example questions
- An applicant for health insurance fails to disclose a diagnosis of diabetes.
Can the insurer rescind the policy?
Yes. Even if the omission was accidental, the insurer may rescind once the omission is discovered, because the condition would likely affect underwriting and pricing.
- Brenden applies for life insurance but fails to disclose his recent diagnosis of high blood pressure. He dies six months later of a stroke. The insurer investigates and discovers the omitted medical history.
Is this concealment?
Yes. He failed to disclose a material fact.
Can the insurer rescind the contract?
Yes. Under CIC §331 (Concealment) and CIC §338 (Intentional and fraudulent omission), the insurer is within its legal rights to rescind.