Insurance contracts are unique because they are based on the principle of utmost good faith (uberrima fides). This means both the insurer and the insured must act honestly and disclose all material information. Failure to do so can alter, void, or otherwise impact the contract. California Insurance Code (CIC) outlines several important legal concepts that govern this duty:
Representations (CIC §§ 350–361)
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Definition: A representation is a statement made by the applicant during the insurance process (usually on the application).
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Key Statutes:
- §355: A representation may be altered or withdrawn before the contract is issued.
- §358: A representation is considered false if the facts do not match the assertion.
- §354: A representation may become an implied warranty, but never an express one.
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Example: An applicant states they are a non-smoker when applying for life insurance. If they actually smoke, that statement is a false representation and may lead to policy rescission.
Misrepresentation (CIC §§ 780–784)
Warranty (CIC §§ 440–449)
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Definition: A warranty is a statement or promise made in the policy that must be strictly true and complied with.
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Types:
- Express Warranty: Written directly into the contract. Example: A fire insurance policy that expressly requires the insured to maintain an operational sprinkler system.
- Implied Warranty: Not written, but assumed based on conduct or purpose. Example: A business storing explosives has an implied duty to follow safety standards.
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Consequence of Breach: Violation of a material warranty gives the insurer the right to rescind coverage.
Concealment (CIC §§ 330–339)
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Definition: Concealment is the failure to disclose or communicate material facts. This can be intentional or unintentional, the important part is if the concealed/omitted fact is material.
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Key Statutes:
- CIC §331: Either type of concealment entitles the injured party to rescind the contract.
- CIC §333: Exceptions—certain (immaterial) facts do not have to be disclosed, including:
- What the other party already knows.
- What the other party should know in the ordinary course of business.
- What the other party has waived.
Facts that prove the existence of an excluded risk.
- Facts that relate to an excluded risk.
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Example: If an applicant forgets to disclose a minor past claim that the insurer already has access to in a database, this omission may not constitute concealment.
Materiality (CIC §334)
- Definition: A fact is considered material if it would influence the insurer’s decision-making regarding coverage, premium, or contract terms.
- Important Point: Materiality is judged not by whether the omission or misstatement actually caused a loss, but by whether it could have reasonably influenced the insurer’s decision.
- Example: If an applicant fails to disclose a history of DUI convictions, even if no claim arises from drunk driving, that information is still material to the underwriting decision.
Fraud (CIC §§ 338, 1871.1–1871.4)
- Definition: Fraud is the intentional misrepresentation or concealment of a material fact with the purpose of deceiving another party.
- When it occurs: Fraud may arise during the application process (e.g., lying about prior claims or medical history) or when filing a claim (e.g., staging an accident, inflating damages).
Consequences:
- Grounds for rescission of the contract or denial of a claim.
- May result in criminal penalties, including fines, restitution, and imprisonment.
- Insurance fraud is aggressively prosecuted in California, often in coordination with the CDI Fraud Division.
