Rescission of Insurance Contracts

Rescission is the legal cancellation of an insurance contract, with the effect of restoring both parties to the position they were in before the contract was made. In other words, it is as if the policy never existed. This remedy is available when one party—usually the insured—has failed to uphold their legal duties of honesty and disclosure.

When Rescission Is Allowed?

Under the California Insurance Code, insurers have the right to rescind a contract under several circumstances:

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• If an insured makes a false statement about a material fact in their application, the contract may be rescinded.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 obligations. Typically, the insurer will return any paid premiums, and the insured forfeits any right to claim benefits.
• 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. While fraud almost always justifies rescission, even innocent (unintentional) concealment can be grounds for rescission if it relates to a material fact.

Example #1

Suppose an applicant for health insurance fails to disclose a diagnosis of diabetes. Even if the omission was accidental, the insurer may rescind the policy once the omission is discovered, since knowledge of the condition would have influenced underwriting and pricing decisions.

Example #2

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 medical history was omitted.

Is this concealment?

Can the insurer rescind the contract?