California Court Denies Rescission of Insurance Policy

In its recent decision in Thompson v. Navigators Ins. Co., 2012 U.S. Dist. LEXIS 60122 (S.D. Cal. Apr. 30, 2012), the United States District Court for the Southern District of California considered whether an insurer was entitled to rescission of a general liability policy issued to a contractor based on misrepresentations concerning the nature of work it would be performing.

Like most rescission cases, the insurer, Navigators, did not learn of the grounds for rescission until its insured, TBI, was named as a defendant in an underlying lawsuit.  TBI had been hired to repair a roof on a commercial structure that had been damaged in a fire.  During the course of the repair work, an employee of another contractor was injured when he fell through a hole in the roof.  After receiving notice of suit, Navigators rescinded the policy based on material misrepresentations made in the policy application.  In the ensuing coverage litigation, Navigators claimed that if it was not entitled to rescission, that in the alternative, coverage was unavailable on other grounds, including the ground that coverage was limited to the insured’s work on residential structures.  The court considered each of these issues on motion for summary judgment.

Navigator’s first basis for rescission was based on TBI’s response to an application question asking whether the insured engaged in “structural demolition.”  TBI answered “no” to this question.  The invoice for the work in the underlying matter, however, stated that TBI was performing “demo roof.”  TBI argued that all contractors necessarily perform some degree of “demo” work when they remove existing parts of structures to complete their jobs.  Such work, TBI contended, is different than the industry understanding of “demolition,” which is demolition and removal of an entire structure.  The court concluded, based on this argument, and because Navigators failed to provide a satisfactory definition in response, that “demolition” as used in the application was ambiguous, and as such, summary judgment was unavailable on this particular alleged misrepresentation.

The court concluded similarly with respect to the application question asking whether there had been or would be “[r]oofing performed by the applicant.”  TBI answered “no” to this question.  TBI conceded that its contract in the underlying matter involved work on a roof.  It nevertheless contended that within the construction industry, roofing generally refers to installation of the waterproofing system, such as shingles.  TBI was not performing this type of work, but instead was performing framing on which waterproofing later would be installed.   Navigators, on the other hand, pointed to the fact that the policy application stated that “[a]ll roofing work must be subcontracted,” thus indicating that any work performed in connection with a roof, whether relating to waterproofing or framing, would not be covered if performed by the insured.  In light of the competing proposed definitions, the court found the term “roofing” to be ambiguous, and thus denied summary judgment on this misrepresentation as well.

The court also rejected Navigators argument that rescission was proper based on TBI’s representation in the application that it performed 100% residential work, and that the project giving rise to the underlying action was a commercial building.  Navigators argued that this misrepresentation was material, since it would have charged a higher premium had it known that TBI was performing work on commercial projects.  The court, however, found a question of fact as to whether Navigators actually would have charged a higher premium.

Finally, Navigators argued that rescission was proper based on TBI’s response to a question as to whether it would perform any repair or remediation of fire damage.  TBI answered no to this question.  While the underlying project was, in fact, repair of a roof that had been damaged by a fire, TBI argued that this misrepresentation was not material, and pointed to inconsistencies in Navigators’ underwriting guidelines as to whether the company would insure such work.  These inconsistencies, the court held, precluded a grant of summary judgment in Navigator’s favor.

Having held that summary judgment was inappropriate on rescission, the court turned to Navigator’s argument that the underlying matter did not fall within the policy’s scope of coverage, which was limited to work on residential structures.  The policy’s declarations identified TBI’s business as “CONSTRUCTION OF RESDIENTIAL PROPERTY NOT EXCEEDING THREE [sic].”  Navigators contended that the declarations defined the policy’s scope, and that as such, TBI’s work on a commercial structure was not within the policy’s coverage.  The court, however, found the policy ambiguous on this point, noting that, “it is not completely clear that the unfinished phrase ‘Carpentry – Construction of Residential Property Not Exceeding Three’ excludes all coverage for commercial property in all situations.”  For instance, explained the court, “TBI may have believed that carpentry was permissible on any type of building but ‘construction’ work was limited to residential property not exceeding three stories.”   More significantly for the court, the policy did not clarify the scope of coverage within the insuring agreement or by endorsement.  In other words, the identification of TBI’s business in the policy declarations, in the absence of any further reference to this in the remainder of the policy, did not definitively define the policy’s scope of coverage, at least for the purpose of summary judgment.

Notwithstanding the court’s ruling against Navigators on rescission and on the scope of the policy’s coverage, the court rejected TBI’s argument that by having rescinded the policy, Navigators was precluded from arguing coverage defenses.  Thus, Navigators was not barred from arguing scope of coverage and other applicable exclusions at trial.