9th Cir. Affirms D&O Carrier’s Rescission of Policy Based on Insured Debt Collection Agency’s Misrepresentation of Fact in Application

In August 2013, FBI agents executed a search warrant at the offices of Professional Collection Consultants (“PCC”). Over the next several months, investigators subpoenaed several PCC employees and PCC produced thousands of documents. In February 2014, PCC applied for directors and officers liability insurance from Western World Insurance Co. (“Western”), and Western issued PCC a policy. PCC had submitted (and Western accepted) a CNA insurance renewal application form, even though Western is not a CNA Company and PCC was not renewing a Western policy. In 2015, Western moved to rescind the policy on the basis that PCC made a material misrepresentation in its application. The disputed question read: “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 marked “No.”  The district court granted Western’s summary judgment motion for rescission and denied PCC’s request for additional discovery. PCC appealed. We have jurisdiction under 28 U.S.C. § 1291. . . We affirm.  1. PCC’s answer was a material misrepresentation because it was aware of existing circumstances – the federal investigation – that could lead to a claim covered by the policy. Under California law, a party may rescind an insurance contract if the other party made representations “false in a material point.” Cal. Ins. Code § 359. “Materiality is determined solely by the probable and reasonable effect which truthful answers would have had upon the insurer.” Thompson v. Occidental Life Ins. Co., 513 P.2d 353, 360 (Cal. 1973); see also Cal. Ins. Code §§ 334, 360. The materiality inquiry is a “subjective test viewed from the insurer’s perspective.” Superior Dispatch, Inc. v. Ins. Corp. of N.Y., 104 Cal. Rptr. 3d 508, 520 (Ct. App. 2010), as modified on denial of reh’g (Feb. 22, 2010). “[R]escission effectively renders the policy totally unenforceable from the outset so that there was never any coverage and no benefits are payable.” Imperial Cas. & Indem. Co. v. Sogomonian, 243 Cal. Rptr. 639, 645 (Ct. App. 1988); accord U.S. Fid. & Guar. Co. v. Lee Invs. LLC, 641 F.3d 1126, 1136 (9th Cir. 2011).  PCC contends that it did not misrepresent the truth because, if the application question is read literally, PCC’s “no” answer informed Western that PCC was aware of circumstances that could lead to a claim. However, the form instructions stated that a “yes” answer would require applicants to provide “detailed information” about their answer and could precipitate “substantially different terms and conditions.” PCC provided no additional information to explain its answer. Given that context, Western reasonably understood PCC’s answer to mean PCC was not aware of any circumstances that could lead to a claim. The policy covered claims arising from, inter alia, a civil, regulatory, criminal, or administrative proceeding or investigation against PCC or any of the individual insureds. Although PCC claims it thought the federal investigation was over before PCC completed the application,¹ the only reasonable conclusion is that the federal criminal investigation, even if closed or on hold, nonetheless might lead to a claim under the policy.  PCC also contends its answer was immaterial because the question was required only for applicants who, unlike PCC, sought increased policy limits. Specific demand for information “is in itself usually sufficient to establish materiality,” Thompson, 513 P.2d at 360, but not necessary. Courts also “inquire into the nature of the information withheld.” Taylor v. Sentry Life Ins. Co., 729 F.2d 652, 655 (9th Cir. 1984). Put simply, a misrepresentation is material when it “regard[s] the nature of the risk to be insured.” Merced Cty. Mut. Fire Ins. Co. v. California, 284 Cal. Rptr. 680, 685 (Ct. App. 1991). PCC was not entitled to misrepresent the truth about the investigation simply because Western did not ask a specific question.