good morning others and lisa darling alderson i represent star insurance company in this case and i would like to reserve five minutes of the end for a reply and i'd like to climb the california insurance code recognizes that for the insurance market work insurers have to be able to rely on the representations of the new at the insurer when deciding whether or not to accept a risk obviously the more time and money and it sure has to spend during the underwriting process the slower the process a policy issue which will be in the higher the premiums the california insurance code places an affirmative obligation on both parties to a contract to communicate all material facts this disclosure obligation applies in many circumstances even if a specific question was not directly asked over article one section three thirty three and three thirty six lists some certain circumstances where a question  inquiry made before an insured is obligated to disclose certain types of information if material facts are concealed article one section three thirty one provides that a policy can be rescinded once a representation is made however whether voluntarily or in response to an inquiry the insurance co provides the parties the right to rely on those representations and if a representation is false complaint alleged actions under california and surance code provisions covering concealment so why doesn't the law of waiver why does the law waiver not apply well first of all i'm not arguing that the law of labor doesn't apply at all by the common law waiver standard the intentional relinquishment of the of a known right i believe that would apply what i argue does not apply in section three thirty six of article one of the insurance code now yes you're right our complaint alleged alternative theories of possible rescission we argue both concealment and misrepresentation but what was this established improved on summary judgment was a actual material misrepresentation in writing in applications and in e mails section three thirty one in context of article one is talking about when an insurer must ask the question in order to proceed with a concealment argument against insured when there was silence when there should have been speech they say there are times that the code says there are times when there should have been a question asked article two does not refer to that section and anyway article two does refer back to the article one's definition of materiality post claim inspection report showed that sixty five percent of sun west revenue came from recycling paper products doesn't that report reflect that that star had and that's to get it send my sop aeration surlier it would have it that  they had done that it would have discovered the truth that a significant part of its business with paper processing you know the sixty five percent people in plastics was not discovered by star until after the fire last after star had hired a forensic accountant to go through all of sun west metals daily receipts at a cost of thirty five thousand dollars to start and to discover was the annual revenue percentage that was the true percentage the inspection that happened during the course of the policy a brief general liability inspection the insulation were obviously you talked about the paper and all of that and then you asked for some answers and then you didn't when you got vague answers back you didn't do anything and then the fire happens two years later right that was i disagree with that characterization of the inspection said that the description of the stock on site was aluminum glass and paper you know the only one of those that is a concern under our guidelines paper the inspection report and you'll find this at the excerpts of record five twenty nine also said that the maximum and minimum value of the stock on site there was only between ten and twenty thousand dollars we're talking about a five million dollars five to six million dollars per year operation according to the application that star had received so the fact that a third maybe a third or less of tend to thousand dollars on site this one particular day involve paper did not notify star that there that the paper was actually sixty five percent of their of their business operation now we talked a little bit about the wave of standard the waiver standard under common law is the intentional relinquishment of a known right the california supreme court has explained that waiver always rests on intent is the waiver standard that applies in any context including rescission of an insurance policy but our district court here did not apply this law did not  me that there was an intentional relinquishment of a known right according to establish a waiver law that just a court needed to find its star actually knew it had the right to rescind at some earlier point in time the district court did not make that finding based on the findings of fact it could not have made such a finding and said the district court held that all at some west had to prove was that starr was in possession of information that distinctly implied that sun was paper and plastic processing exceeded the amounts represented that what the statute says it uses the term distinctly implied that is what section three thirty six says about when an insurer has to make an inquiry and the and the district court failed to even analyze  the judge did not state that part of the rule the judge did not apply that part of the rule and did not analyze whether or not the inquiries made which satisfy and avoid the waiver under that statute regardless in all cases in the last thirty years  waiver in the context of the rescission of an insurance policy all courts have said that this common law we were standard of the intentional relinquishment of a known right apply since even when section three thirty six it seems to me that if you had just gone on their that the big part of their business was cardboard and paper your client rather well the my client did go to the website and did review that and remember a website is an advertisement a website is not a financial report that says you know what we are percentage of revenue is going to be much it wouldn't make you a little suspicious i mean the problem here is that insurance companies the reason this law exists is that insurance companies can survive deliberate or blind indifference to what's actually going on and take the premiums from an insured wait till there's a lot and then obvious and go aha we have grounds for and that's what the law protects against that's not what happened here our underwriter did review that website and in response to reviewing that with website sending e mail that you can find excerpts of record for eighteen that said on the questionnaire you so the question was asked a response was received when we got in the inspection report which which you mentioned before and after the inspection report a second e mail was sent specifically asking noting there was a discrepancy saying in review of the physical inspection it indicates the operations consist of purchasing aluminum glass and paper but your supplemental said you were it was aluminum and i am please confirm and in response we got the deliberate deception in response starr was told each day the amount varies the day the inspector came in and they have had slightly different numbers the application is the average of the entire policy year and there was no reason based on the information that starr ha the to know that that was false the numbers that were provided this four million in sales of aluminum in one million in sales veyron steel that boarded with the information provided in the original application in order to know that it had the right to rescind star had to not just suspect that the information provided on the application was not correct and also had to know that the true information would have been material to its underwriting to sir are you ar district court found eight grounds and which that evidence should have distinctly implied that it had a right to it should have investigated further are you application of the law to these facts under this case because while suspicions may have been raised the evidence was that starr noticed that followed up on that inquired further asked the only party who had the answer the only part know making some independent further investigation it yourself and he certainly did that after the loss bret correct at edison again expense that was more expensive than the cost of the premium and that's something else that has to be considered here  california insurance co says that you can rely on the representations of the insured and it does that for a reason because you can't spend more money than the premium collected trying to figure out if they're lying to you we followed up we asked them questions we got in response the broker was an agent of some less metals star had no reason to believe that the broker was completely making things up without talking to some less except for their stuff that's going on in twenty eleven twenty and twenty two thousand eight prepared by the california workers comp independent review board the report stated that ten weiss operations consist of buying and selling non ferrous scrap metal approximately sixty percent ferrous metal two percent newspaper computer paper cardboard thirty five percent and c r v bottles glass three percent and that was all before the renewal and then also i think in january of two thousand and twelve there was a second site inspection was commissioned pursuant to sun was application for worker's comp policy on that day of the site visit san west received hundreds of thousands of pounds of cardboard and more than twenty one thousand pounds of c r b plastic apparently  apparently neither jia see what g j sullivan or meadowbrook reviewed this report so let me there's a lot of things that are going on and then you actually go to a renewal if there's no doubt that sun west misrepresented things but that being said there's there were a lot of things says judge one i said that the district court found it and as things that put them on notice to do more investigation are to follow through and your honor those things came in during the first policy period and that did you see i r b report that you mentioned was almost four years old at the time came in and after that report came in there was a requirement of a signed supplemental application on renewal and in when as far as to send a notice of cancellation when that signed supplemental application was not our state we've used almost all your time if you want to save any time for rebuttal you might want to think you hold the arrows in your quiver there and let's start with the standard then because i think it's important to the court understand the procedural posture which this went to trial and that is that judge carter term and on summary judgment the star had so he went to trial on what was essentially a three affirmative defenses a waiver chante i can't hear you can you please tell them to be quiet in the hall this is law students from irvine  we went to trial on three affirmative defenses one was a statutory waiver under insurance code three thirty six which is then quoted earlier today and all complained they see it the other was a latch is firm and of defense in the of insurance code twenty seven and twenty seventy one to rescind once there's been a long lost in connection with a fire case like this you have to prove actual fraud that is an intention to deceive on the part of the insured and there are good reasons for that rule because if you look at property policies there are often times what i'll call innocent co insurance who can be involved there are all here your client doesn't really fall in that category to be perfectly honest but that being sad i mean it's it appears that the court thought that your client did make some misrepresentations but it was but that they were but that star put a blind eye to it didn't follow it through and then wait until there was a catastrophic disaster and then said oh we want to rescind now well i i beg to differ you made representations in your claim to know without the knowledge or authorization of my client and they're not only did he find out there's not one shred of evidence in the record to suggest my client didn't know where i'm done that get all the financial information they made it up that from it's ok send wes recovered from star on it's breach of contract claim right that's the one that correct that's the one that you won and the district court offset that award based on some white settlement with now what i guess and i didn't offset all of it just the part that they believed was as to the damages because dunlap didn't dunlap settlement so but this offset wasn't the attorney's fees it was for the physical plant it was and so and that was and so i know that you you cite certain cases that seem to i think sound in tor cite for the proposition that the collateral source rule applies to contract damages because it seems to me that looking at this your client was made whole and it would be a double recovery well i don't think the client was made whole under under any circumstances and i think i think the ok got all the money between dunlap and starr got the money for the premises fire right well i don't think that the that that would be if you if you accept that the offset should have been given a collateral solution should not why that's true but there is there is no statutory authorization whatsoever for application of an for a offset when you are joint on a contract but there is we cited one decision to you i think two decisions one was that the shell oil case on this particular topic and the other was the s e c case which is a district court case it's judge carter and what you had there was a settlement with a bank that was sued on a breach of contract action in the later on the that and that which was a breach of contract i think also and that i think it's best rad as endorsing a broader equitable doctrine of preventing double recovery for contract out damages while there certainly cases that talk about not allowing double recovery where you have a single plaintiff for example seen suing a single defendant and proceeding on more than one theory say fraud and contract i'm not aware of any case that  contemplated that that part of that settlement was allocated to attorneys fees which of course was disputed it was contested it was a compromise in the attorney's fees continue to mount as we sit here today close to mine now and you know i want to come back i suppose to the i've addressed the what standard should we be held to issue i believe which is pretty clear and or th under both the contract at least under the contract and the reason for the case as well but in the statutes as well but the whole waiver issue even under the standard that we were held to keith richards are me sweet little lies is that what you are you know the tune get out ok you don't have to mean it and just say those words to me and i want to hop in here was you had mr king who is the lead underwriter for an insurance company who when he ok and star sent their own last inspector out there you went out there twice for two different inspections the first day he was there five hundred thousand pounds of cardboard got processed on that site i purged you to look at the supplemental excerpts of record in this case which depict in graphic terms what this what this site looks like an old trial judge once told me duke your case whatever you do is got to preserve the appearances which means you've got to acknowledge what any fool can see and if you look at those pictures and look at that website you can walk out on that premises without tripping over cardboard or paper  further to say on that i think i've addressed everything i have to say your honor i briefed it extensively and i appreciate the court's time indulgence thank you very much counsel like to focus just a little bit on the issue of materiality now to know that starr had a right to rescind had to know not just that the information was false but that the true information would have cost their underwriters to make a different decision here courts have explained that an incorrect answer on an insurance application is not grounds for recision where the true facts if you know would not have made the contract less desirable to the insurer now we've heard a lot about the amount of pounds of cardboard that would have been on site on one particular day or even many days but materiality is a subjective test under the law it is a reasonable unsure standard does not apply if you did it it does not matter opinion or what the district court's opinion is about what metric starr should have used in determining whether or not to accept this risk they might say you should have used volume or pounds rather than in your revenue but the way star scrappy was program was set up the way the supplemental questionnaire the questions were asked was a percentage of annual revenue write that it is it doesn't seem that that send less medals even understood what your program was well that is some some level beside the point because star asked the question they needed for their application in order to figure out whether they felt within their guidelines and they followed the the information that was provided in making their decision for one for two mr dunlap did know mr dunlap had tried to get a different insured in called bethel plastics and was told this is a scrap metal program so there was some knowledge there of some less agent that this was meant to be a scrap metal program now the percentage of anal revenue is what was announced a one day inspection of how much cardboard is on site that there's not going to tell you the percentage of annual revenue cardboard is worth like one fourteenth as much as aluminum it could be quite a bit there and it's might have been worth less than the aluminum that was on site there is nothing in any of the case law about recision and labor that says an insurer has to go through and hire a forensic accountant certainly put you on notice of something it would be like you know i don't worker's comp thing that they have a video of the guy up on the rough well that doesn't tell you what he could do every single day but the fact that he could climb up on the raft one day or you know when you go out there and there's cardboard all over the place that would be very concerning which is why after they got the inspection report they asked they asked this looks different then what was told to us in the application is this right what are your actual operations and they were given a deliberate action every day the amount varies what we're giving you is the annual revenue but we told you was correct why would star not believe that all right thank you counsel your for your time thank you there are insurance