Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_99-cv-05461/USCOURTS-caed-1_99-cv-05461-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgement (Insurance)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

CLARENDON NATIONAL INSURANCE ) 

COMPANY, a New Jersey )

Corporation, )

 )

Plaintiff, )

)

v. )

)

INSURANCE COMPANY OF THE WEST,)

a Texas Corporation, et al., )

)

)

 Defendants. )

______________________________)

)

INSURANCE COMPANY OF THE WEST,)

 )

 Counter-Claimant, )

 )

v. )

 )

CLARENDON NATIONAL INSURANCE )

COMPANY, )

 )

 Counter-Defendant. )

 )

1:99-cv-5461-SMS

MEMORANDUM OF LAW, FINDINGS OF

FACT, AND CONCLUSIONS OF LAW

FOLLOWING COURT TRIAL

This matter was tried to the Court on September 20 and 21,

2004. Ira S. Lipsius and Andrew Karonis of Shindel, Farman &

Lipsius, LLP, appeared and argued on behalf of Plaintiff

Clarendon National Insurance Company (Clarendon); and James P.

Wagoner and Dana E. Denno of McCormick, Barstow, Sheppard, Wayte

& Carruth, LLP, appeared and argued on behalf of Defendant

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Insurance Company of the West (ICW). The joint pretrial statement

filed on May 14, 2004, was adopted in place of the earlier

pretrial order as the order governing the trial. (R.T. at 6.)

Transcripts of the trial were filed in this Court on November 2,

2004; by February 8, 2005, the parties had submitted Defendant’s

post-trial brief, both parties’ proposed findings of fact and

conclusions of law and replies thereto, and Defendant’s reply to

Plaintiff’s Appendix. On August 23, 2005, each party filed

supplemental briefing as directed by the Court. The Court has

considered these matters as well as all the briefing submitted

before the trial, and the matter has been submitted to the Court.

The matter has been referred to the Magistrate Judge for all

proceedings, including the entry of final judgment, pursuant to

28 U.S.C. § 636(c), Fed. R. Civ. P. 73(b), and Local Rule 73-301.

 ISSUES TRIED

The parties have stipulated that all legal issues resolved

by the Court’s order of June 30, 2000, with the sole exception of

the Court’s determination regarding the materiality of G&P’s

alleged misrepresentation which is set forth at II.C. of the June

30, 2000 order, are deemed the law of the case. (Joint Pretrial

Statement and Pretrial Order filed May 14, 2004 at 28.) 

In the order of June 30, 2000, Judge Coyle determined that

the ICW policy’s coverage of G&P under the base policy is primary

over the Clarendon policy; the Clarendon policy’s MCS-90

endorsement provides no coverage for purposes of disputes among

insurers over ultimate liability and thus provides no coverage as

against ICW; and Clarendon is entitled to indemnity/reimbursement

of legal fees Clarendon paid in defending H&G because Clarendon’s

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liability arises only from the MCS-90, a governmentally required

filing. 

In the order of January 16, 2001, Judge Coyle granted

Defendant’s motion for a new trial or to alter and amend

judgment, determining that there was a dispute of material fact

regarding whether G&P engaged in material misrepresentation

and/or concealment in applying for the ICW policy which had not

been waived or lost by estoppel because neither waiver nor

estoppel had been established on the evidence submitted by

Clarendon, the subrogee of G&P, ICW’s insured.

At the trial, the Court determined that Judge Coyle had thus

already decided that the ICW base policy covering G&P was primary

and that the truck, which included the trailer, was a

specifically described auto. (R.T. at 10-11.) The Court further

concluded that in addition to the misrepresentation defense to

ICW’s coverage, the trial would also cover the issues of waiver

and/or estoppel against denying coverage on the ground of

misrepresentation. (Id. at 11-12.)

The parties reserved the right to stipulate to the amounts

expended by the parties in defending underlying legal actions

that were filed as a result of the accident in which the insured

was involved. (Id. at 18-19.)

Therefore, the issues tried at the bench trial in September

2004 are whether or not material misrepresentation or concealment

rendered the ICW insurance contract void or otherwise provided a

defense to ICW, and whether or not this defense was waived, or

ICW is estopped to raise it.

///

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1

 As is later discussed, the parties’ contract provided that it would be void if there were fraud or intentional

concealment or misrepresentation; thus, a higher standard (i.e., requiring intentional misrepresentation or

concealment as to a material matter) than that otherwise provided for by statute is operative in the instant case. 

4

MEMORANDUM OF LAW

I. Governing Law

In his order of June 30, 2000, Judge Coyle determined that

the law governing the interpretation of the policies and the

insurer’s obligations was the substantive law of California. Id.

at 10-12. Neither party seeks to reopen that issue or argues that

any other law should govern the issues remaining in dispute.

Thus, California law governs.

II. Burden of Proof, Persuasion; Defense

Defendant has the burden of proof by a preponderance of the

evidence of each fact the existence or nonexistence of which is

essential to the affirmative defense of misrepresentation. Cal.

Evid. Code §§ 115, 500; Thompson v. Occidental Life Ins. Co. of

California, 9 Cal. 3d 904, 915-916, 919 (1973); see, Liodas v.

Sahadi, 19 Cal.3d 278, 286-90 (1977). The elements in the present

case1 are intentionally false material misrepresentation or

concealment of facts with the intent to defraud and in order to

obtain insurance coverage; a mere mistake or negligence is not

sufficient. Leasure v. MSI Insurance Co., 65 Cal.App.4th 244,

247-48 (1998); Hyland v. Millers Nat. Ins. Co. 91 F.2d 735, 743

(9th Cir. 1937), rehg. denied, 92 F.2d 462, cert. denied, 303

U.S. 645. “Preponderance of the evidence” means that the trier of

fact is only required to believe that the existence of a fact is

more probable or reasonable than its nonexistence, Kennedy v.

Southern California Edison Co., 268 F.3d 763, 770 (9th Cir. 2001)

Case 1:99-cv-05461-SMS Document 273 Filed 07/07/06 Page 4 of 80
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(applying California law), and that in terms of the probability

of truth of evidence, when weighed with that opposed to it, the

evidence has more convincing force and greater probability of

truth, Leslie G. v. Perry & Associates, 43 Cal.App.4th 472, 482-

83 (1996).

III. Intentional or Negligent Concealment or

Misrepresentation

A. California Statutory Law

Under California statutory law, neglect to communicate that

which a party knows, and ought to communicate, is concealment.

Cal. Ins. Code § 330. Each party to a contract of insurance shall

communicate to the other, in good faith, all facts within his

knowledge which are or which he believes to be material to the

contract as to which he makes no warranty, and which the other

has not the means of ascertaining. Cal. Ins. Code § 332. 

California statutory law provides that concealment, whether

intentional or unintentional, entitles the injured party to

rescind the contract. Cal. Ins. Code § 331. Thus, under the

statute, negligent or even innocent concealment warrants

rescission. Barrera v. State Farm Mut. Auto Ins. Co., 71 Cal.2d

659, 666 n. 4 (1969); Mirich v. Underwriters at Lloyd’s London,

64 Cal.App.2d 522, 529-30 (1944).

The completion of the contract of insurance is the time to

which a representation must be presumed to refer. Cal. Ins. Code

§ 356. 

B. Contractual Interpretation

The provisions of the contract before the Court must be

considered.

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6

Unless it turns on the credibility of conflicting extrinsic

evidence or on underlying facts that are in dispute, the

interpretation of an insurance policy is solely a question of

law. Waller v. Truck Ins. Inc., 11 Cal.4th 1, 18 (1995); Parsons

v. Bristol Development Co., 62 Cal.2d 861, 865-66 (1965); Merced

Mutual Ins. Co. v. Mendez, 213 Cal.App.3d 41, 45 (1989). 

Pursuant to California law, the first consideration is to

look at the language of the contract in order to ascertain the

plain meaning or the meaning that a layperson would ordinarily

attach to the language. Waller v. Ins. Exchange, Inc., 11 Cal.4th

at 18. This is in furtherance of the general principle that the

mutual intent of the parties at the time of contracting is to be

given effect, Cal. Civ. Code § 1636, and is to be inferred, if

possible, solely from the words of the contract, Waller, 11

Cal.4th at 18. It is the clear and explicit meaning of the

contractual provisions, interpreted in their ordinary and popular

sense, that is to govern unless words are used by the parties in

a technical sense or are given a special meaning by usage. Id.;

Cal. Civ. Code §§ 1636, 1638-39, 1644. Dictionary meanings, the

context of the entire policy, and a commonsense view to avoiding

absurd results may be useful to put the Court in the position of

a layperson and understand how he or she might reasonably

interpret the exclusionary language. MacKinnon v. Truck Ins.

Exchange, 31 Cal.4th 635, 649-50 (2003). 

C. The Contract

1. Two References to Fraud

The principal contractual provision in question, and the

only one adverted to by the parties, is as follows:

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2

 The Common Policy Conditions refer to matters such as cancellation, changes, examination of the

insured’s books and records, inspections and surveys, premiums, and transfer of rights and duties. 

7

2. CONCEALMENT, MISREPRESENTATION OR FRAUD

This Coverage Form is void in any case of fraud by

you at any time as it relates to this Coverage Form. It

is also void if you or any other “insured,” at any time, 

intentionally conceal or misrepresent a material fact 

concerning:

a. This Coverage Form;

b. The covered “auto”;

c. Your interest in the covered “auto”, or

d. A claim under this Coverage Form.

(Jt. Ex. 1 at 21.) Review of the policy (Jt. Ex. 1) reveals that

this provision appears in Section V of the policy, entitled,

“Truckers Conditions,” which begins with the statement, “The

following conditions apply in addition to the Common Policy

Conditions.” Id. at 20. The Common Policy Conditions constitute a

separate part of the policy, (id. at 31), which is not entitled

as an endorsement, but appears within a series of endorsements

(id. at 26-39).2 The Common Policy Conditions section begins,

“All Coverage Parts included in this policy are subject to the

following conditions.” (Id. at 31.) Thus, the Truckers

Conditions, which apply in addition to the Common Policy

Conditions, appear to be intended to apply to all coverage parts

of the contract. The Truckers Conditions include Loss Conditions

(at 20-21), and General Conditions (at 21-22), of which the fraud

provision is one.

Terms and provisions must be read in their ordinary and

popular sense, but each must be interpreted in the context of the

contract as a whole and the circumstances of the case. Bay Cities

Paving & Grading, Inc. v. Lawyers Mut. Ins. Co., 5 Cal.4th 854,

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 The cancellation provision in the Common Policy Conditions section states that all coverage parts are

subject to cancellation by the insurer by delivery of ten days’ or thirty days’ notice, depending on the reason for

cancellation; specifies the contents, effective date, and address for delivery of notice of cancellation; and provides

for refund of premiums. (Jt. Ex. 1 at 31.)

8

867 (1993). 

There are no definitions in the policy pertaining to the

pertinent contract terms of “concealment,” “misrepresentation,”

“fraud,” or “intentionally.” (Id. at 22-24.) However, one other

reference to fraud and misrepresentation appears in the policy’s

“CALIFORNIA CHANGES--CANCELLATION AND NONRENEWAL” endorsement,

which is prefaced by following instructions:

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ

IT CAREFULLY.

(Id. at 28.) The endorsement adds provisions to the Cancellation

Common Policy Condition3 and “modifies insurance provided under,”

among other types, businessowners policy, commercial auto

coverage part, and pollution liability coverage part. Id. It is

not clear that it applies to any particular coverage form in the

instant policy; there is no reference to the truckers coverage

form pursuant to which coverage was provided in the policy.

However, it is an endorsement checked as applying to the instant

policy. (Id. at 2.) With respect to “All Policies in Effect For

More Than 60 Days,” it provides:

...[W]e may cancel this policy only upon the 

occurrence, after the effective date of the policy,

of one or more of the following:

....

(2) Discovery of fraud or material misrepresentation

by

(a) any insured or his or her representative

in obtaining this insurance; or

(b) You or your representative in pursuing

a claim under this policy.

(Id. at 29.) 

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It might be argued that the cancellation and nonrenewal

endorsement directly affects or modifies the provision regarding

the policy being void for concealment, misrepresentation, or

fraud that appears in the Truckers Conditions section. (Jt. Ex. 1

at 21). However, the cancellation and nonrenewal change

endorsement does not state that it modifies the Truckers

Conditions, the Truckers Coverage Form, or even the Common Policy

Conditions in general. Instead, it expressly adds provisions to

the Cancellation Common Policy Condition. (Id. at 28.) The

pertinent Common Policy Condition (Jt. Ex. at 31) is the one for

cancellation, which does not purport to define when the policy is

void or when the insurer may seek retroactively to avoid the

obligations of a policy that was never cancelled; instead, it

relates only to the process of cancellation itself after the

policy has been in effect for sixty days. Cancellation is a

prospective phenomenon; rescission is retroactive. See Fireman’s

Fund American Insurance Co. v. Escobedo, 80 Cal.App.3d 610, 619

(1978). The clear linking of the two provisions indicates that

the two provisions permitting cancellation should be read

together. The plain meaning of the two cancellation provisions

read together is that after sixty days, the policy may be

cancelled for various stated grounds, which include fraud or

material misrepresentation. 

The Court concludes that the endorsement regarding grounds

and procedures for cancellation does not directly affect the

provision in the Truckers Conditions section of the Truckers

Coverage Form that concerns when the policy may be declared void.

///

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4In other respects, the contract does refer to provisions of law. In the

liability coverage section of the Truckers Coverage Form, there are “Out-ofState Coverage Extensions” that increase the limit of insurance and provide

for minimum amounts and types of other coverages required by laws of the

jurisdiction where a covered auto is being used (Jt. Ex. 1 at 15), and there

are coverage exclusions for any obligation of the insured pursuant to workers’

compensation, disability benefits, or unemployment compensation laws, (id. at

16). Endorsements also reflect “CALIFORNIA CHANGES” regarding primary coverage

in cases involving insureds in the auto-related businesses, (id. at 26);

cancellation and nonrenewal, (id. at 28-30); and California uninsured

motorists coverage-bodily injury, (id. at 37-39). The policy also refers to

uninsured motorist coverage in connection with a California Uninsured and

Underinsured Motorist Coverage Selection Form and an election form concerning

Uninsured Motorist-Property Damage Coverage. (Id. at 40-41.)

5 As noted, the policy states that it is void in any case of “fraud... as

it relates to this Coverage Form,” and it is also void if an insured at any

time “intentionally conceal[s] or misrepresent[s] a material fact concerning:

a. This Coverage Form;

b. The covered “auto”;

c. Your interest in the covered “auto”, or

d. A claim under this Coverage Form.” (Jt. Ex. 1 at 21.)

10

2. Inconsistency between the Policy and

 California Statutory Law

Insurers and insureds are generally free to enter into

contracts that provide for coverage more favorable to the insured

than those permitted by statute. Utah Property & Casualty Ins.

etc. Assn. v. United Services Auto. Assn., 230 Cal.App.3d 1010,

1023-24 (1991). It must be determined if by mentioning

intentional conduct in the contract as a basis for voiding the

contract, the parties intended to limit the rescission remedy to

intentional conduct and impose a stricter standard than that

permitted by statute, or whether the broad, statutory provision

was intended to remain in effect despite the contractual

language.

The contract does not expressly refer to the inconsistent

statutes noted hereinabove.4

The Court will first consider the contractual language.5 The

contractual provision clearly and unambiguously states that the

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coverage form is void in any case of fraud by the insured

relating to the coverage form, and it is also void if an insured 

intentionally conceals or misrepresents a material fact

concerning the coverage form or other specific matters. Common

usage would indicate, and a reasonable layperson would

understand, that “void” means of no legal force or effect; the

reference to “fraud” denotes deceit or trickery; the use of

“intentional” means having an intention or purpose; the reference

to “concealment” denotes conscious prevention or avoidance of

disclosure; and the use of “misrepresentation” means a misleading

or untrue representation. See Webster’s Third New International

Dictionary of the English Language, Unabridged (1986) at 2562,

904, 1176, 469, and 1445. The plain meaning of “fraud” would not

include an unintentional or negligent misrepresentation. Further,

a reasonable layperson would understand that the adjective

“intentional” modifies both “concealment” and

“misrepresentation.” See, Ward General Services, Inc. v.

Employers Fire Ins. Co., 114 Cal.App.4th 548, 554 (2003); TriState Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180

F.Supp.2d 1203, 1217 (D.Kan. 2001) (construing a provision

virtually identical with the one in the instant policy, and

noting that the goal of avoiding unreasonable results also

supports this construction). The plain meaning of the provision,

then, is that the coverage form is void if an insured engages in

fraud (trickery or deceit), intentional concealment, or

intentional misrepresentation.

Defendant argues that the policy does not state that it is

void “only” where the insured has intentionally concealed or

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misrepresented material facts, and such a meaning is not

necessarily implied; further, the policy provision speaks to when

the policy is void, whereas an insurer may defend against a claim

on the basis of concealment or misrepresentation without

declaring the entire policy void.

It is true that the policy does not expressly state that it

is void “only” in cases of intentional misrepresentation or

concealment; further, it does not address “rescission,” the

distinction between void and voidable contracts, or the

interrelationship of the various legal remedial concepts

potentially involved in a formal legal analysis of these issues.

However, the question to be determined is whether the policy is

ambiguous in light of the context of the underlying California

law. Arguably, the meaning of the provision is clear, and no

further analysis should be required. Cf. Tri-State Ins. Co. of

Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d at 1217.

Whether a contract is ambiguous is a question of law for the

Court. Airborne Freight Corp. v. McPherson, 427 F.2d 1283, 1285

(9th Cir. 1970); Winet v. Price, 4 Cal.App.4th 1159, 1164-65

(1992). 

A policy is ambiguous when it is capable of two or more

constructions, both of which are reasonable. Bay Cities Paving &

Grading, Inc. v. Lawyers Mut. Ins. Co., 5 Cal.4th at 867.

Defendant argues that a reasonable person could contend that even

though the policy itself sets forth only one type of fraud as

sufficient to avoid the contract, and thus to avoid coverage, the

insurer nevertheless may in effect avoid the contract on lesser

grounds not mentioned in the contract, or at least avoid any

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legal effect of the contract based on misrepresentation of a

lesser type. 

Even if it is assumed that an ambiguity is present, the goal

of interpreting a contract of insurance in California is

effectuating the intent of the parties. Cal. Civ. Code, §§ 1636, 

1641. To that end, all parts of a contract are considered with

reference to each other and to the contract as a whole as well as

with reference to the subject of the contract and the

circumstances of contracting. Cal. Civ. Code §§ 1641, 1647.

If the policy provision is considered ambiguous, then it

must be interpreted in the sense that the promisor reasonably

believed that the promisee understood it at the time the policy

was issued, that is, whether the meaning is consistent with the

insured’s objectively reasonable expectations. Bank of the West

v. Superior Court (Industrial Indemnity Co.), 2 Cal.4th 1254,

1264-65 (1992). It is not reasonable to conclude that the insured

would expect from the policy language that unmentioned, lesser

species of nondisclosure or misrepresentation would nevertheless

permit the insurer, under the rubric of a defense to specific

coverage as distinct from a wholesale avoidance of the contract,

nevertheless to argue that the contract was of no legal effect as

to the insured. This is not within the objectively reasonable

expectation of an insured layperson, who would understand from

the policy language that for the contract not to be binding, the

conduct would have to fraudulent or intentional.

It is established that insurance policies are subject to the

rule of construction applicable to all contracts, namely, to

construe them so as to give effect to all terms and not to render

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them surplusage. ACL Technologies, Inc. v. Northbrook Property &

Casualty Ins. Co., 17 Cal.App.4th 1773, 1785-86 (1993). The fraud

provision states that the policy is void if the insured

intentionally conceals or misrepresents a material matter. To

interpret it to mean that unintentional, or negligent,

misrepresentations also render the policy ineffectual would

remove any limiting effect of the provision and render the

specification of intentionality mere surplusage, a result not

only precluded by the pertinent canon of construction, but also

not within an insured’s reasonable expectation. 

This result is consistent with decisions in other

jurisdictions that have considered similar issues of construction

of policy provisions that set standards that were inconsistent

with, and more favorable to the insured than, analogous statutory

provisions. It has been held that where statutes permit

rescission or avoidance of liability under a policy on the ground

of innocent or negligent misrepresentations, a policy term

providing that the policy is void for fraud or intentional

misrepresentation or concealment will be given effect such that

intentional or fraudulent conduct is required for the insurer to

rescind or defend on the basis of nondisclosure or 

misrepresentation. See State Farm General Insurance Co. v.

Oliver, 658 F.Supp. 1546, 1550 (N.D.Ala. 1987), aff’d. 854 F.2d

416, 419-20 (11th Cir. 1988) (a statute that provided that

misrepresentation, concealment, or omissions and incorrect

statements shall not prevent recovery under the policy or

contract unless either material to acceptance of the risk or the

hazard, or the insurer in good faith would not have issued the

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policy or would not have issued it at the premium rate in

question if the true facts had been known to the insurer as

required either by the application or contract or otherwise, was

held not to determine the meaning of the contract, where the

contract by its terms provided that if an insured intentionally

concealed or misrepresented a material fact, the policy was void

as to the insured; the court reasoned that the insurer had

contracted for something different and had contractually excused

innocent misrepresentations in the application); Gainsco v.

ECS/Choicepoint Services, Inc., 853 So.2d 491, 492-3 (Fla. 2003)

(the policy provided that it was voidable for intentional

concealment or misrepresentation, whereas the statute voided a

policy without regard to the whether omission or concealment was

intentional); Tri-State Ins. Co. of Minnesota v. H.D.W.

Enterprises, Inc., 180 F.Supp.2d 1203, 1216-17 (D.Kan. 2001)

(holding that a policy provision that the coverage form was void

in case of fraud or intentional concealment or misrepresentation

of a material fact unambiguously required intentional conduct to

render the policy void such that inconsistent statutes would not

be considered, but noting that the result would be the same if it

were considered ambiguous because the language should be

construed against the drafter); see also, Green v. Life & Health

of Am., 704 So.2d 1386 (Fla. 1998) (policy concerned

representations made to the best of the insured’s knowledge and

belief); Hauser v. Life General Security Ins. Co., 56 F.3d 1330

(11th Cir. 1995) (ERISA case, policy provision that concerned the

insured’s knowledge and belief); Simmons v. Conseco Life Ins.

Co., 170 F.Supp.2d 1215, 1222 (M.D.Fla. 2001) (unintentional

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misrepresentation by applicant regarding grade of prior

convictions was held insufficient to permit the insurer to void

the policy despite a statute permitting avoidance for innocent

material misrepresentations because the policy affirmation

regarding the truth of the representation was in terms of “best

of the applicant’s knowledge and belief” pursuant to the

insurer’s choice to draft a standard of truthfulness of

representations that was less rigid than the statutory language).

The fact that many of the cases cited by Plaintiff rely on

law other than California law does not render them inapplicable.

It is understood that California law governs the construction of

the instant contract. However, the out-of-jurisdiction cases

involve issues of construction of statutes and contractual

provisions that are analogous in varying degrees to those

involved in the present case. The decisions show that various

courts, applying rules of contractual construction similar to

those of California, have concluded that insurers may choose to

require less rigid standards of disclosure or representation in

connection with the contracts in question, and that when they do

so, their drafting choices will be construed in light of the

reasonable expectations of the applicant for insurance and in

furtherance of the principles that all language in a contract

should be given effect and that ambiguous terms will be construed

against the insurer who drafted them and in favor of coverage.

The Court does not read these decisions as requiring insurers

affirmatively to put statutory language in their contracts in

order to avail themselves of statutory rights; rather, they

pertain to situations in which the insurer has included in the

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contracts in question language which is inconsistent with

statutory provisions.

Defendant relies on Mitchell v. United National Insurance

Company, 127 Cal.App.4th 457 (2005), in which the intermediate

appellate court was faced with reconciling two conflicting

statutes, both of which were applicable to a fire insurance

policy. Cal. Ins. Code §§ 331 and 359, which are applicable to

the type of policy involved in the present case, declare the

injured party is entitled to rescind insurance by “[c]oncealment,

whether intentional or unintentional,” (§ 331), or for a

materially false representation (§ 359).

Two other statutes were involved in Mitchell. One was Cal.

Ins. Code § 2070, which provided that all fire policies “shall be

on the standard form” and shall not contain additions, and that

any peril coverage must be substantially equivalent to or more

favorable to the insured than that contained in the standard fire

insurance policy form. Cal. Ins. Code § 2080 stated that except

as provided in that article, clauses imposing specified duties

and obligations upon the insured and limiting the liability of

the insurer may be attached to the standard form as riders.

Section 2071, the standard fire insurance policy form, stated:

“Concealment, fraud: This entire policy shall be

void if, whether before or after a loss, the insured

has willfully concealed or misrepresented any material

fact or circumstance concerning this insurance or

the subject thereof, or the interest of the insured

therein, or in case of any fraud or false swearing by the

insured relating thereto.”

California case law established that in order to void a policy

based on the insured’s violation of this fraud and concealment

provision, the false statement must have been knowingly and

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willfully made with the intent (express or implied) of deceiving

the insurer, and the materiality of the statement would be

determined by an objective standard of its effect upon a

reasonable insurer. Mitchell, 127 Cal.App.4th at 634-35. Thus,

the insurer’s right to void a fire insurance policy under § 2071

was more limited than the right to rescind accorded by §§ 331 and

359. 

In Mitchell, the court ruled that §§ 2070 and 2071 did not

preclude rescission by the insurer for unintentional

misrepresentation under the more liberal standard of rescission

set forth in §§ 331 and 359 1) because of legislative intent, 2)

because §§ 2070 and 2071 did not expressly exclude application of

other statutory provisions; 3) it made no sense to exclude a fire

insurance contract from the terms afforded by other statutes; 4)

the canon of statutory construction that different statutes

within the same code should be interpreted to be consistent; 5)

freedom of contract and the right of an insurer to make an

informed decision whether or not to insure a given risk were

strong policy considerations that support more liberal rescission

rights for misrepresentations made at the inception of the

insurance contract; and 6) §§ 331 and 359 apply to

misrepresentations made at any time but normally govern parties’

obligations during formation of the contract, whereas the

standard fire insurance fraud and concealment provisions

typically was exercised in connection with a claim for policy

benefits. Id. at 471-473. The court in Mitchell relied on cases

indicating a similar reconciling of two New York state statutes

permitting rescission by the insurer for material

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misrepresentations on the one hand but otherwise voiding fire

policies in the event of the insured’s willful concealment or

misrepresentation of a material fact. 

In contrast, in the present case, the issue is not

reconciling two conflicting statutes; rather, it is determining

the appropriate construction of a contract in light of its terms.

The governing object is not to attempt to reconcile inconsistent

statutes, but rather to give effect to the expressed intent of

the parties, and to consider statutory limitations on coverage

only as appropriate in the course of construction of the

contractual language.

Review by the California Supreme Court was not sought in

Mitchell. 

Mitchell was followed in Atmel Corporation v. St. Paul fire

& Marine, 426 F.Supp.2d 1039 (N.D.Cal. 2005), where an errors and

omissions policy stated that the policy was void if specified

persons hid important information or attempted to defraud or lie;

the policy stated that everyone made mistakes and that

unintentional errors or omissions would not affect the insured’s

rights under the policy. The insured, who allegedly had provided

inaccurate information in the application process, argued that

the insurer had waived its statutory right to rescind for

anything but intentional fraud. The court concluded that it was

not a waiver of a statutory right to material information because

the insurer asked specific questions in the application. The

court relied on Mitchell as holding similar language inapplicable

to rescission of a policy based on misrepresentation and

concealment in a policy application. The Court followed Mitchell

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because even though Mitchell was different because it concerned

language from two statutes, as distinct from contractual language

and statutory language, there was “nevertheless no persuasive or

logical reason to arrive at a different interpretation of a very

similar clause in this case.” 426 F.Supp.2d at 1050. The Court

also stated that common sense dictated that the fraud and

misrepresentation clause, which was contained in the policy

issued after the application had been approved, did not apply to

misrepresentation or concealment in an insurance application. Id.

The Atmel decision is not persuasive because it really did

not analyze the different canons of construction applicable in

the two types of cases (construction of a contract which

conflicted with statutory language, versus construction of

language in a contract which was based on and required by

statutes). In Mitchell, the California legislature had directed

that the pertinent portion of the contract be included. In the

present situation, private parties wrote the contract, which is

to be construed in light of the intent of the parties as

reasonably manifested in contractual language; statutory language

here was not mandated as part of a contract, but rather was

merely background which the parties were free to supercede by the

use of contractual terms.

Mitchell has been criticized. Although Mitchell succeeded

in avoiding different rescission standards for fire insurance

than for other coverages in the same policy, the result may be

contrary to settled rules of statutory construction because the

specific provision of § 2071 dealing with fire insurance should

control over contrary provisions in §§ 331 and 339 dealing with

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insurance generally, Miller v. Superior Court, 21 Cal.4th 883,

895 (1999); and § 2071 should have controlled over the earlier

enacted sections 331 and 359, see, Croskey and Kaufman,

California Practice Guide: Insurance Litigation at 5:172 (Rutter,

2005).

Defendant argues that as in Mitchell, it is appropriate to

give effect to the statutes giving the insurer a broader right to

void a contract to the application process. However, despite the

statutory policy in favor of disclosure at the inception of the

contract identified in Mitchell, Mitchell also recognized the

policy supporting the freedom of contracting. Here, the insurer

freely chose to include language more favorable to the insured

that is reasonably understood as limiting the circumstances under

which the insurer may assert that the contract is of no effect

based on nondisclosure or misrepresentation. 

When contracting parties use terms that provide for broader

coverage than that otherwise provided by reference to statute,

those terms are regularly interpreted to provide broader

coverage. Mission v. Coachella, 210 Cal.App.3d 484 (interpreting

“efficient proximate cause” in a coverage clause as referring to

a predominating cause, which resulted in broader coverage, as

distinct from a triggering cause, which would have resulted in a

more restrictive scope of coverage consistent with judicial

interpretations of Ins. Code § 530 and 532); State Farm Casualty

Co. v. Martin, 872 F.2d 319, 321 (9th Cir. 1989) (interpreting a

contractual term that excluded losses from concurrent causes more

strictly than the statute, Ins. Code § 530, which the court noted

would correctly have been implied as the meaning of the policy

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only in the absence of contractual language to the contrary). It

is established that in the absence of any general declaration of

public policy, there is no reason to interfere with the parties'

full freedom to contract for coverage on any terms not

specifically prohibited by statute. National Insurance

Underwriters v. Carter, 17 Cal.3d 380, 387-88 (1976). 

Although statutory terms may be incorporated into a

contract, this is applied to find coverage required by statutes

where insurance policies otherwise do not afford coverage. Utah

Property and Casualty Insurance Guaranty Association v. United

Services Automobile Association, 230 Cal.App.3d 1010, 1019-20

(1991) (collecting cases). A limitation on coverage contained in

a statute will not be implied into a policy that lacks such a

limitation where a layperson reading the policy would have no

reason to suspect the limitation would apply. Utah Property and

Casualty Insurance Guaranty Association v. United Services

Automobile Association, 230 Cal.App.3d 1010, 1015-16 (not

implying a statutory one-year time limit for uninsured carriers

to become insolvent into a policy providing for coverage of

insolvent insurers’ responsibilities). Where statutory provisions

set a minimum or floor amount of coverage, statutory exclusions

or limitations intended to provide a ceiling must be expressly,

clearly, and plainly incorporated into a policy. Utah Property,

230 Cal.App.3d at 1017. Less favorable coverage provisions of a

statute will not be read into the policy to the insured’s

detriment. Id. at 1018. A policy or its endorsements cannot be so

interpreted as to become meaningless, or to withhold coverage

normally expected by a layperson with an ordinary mind.

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Continental Casualty Co. v. Phoenix Construction Co., 46 Cal.2d

423, 437-38 (1956). 

Laypersons cannot be expected to know of statutory

limitations or exclusions on coverage not contained in their

insurance policies; a rule invalidating lay persons’ trust in the

language of their policies would result in unanticipated gaps in

coverage at the least. Utah Property, 230 Cal.App.3d at 1021.

Insurers, who are fully capable of knowing about statutory

restrictions on coverage and of incorporating those statutory

restrictions in the language of their policies, may fairly be

expected to use clear and express language incorporating

statutory restrictions. Id. Even where a statute expressly

purports to limit express contractual provisions contrary to its

own terms, any limit upon freedom of contract is narrowly

construed. Henricks v. Metropolitan Life Ins. Co., 7 Cal.2d 619,

632 (1936) (upholding the validity of a construction of a

contract that provided an alternative different from and in

addition to, but not contrary to, statute which prohibited terms

“contrary to” the statute).

Focusing on the use of the word “void” in the contract, and

the reference to rescinding in § 331, Defendant argues that the

provision specifying that the policy is void does not impliedly

negate ICW’s right under the law alternatively to rescind, or

defend on grounds that the risk was misrepresented. 

Defendant’s argument rests on two prongs. Defendant asserts

that the statutory and decisional law in force at the time a

policy is issued must be read into each policy with full binding

effect. Defendant cites to Interinsurance Exchange v. Ohio Cas.

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Ins. Co., 58 Cal.2d 142, 147-48 (1962), in which a customer of an

insured car dealer who was involved in an accident was excluded

under the terms of the dealer’s policy, a policy written at a

time when the applicable statutory law, public policy, and

decisional law required coverage of permissive users. At the time

of the accident for which coverage was sought, the statute had

been amended. It was held that even if it were assumed that the

amendment had changed the public policy, it could not have

retroactively validated an agreement that was either void, or

unenforceable, pursuant to the statutory law in effect when it

was written. Id. at 146-47. The permissive user coverage

discussed in Interinsurance Exchange v. Ohio Cas. Ins. Co. was

minimum coverage required as a matter of public policy for the

protection of insured parties and their permittees. In contrast,

in the present case, the policy provision limiting the

circumstances in which policies were void did not violate any

public policy requiring that insurers be given enumerated rights

or privileges, but rather was within the realm of matters subject

to the parties’ bargaining and prerogatives to agree on coverage

more favorable to the insured. Cf. National Ins. Underwriters v.

Carter, 17 Cal.3d 380, 388 (1976), in which it was stated, "[I]n

the absence of any general declaration of public policy ... we

discern no reason to interfere with the parties' full freedom to

contract for coverage on any terms not specifically prohibited by

statute"; Utah Property & Casualty Ins. etc. Assn. v. United

Services Auto. Assn., 230 Cal.App.3d 1010, 1023-24 (collecting

cases, considering a policy that did not limit a period of

insolvency protection and an uninsured motorists statute that

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limited it to a one-year period, and concluding that as

reasonably anticipated by a layperson and consonant with public

policy, the policy provided greater coverage than that required

by law and did not incorporate an exclusion or limitation not

stated in the policy). 

Defendant does not cite, and the Court is unaware of, any

authority either requiring a lay person in the position of the

insured to read into a policy a statutory provision that would

put more restrictive limits on coverage than those stated in a

policy, or recognizing a public policy that would preclude a

condition that was more favorable to the insured and provided

coverage except with respect to intentional concealment in

circumstances such as those in the present case. Such a position

would be contrary to established principles that a policy should

be interpreted in light of the expectations of a reasonable

insured person, not a reasonable attorney or insurance expert,

Crane v. State Farm Fire & Cas. Co., 5 Cal.3d 112, 115 (1971),

and not necessarily one with knowledge of subtle legal

distinctions, Safeco Ins. Co. of America v. Robert S., 26 Cal.4th

758, 765-66 (2001) (declining to conclude that an insured’s

reasonable expectations would include understanding of the

distinction between gross and ordinary negligence). 

Defendant also argues that because the policy provision

voids the policy for intentional concealment or

misrepresentation, and because an insurer need not rescind for

misrepresentation or concealment but may take advantage of an

alternate remedy of defending against a claim on the policy on

the basis of misrepresentation or concealment, the policy

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provision should be interpreted only to affect the remedy of

rescission and not the alternate remedy of defending against a

claim on the policy. Defendant cites De Campos v. State Comp.

Ins. Fund, 122 Cal.App.2d 519, 528 (1954). In De Campos, the

court upheld a judgment for an insurer against an insured

employer. The insurer had previously unsuccessfully litigated a

worker’s compensation action against heirs of an employee who

died in the scope of employment. The insurer had refused to

defend the insured employer in the worker’s compensation action,

but no issue of fraud or misrepresentation by the insured

employer had been raised in the worker’s compensation case. When

the insured employer brought an action against the insurer for

the employer’s costs of defending itself in the worker’s

compensation action, the insurer took the position that coverage

for the decedent had been excluded by various policy provisions,

and that the policy had issued based on material concealment by

the insured employer of 1) the decedent’s status as an excluded

partner (which was found to have been an ambiguous exclusion and

was resolved against the insurer), and 2) the decedent’s

compensation, which was a basis for assessment of the risk and

should have been figured into the premium cost. When the insured

employer sued the insurer on the policy for the costs of its

defense, the insurer defended because 1) the policy was not in

effect because of fraud (of the intentional variety), 2) the

employer waived its contractual right to a defense under the

policy and was estopped to seek it because of the fraud and

breach of warranty, and 3) the employer was in breach and

default, and thus could not seek performance of the contract. The

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insurer also claimed damages from the employer for the fraud. In

upholding the trial court’s judgment for the insurer based on

fraud, the Court noted that the insurer had alternate,

inconsistent remedies for damages or rescission; the court

characterized the damages action as one on the contract for

breach of contract, and it relied on the fact that insurer there

had not argued that there was no contract, but in fact had argued

that the contract was in effect, but that the decedent had been

excluded based on his status. (Id. at 525-27.)

In the present case, the Defendant insurer is not defending

against a claim brought by a policy holder; rather, it is

resisting a third party insurer’s claim for reimbursement or

contribution. The basis of Defendant’s resistance is that

Defendant’s obligation under the policy, or policy coverage, may

be avoided because of the insured’s concealment or

misrepresentation of a material matter; Defendant is not seeking

damages on the contract. To the extent that Defendant is relying

on the contract, it is resorting to the provision that permits

the policy to be declared void for fraud or intentional

concealment or misrepresentation.

In any event, under the pertinent California law, the

intricacies of the terminology and substance of the law of

remedies do not necessarily determine the interpretation of the

policy provision according to the reasonable expectations of a

lay insured, who is not in the position to recognize and

appreciate fine distinctions pertaining to alternate legal

remedies not referred to in the contract. A reasonable insured

would understand the provision to exclude coverage on the basis

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of fraud, and not to constitute a partial reference to one of a

multitude of legal remedies. Likewise, a reasonable insured

layperson would not expect the provision to describe situations

in which the contract is void, as distinct from voidable or

subject to rescission, or to distinguish among remedies which are

based on the invalidity of the contract due to fraud but which

arise in different procedural contexts or differ in some manner

with regard to legal scope or effect.

Finally, if there is ambiguity with respect to coverage, a

contract may be interpreted most strongly against the party who

caused the uncertainty to exist, Cal. Civ. Code § 1654, and

specifically against the insurer, in order to protect the

insured's reasonable expectation of coverage in a situation in

which the insurer-draftsman controls the language of the policy.

Accordingly, coverage language is interpreted in its most

inclusive sense, and exclusions in a policy are narrowly

interpreted. Mission National Insurance Co. v. Coachella Valley

Water District, 210 Cal.App.3d 484, 496-7 (1989). An insurer has

an obligation to use such language as to make the conditions,

exceptions and provisions of a policy clear to the ordinary mind

engaging in a plain, commonsense reading of the terms; if the

insurer’s language should fail, any ambiguity or reasonable doubt

must be resolved in favor of the insured and against the insurer.

It is established that ambiguous terms are resolved in the

insured’s favor, consistent with the insured’s reasonable

expectations. Safeco Ins. Co. of America v. Robert S., 26 Cal.4th

758, 763 (2001); Pacific Heating and Ventilating Co. v.

Williasmburgh City Fire Ins. Co. of Brooklyn, 158 Cal. 367, 370

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(1910); Paramount Properties Co. v. Transamerica Title Ins. Co.,

1 Cal.3d 562, 569 (1970). 

Applying these canons, Plaintiff’s construction, namely,

that the contract provided for the insurer to avoid coverage on

the basis of concealment or misrepresentation only for

intentional or fraudulent conduct, should be adopted because

Defendant drafted, or was responsible for the wording of, the

contract, and the Defendant is the insurer. Had Defendant wanted

to have a broader ground upon which to avoid the contract for

merely negligent or fully innocent conduct, Defendant could have

said nothing, or Defendant insurer could have specifically

provided that all forms of nondisclosure and misrepresentation

would have been a basis for voiding the contract. 

The Court concludes that in order to prevail on its defense,

Defendant must show that the insured engaged in intentional

concealment or intentional misrepresentation with respect to the

coverage form.

IV. Intentional Concealment or Misrepresentation

The Defendant asserts that G&P misrepresented that Pannu was

the only driver and concealed the fact that Inderjit was also a

driver.

Plaintiff argues that the intentional element of intentional

misrepresentation or concealment is defined by California Jury

Instructions, Civil, Book of Approved Jury Instructions [BAJI],

January 2005 Edition, § 12.31, which defines the essential

elements of a claim of fraud by an intentional misrepresentation

as including a false representation with respect to which:

3. The defendant (here G&P) must have known that the 

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representation was false when made [or must have made the 

representation recklessly without knowing whether it was 

true or false];

4. The defendant (here G&P) made the

representation with an intent to defraud the plaintiff,

that is, [he] [she] (here G&P) must have made

the representation for the purpose of inducing the 

plaintiff to rely upon it and to act or to refrain from

acting in reliance thereon....

Id., BAJI 12.31. The Court notes that BAJI 12.35 states that the

essential elements of a claim of fraud by concealment include

concealment or suppression of a material fact that the defendant

was under a duty to disclose to the plaintiff and as to which:

3. The defendant (here G&P) intentionally concealed

or suppressed the fact with the intent to defraud

the plaintiff.

The Court further notes that California Jury Instructions,

Civil, January 2005 Edition, CACI 335 governs the affirmative

defense of fraud that vitiates consent and prevents formation of

a contract. It states in pertinent part that to succeed in the

defense, the defendant must prove with respect to the plaintiff’s

representation:

2. That [G&P] knew that the representation was 

not true;

3. That [G&P] made the representation to persuade

[ICW] to agree to the contract;

4. That [ICW] reasonably relied on this representation; and

5. That [ICW] would not have entered into the contract

if [it] had known that the representation was not true.

Plaintiff also cites to Kentucky Cent. Life Ins. Co. v.

Marin Bay Park Trust, 958 F.2d 377 (9th Cir. 1992) (unpublished

disposition) (TABLE, TEXT IN WESTLAW, NO. 91-15004, 91-15276), to

the effect that although an insured must read the contract and

report any misrepresentations or omissions, a contract may not be

rescinded by an insurer if the insured in good faith gives

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answers that are truthful but, owing to the fraud, mistake, or

negligence of the insurance company’s agent filling out the

application, are incorrectly transcribed, or if the agent gave

the insured the impression that additional responses were

unnecessary.

Here, there does not appear to be evidence that Mirko was

the insurer’s agent; rather, she was the insured’s agent.

Defendant argues that the requirements for making out the

defense should be governed by California Jury Instructions,

Civil, January 2005 Edition, CACI 2308 (revised October 2004),

rescission for misrepresentation or concealment in an insurance

application, which does not necessarily require intentional

misrepresentation or concealment. Defendant also criticizes

Plaintiff’s citation of an unpublished case (Kentucky Cent. Life

Ins. Co. v. Marin Bay Park Trust), and Defendant notes that the

case involved life and disability insurance, which by statute

(Cal. Ins. Code § 10380) requires intentional falsity in an

insurance application. However, these points are based on an

assumption that Cal. Ins. Code § 331 governs the Defendant’s

right to rescind, and it is untenable in light of the Court’s

previously discussed construction of the contract to provide more

favorable insurance coverage than that provided by Cal. Ins. Code

§ 331.

The BAJI and CACI instructions regarding intentional

misrepresentations or concealment accurately reflect California

law, namely, that a representation or concealment must be

accomplished “with intent to deceive another party thereto, or to

induce him to enter into the contract”; and the action may be

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either “[t]he suggestion, as a fact, of that which is not true,

by one who does not believe it to be true... or “[t]he

suppression of that which is true, by one having knowledge or

belief of the fact....” Cal. Civ. Code § 1572. A fraudulent

misrepresentation is one made with the knowledge that it is or

may be untrue. Seeger v. Odell, 18 Cal.2d 409, 414 (1941). 

V. Materiality of Misrepresentation or Concealment

The materiality of a representation is determined by the

same rule as the materiality of a concealment. Cal. Ins. Code §

360.

Materiality is a question of law. Merced County Mut. Fire

Ins. Co. v.State of California, 233 Cal.App.3d 765, 772 (1991). 

The California Insurance Code contains multiple provisions

regarding disclosures that are required. Cal. Ins. Code § 332

provides:

Each party to a contract of insurance shall communicate

to the other, in good faith, all facts within his 

knowledge which are or which he believes to be

material to the contract and as to which he

makes no warranty, and which the other has not the

means of ascertaining.

Cal. Ins. Code § 333 provides that absent inquiry, neither party

is bound to communicate things that are waived or which pertain

to risks excluded by warranty, or which the other knows or ought

to know and of which the party has not reason to suppose the

other ignorant.

Materiality is to be determined not by the event, but solely

by the probable and reasonable influence of the facts upon the

party to whom the communication is due, in forming his estimate

of the disadvantages of the proposed contract, or in making his

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inquiries. Cal. Ins. Code § 334. The question is whether or not

the matter misstated or concealed could reasonably be considered

in affecting the insurer’s decision as to whether or not to enter

into the contract, in estimating the degree or character of the

risk, or in fixing the premium. Holz Rubber Co. Inc. v. American

Star Ins. Co., 14 Cal.3d 45, 61 n. 16 (1975). Materiality has

been found where had the true facts been disclosed, the insurer

would not have provided coverage without an exclusion of the

misrepresented matter. Williamson & Vollmer Engineering, Inc. v.

Sequoia Ins. Co., 64 Cal.App.3d 261, 272-74 (1976) (materiality

established where a professional liability insurer demonstrated

that a policy that had issued based on concealment of a pending

claim would have contained an exclusion for the concealed claim). 

The test is subjective in the sense that the critical

question is the effect truthful answers would have had on ICW,

not on some average reasonable insurer. Imperial Casualty &

Indemnity Co. v. Sogomonian, 198 Cal.App.3d 169, 181 (1988).

It has been held in California that if an insurer asks

specific questions on an application, this is usually sufficient

to establish that the answer is material as a matter of law

because the insurer asked for the information. Thompson v.

Occidental Life Ins. Co., 9 Cal.3d 904, 916 (1973) (quoting Cohen

v. Penn Mutual Life Ins. Co., 48 Cal.2d 720, 726 (1957)(where the

insured, in applying for a life insurance policy, had

misrepresented his history of a heart condition, and where the

insurer had asked specific questions regarding not only diagnosed

conditions, but also suspicious circumstances or symptoms)).

However, it does not appear that the single circumstance of the

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insurer’s having asked a question on an application is sufficient

to determine the materiality issue because courts have undertaken

further analysis of additional pertinent circumstances. Ransom v.

Penn. Mutual Life Ins. Co. 43 Cal.2d 420, 426-27 (1954); Imperial

Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d at 180-81. 

Even where lip service is given to the determinative

character of the factor of asking for information, the California

courts nevertheless complete a more thorough analysis of the

materiality question, Cohen, 48 Cal.2d at 726-28 (focusing on the

nature of the misrepresentation); Thompson, 9 Cal.3d at 916-918

(considering the questions, the testimony of medical witnesses,

and all inferences). 

It is acknowledged that an incorrect answer on an insurance

application does not alone give rise to the defense of fraud

where the true facts, if known, would not have made the contract

less desirable to the insurer. Thompson v. Occidental Life Ins.

Co., 9 Cal.3d 904, 916 (1973); California-Western States Life

Ins. Co. v. Feinstein, 15 Cal.2d 413, 423-24 (1940); Imperial

Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d at 181. 

It has also been emphasized in connection with such analysis

that the trier of fact is not required to believe the "post

mortem" testimony of an insurer's agents that insurance would

have been refused had the true facts been disclosed. Thompson at

916.

Thus, the more reasoned view is that the fact that

information was solicited on an application for insurance is a

factor to be considered in determining materiality, but it is not

the sole factor; determination of materiality remains a question

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to be determined based on a multitude of factors.

A misrepresentation of loss history or drivers’

qualifications may be material. Certain Underwriters at Lloyd’s

v. Montford, 52 F.3d 219, 222 (9th Cir. 1995) (concealment of

history of a previous total loss claim in application for marine

insurance); Civil Service Employees Ins. Co. v. Blake, 245

Cal.App.2d 196, 198 (1966) (casualty policy, driver’s health

history and history of driver’s license revocation and denial);

Allstate Ins. Co. v. Golden, 187 Cal.App.2d 506, 512 (1960) (auto

policy, concealment of prior suspension of driver’s license for

speeding).

If the applicant for insurance had no present knowledge of

the facts sought or failed to appreciate the significance of

information related to him that formed the basis of his answers,

his incorrect or incomplete responses would not constitute

grounds for rescission. Thompson, 9 Cal.3d at 916.

As against a principal, both principal and agent are deemed

to have notice of whatever either has notice of, and ought, in

good faith and the exercise of ordinary care and diligence, to

communicate to the other. Cal. Civ. Code § 2332. Awareness of an

insured’s agent that information is important or material may be

imputed to the insured; thus, a duty to communicate information

pursuant to Cal. Ins. Code § 332 may rest upon the agent’s

knowledge, and belief in the materiality of withheld facts may be

based on the belief of an authorized agent. Merchants Fire

Assurance Corp. v. Lattimore, 263 F.2d 232, 240-41 (9th Cir.

1959).

The burden of proving misrepresentations is on the insurer.

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Thompson 9 Cal.3d at 919.

 VI. Agency

The existence and scope of an agency is generally a question

of fact, Brokaw v. Black-Foxe Military Institute, 37 Cal.2d 274,

278 (1951), unless the essential facts are undisputed and subject

to only one inference, in which case it is a question of law,

Van’t Rood v. County of Santa Clara 113 Cal.App.4th 549, 562

(2003).

A. Broker

An insurance broker is a person who, for compensation and on

behalf of another person, transacts insurance other than life

insurance with, but not on behalf of, an insurer. Cal. Ins. Code

§ 33. Insurance brokers who lack authority to bind the insurance

company are not agents of the insurance company, but rather are

independent contractors acting only on behalf of the insured and

not the insurer. Rios v. Scottsdale Ins. Co., 119 Cal.App.4th

1020, 1026 (2004); Marsh & McLennan of Calif., Inc. v. City of

Los Angeles, 62 Cal.App.3d 108, 117-18 (1976).

B. Agent

The most definitive characteristic of an insurance agent is

the agent’s ability to bind the agent’s principal, the insurer.

Marsh & McLennan of Calif., Inc. v. City of Los Angeles, 62

Cal.App.3d at 118.

VII. Language Difficulty and Duty to Read the Contract

Generally an insured has a duty to read a policy and report

any misrepresentations or omissions as part and parcel of the

duty to engage in fair dealing with respect to the contract. 

Telford v. New York Life Ins. Co., 9 Cal.2d 103, 107 (1937). 

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Even where misrepresentation or concealment need not be

intentional to constitute a defense, rescission of a contract is

not permitted for an incorrect or incomplete response if the

applicant had no present knowledge of the facts sought or failed

to appreciate the significance of information related to him.

Trinh v. Metropolitan Life Insurance Co., 894 F.Supp. 1368, 1373

(N.D.Cal. 1995). Where an applicant, acting in good faith, does

not understand the significance of the information he fails to

disclose, the applicant is not at fault. Id. Further, an

illiterate applicant, or one who does not speak the language in

which the policy is written, may not be charged with failing to

read the insurance application of agreement. See id. (and

California authorities there cited).

VIII. Named Driver Exclusions

Cal. Ins. Code § 11580.1(b)(4) and (d)(1) requires that

every policy of automobile liability insurance shall contain

insurance for any person using a covered motor vehicle, provided

the use is by the named insured or with his or her permission,

express or implied, and within the scope of the permission;

however, exceptions may be effected by designating an excluded

driver by name. This requires coverage for all permissive users

and only authorizes exclusions for specifically named drivers.

Assuming for the sake of argument that this provision

applies to the policy in issue in the present case, the Court

notes that ICW cites several cases (ICW F. & C. at 25-26) which

concern coverage that was inconsistent with that mandated by

statute, not coverage limited by a named driver exclusion within

the scope of the statute. See Metz v. Universal Underwriters Ins.

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Co., 10 Cal.3d 45, 50-53 (1973) (exclusion of coverage of

vehicles while rented to others, or used by permissive users with

other insurance); Hertz Corp. v. Home Ins. Co., 14 Cal.App.4th

1071, 1078 (1993) (driving while intoxicated); C.S.A. etc. v.

Gong, 162 Cal.App.3d 518, 528 (1984) (concerning limitations of

liability for permissive use of non-owned vehicles); Contreras v.

America, Compania General De Seguros, S.A., 48 Cal.App.3d 270,

281 (1975) (exclusion of liability for injuries to occupants of

the insured vehicle found invalid); Glens Falls Ins. Co. v. Globe

Indemnity Co., 276 Cal.App.2d 643, 645-48 (1969) (provision

regarding permissive users loading or unloading a vehicle). Thus,

although a policy limitation against permissive users would have

been inconsistent with statute and in contravention of the public

policy to protect permissive users and third parties, it is not

clear that the same could be said about a warranty by G&P not to

permit Inderjit Singh to drive, coupled with a named driver

exclusion within the terms of the statute. 

IX. Cancellation

Cancellation is termination of coverage by an insurer (other

than termination at the request of the insured) during a policy

period. Cal. Ins. Code § 660(g). Policies of insurance generally

may be cancelled only by mutual consent or if the right to do so

is reserved in the policy or is authorized by statute. Spott

Electrical Co. v. Industrial Indem. Co., 30 Cal.App.3d 797, 806

(1973). Subject to legislative restriction, parties may agree on

the cause, method, and means of cancellation. Jensen v. Traders &

General Ins. Co., 52 Cal.2d 786, 790 (1959). Although a statute

limits the grounds upon which an insurer may cancel automobile

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6

 Section 677.2 requires all notices of cancellation to be in writing, be mailed to the named insured at a

specified address, state the effective date of cancellation and the reasons therefor, and be given at least thirty days

prior to the effective date of the cancellation (except notice ten days before the effective date is sufficient for

cancellation for fraud or nonpayment of premiums).

39

insurance for nonpayment of premiums, fraud, or material

misrepresentation affecting the policy or the insured, or a

substantial increase in the hazard insured against, Cal. Ins.

Code § 1861.03(c), this statute does not apply to commercial

motor vehicles, as distinct from private passenger vehicles,

National Indemnity Co. v. Garamendi, 233 Cal.App.3d 392, 404-06

(1991). 

Pursuant to Cal. Ins. Code § 676.2(b), an insurer may cancel

commercial insurance for any reason in the first sixty days; the

statute limits the form of cancellation notices and the grounds

for cancellation or policies that have been in effect for more

than sixty days. After sixty days of the policy being in effect,

no notice of cancellation shall be effective unless it complies

with Cal. Ins. Code § 677.26 and is based on the occurrence,

after the effective date of the policy, of nonpayment of premium;

a judgment by a tribunal that the named insured has violated a

California law by an act that materially increases any of the

risks insured against; discovery of fraud or material

misrepresentation by the insured or his or her representative in

obtaining the insurance or in pursuing a claim under the policy;

discovery of willful or grossly negligent acts or law violations

which materially increase the risk; failure to implement loss

control; a change by the named insured or his or her

representative in the activities or property of the commercial or

industrial enterprise which results in a material added risk, a

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materially increased risk or a materially changed risk, unless

the added, increased, or changed risk is included in the policy;

or various determinations by the insurance commissioner. After a

policy has been in effect for more than sixty days, no increase

in rate or change in conditions of coverage shall be effective

unless written notice is delivered at least thirty days prior to

the change. § 676.2(c). The same statute limits the procedures

for implementing a premium or rate increase; a premium increase

may occur if it is calculated on the basis of a current rating

manual and is justified by a physical change in the insured

property or by a change in the activities of the commercial or

industrial enterprise which materially increases any of the risks

insured against. Cal. Ins. Code § 676.2(c), (e).

Witnesses testified that a policy could be cancelled for a

material increase in hazard. The policy permitted this

(Cancellation and Nonrenewal Endorsement), as did statute (Cal.

Ins. Code § 676.2 [violation of law causing serious accident,

resulting in material increase of hazard]). 

ICW argues that the failure to cancel was not probative of a

lack of materiality because ICW would in any event have the

option to keep the policy in effect and defend any later claim of

loss on the basis of fraud. During the period of time in

question, however, ICW asserts that it did not discover the

alleged fraud. Thus, it is not clear how ICW’s asserted right to

determine which remedy to utilize is material to this period of

time. However, if it were material, one logical possibility

regarding ICW’s lack of awareness of the alleged fraud is that

ICW did not know because it did not bother to investigate the

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status of Inderjit as a driver. The Court has rejected the

factual claim that ICW was informed or knew that Inderjit no

longer was driving for G&P. Thus, the failure to investigate as

well as the failure to cancel would seem to be pertinent to the

issue of materiality of the alleged concealment.

Further, even if it is true that an insurer could choose to

maintain the policy but not accept the risk because of a failure

or breach of condition (ICW’s term, post-trial brief p. 37), here

the issue is not a choice of remedy, but rather a question of

drawing an inference as to materiality based on post-application

conduct (failure to ascertain drivers, investigate, cancel).

Although there might not have been an obligation to cancel, that

should not negate the probative force of an inference from the

failure to investigate or cancel when legally entitled to do so.

The authorities cited by ICW go more to waiver than to lack

of an inference of non-materiality. The cases cited by ICW are

factually distinct. Purefoy v. Pacific Auto Indem. Exchange, 5

Cal.2d 81 (1935) held that the trial court correctly ruled that

an insurer could defend against the suit of a third party, which

had sued and received a favorable judgment against the insured

for an injury otherwise covered by insurance, based on the

insured’s failure to give timely notice of the claim as required

by the policy, even though the insurer retained the premium after

it knew that the accident had happened; retention of the premium

may not have been a waiver of the earlier failure to give notice,

but rather a waiver of right to rescind and thereby not cover

future accidents at all; and it should be noted that the insured

was still unavailable/unlocated for a substantial portion of the

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policy period thereafter); Allstate Ins. Co. v. Golden, 187

Cal.App.2d 506, 512 (1960) was a case where the insured

misrepresented his driver’s license history; the insurer reserved

rights because of that with respect to an accident while

investigating the accident and then instituted an action to

rescind three months after the accident, cancelling the policy

pursuant to a policy provision at a later time (thereby

considering the policy in force at some time period after the

accident); it was held that some coverage that existed during the

cancellation notice period (between the sending of the

cancellation letter and the effective date of the cancellation)

did not preclude the insurer’s reliance on the misrepresentation

earlier); Resure, Inc. v. Superior Court, 42 Cal.App.4th 156, 161

(1996), involved the insurer’s suit to rescind the contract, and

the court interpreted a California Insurance Code provision

requiring an insurer to exercise the right to rescind before

action on the contract to mean that the rescission had to be

exercised before the insured sued to enforce the contract in an

action at law; the statute was also interpreted to require an

insurer being sued on the contract at law to raise the contract

as a defense in the action at law instead of beginning a new

action in equity; it was not a bar that the insurer had not

offered to return the premium earlier, had defended against a

third party who had sued the insured on the merits and had

initiated another coverage action earlier, and had defended other

actions against the insured with a reservation of rights; the

insurer could be made whole regardless); in Williamson & Vollmer

Engineering, Inc. v. Sequoia Ins. Co., 64 Cal.App.3d 261 (1976),

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it was held that the insurer could not be forced to pay for costs

of defense and indemnification, even though when it learned of

the concealment on the claim in question, it undertook defense of

another claim and renewed coverage for another term; it was

permissible to reform the policy to exclude the concealed matter

because rescission was not the only remedy, and the insurer could

be made whole); in Barrera v. State Farm Mut. Automobile Ins.

Co., 71 Cal.2d 654, 681 (1969), it was held that the insurer’s

failure to undertake a reasonable and prompt investigation of

insurability resulted in loss of the insurer’s right to rescind

(which would affect responsibility to injured third parties), but

it did not preclude cancellation regarding the future; further,

as against the insured, the insurer might still prosecute a cause

of action for damages for wrongful misrepresentation after

satisfying the injured person's claim, or, in an action brought

by the insured, after he has satisfied a judgment against him by

the injured person, might defend on the ground of

misrepresentations in the application). 

The fact that multiple remedies for a claimed

misrepresentation exist does not preclude looking at the entire

course of conduct undertaken by the insurer with respect to the

circumstances surrounding the alleged misrepresentation or

concealment in determining not whether the insurer can raise the

issue, but rather, whether the alleged misrepresentation or

concealment concerned a material matter. The test of materiality

is subjective. The fact that an insurer was not legally required

to cancel does not render irrelevant to the subjective test of

materiality a decision not to cancel or investigate circumstances

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that could in turn give rise to a right to cancel or rescind.

X. Bad Faith and Cancellation

ICW argues that it did not cancel the policy because of a

fear of being perceived as proceeding in bad faith. 

Asserting that fraud with respect to one risk does not

necessarily affect the enforceability of the remaining insurance,

ICW cites (ICW post-trial Brief at 42) Coca Cola Bottling Co. v.

Columbia Casualty Ins. Co., 11 Cal.App.4th 1176, 1188 (1992), in

which it was held that fraud regarding coverage of products

liability was not material with respect to coverage of automobile

liability to which a claim related and which was a separately

rated subject of insurance. This does not appear to be pertinent

to ICW’s asserted desire to avoid the appearance of proceeding in

bad faith.

The policy’s California cancellation endorsement stated that

the grounds for cancellation were essentially those permitted by

statute (see preceding discussion). Improper or ineffective

attempts to cancel coverage may expose the insurer to liability

for breach of its implied covenant of good faith and cooperation

with the insured. However, a cancellation accomplished in

accordance with statutory and contractual requirements normally

will not breach the insurer’s implied covenant. Williams v. State

Farm Fire & Cas. Co., 216 Cal.App.3d 1540, 1549 (1990). The cases

cited by ICW do stand for the proposition that a bad faith action

against an insurer will lie for wrongful or tortious

cancellation. See, McLaughlin v. National Union Fire Ins. Co., 23

Cal.App.4th 1132, 1157 (1994) (referring to a tortious or

wrongful attempt to cancel coverage when such action was

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arbitrary); Spindle v. Traveler’s Ins. Companies, 66 Cal.App.3d

951, 955-56 (1977) (involving an allegedly tortious cancellation

of medical malpractice insurance of one doctor for the improper

purpose of intimidating others covered by a master coverage

agreement to agree to higher premiums). However, there is no

basis for anticipating a charge of bad faith based upon a proper

cancellation effectuated upon grounds, and pursuant to policies,

acceptable under the contract and statute. An insurer who had

notice of the involvement of an unreported driver of allegedly

insufficient age, and who was involved in a serious accident and

reported by authorities to be at fault, within sixty days of the

effective date of the policy, had an opportunity to cancel the

policy. 

Further, although there was testimony of Barbot that it

would have been vengeful and inappropriate to cancel for

nonpayment of the premium, it would appear that cancellation for

nonpayment was a perfectly valid reason for cancellation. The

concern of Schwarz that cancellation would have required a

discussion with ICW does not render cancellation for a valid

reason inappropriate; no authority is presented that demonstrates

that the fact of the accident eliminated an otherwise appropriate

option to cancel. 

XI. Duty to Investigate

An automobile liability insurer must undertake a reasonable

investigation of the insured's insurability within a reasonable

period of time from the acceptance of the application and the

issuance of a policy. Barrera v. State Farm Mutual Ins. Co., 71

Cal. 2d 659, 663 (1969). This duty directly inures to the benefit

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of third persons injured by the insured; the third party, who has

obtained an unsatisfied judgment against the insured, may

properly proceed against the insurer; the insurer cannot then

successfully defend upon the ground of its own failure reasonably

to investigate the application. Id. at 663-64.

XII. Waiver and Estoppel

The insured has the burden of proof to establish the facts

necessary to demonstrate a waiver or estoppel. Waller v. Truck

Ins. Exchange, Inc., 11 Cal.4th 1, 31, 33-34 (1995). 

Waiver is the intentional relinquishment of a known right

and exists where an insurer intentionally relinquishes its right

to rely on an exclusion; it depends on the intent of the insurer,

and it is not made out by evidence that an insurer merely failed

to specify the exclusion in a letter reserving rights. State Farm

Fire & Cas. Co. V. Jioras, 24 Cal.App.4th 1619, 1628 n. 7 (1994).

California courts will find waiver when a party

intentionally relinquishes a known right after knowledge of the

facts; the burden is on the party claiming a waiver to prove by

clear and convincing evidence that it does not leave the matter

to speculation. Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th

1, 31 (1995). A waiver will be found when a party's acts are so

inconsistent with an intent to enforce the right as to induce a

reasonable belief that such right has been relinquished. Waller,

11 Cal.4th at 33-34; Lunardi v. Great-West Life Assurance Co., 37

Cal.App.4th 807, 824 (1995). An insurer does not waive its right

to rescind a policy on the ground of false representations if it

was unaware of the falsity of those representations. Lunardi, 37

Cal.App.4th at 824. In order for there to be a waiver of the

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right to rescind, there must be actual knowledge of a

misrepresentation. Maggini v. West Coast Life Ins. Co., 136

Cal.App. 472, 477-79 (1934) (knowledge of falsity regarding

health five years before the policy may have been a basis for

suspicion but did not amount to actual knowledge sufficient to

estop insurer from asserting fraud). 

Waiver may be found where the insurer neglects to make

inquiries as to material facts where they are distinctly implied

in other facts of which information is communicated. Cal. Ins.

Code § 336.

It has been held that an insurer does not waive any right to

withdraw from a defense or dispute an obligation to indemnify

claims simply because the insurer agrees to defend the underlying

lawsuits and fails promptly to reserve rights. See, Ringler

Associates Inc. v. Maryland Casualty Co., 80 Cal.App.4th 1165,

1188-90 (2000) (no waiver found despite payment of defense costs

for over two years before reserving rights and then withdrawing

from the defense), and cases there cited. Denial of coverage on

one ground does not impliedly waive grounds not stated in a

denial absent clear and convincing evidence otherwise. Id. 

The elements of an equitable estoppel are 1) the party to be

estopped must know the facts; 2) such party must intend that its

conduct will be acted on, or must so act that the party asserting

the estoppel had a right to believe that it was so intended; 3)

the party asserting the estoppel must be ignorant of the true

state of facts; and 4) the party asserting the estoppel must rely

on the conduct to his injury. Insurance Company of the West v.

Haralambos Beverage Company, 195 Cal.App.3d 1308, 1321 (1987).

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Estoppel requires proof by the insured of detrimental reliance,

Waller, 11 Cal.4th at 33-34, as well as proof of a reasonable

belief that the insurer would provide coverage, State Farm Fire &

Casualty Co. v. Jioras, 24 Cal.App.4th at 1627-28 ns. 7,8. 

Failure to contest a reservation of rights by a declaratory

relief action or other means evinces a lack of reliance. Ringler,

80 Cal.App.4th at 1190-91. 

Failure to retain separate counsel by itself, and

particularly the failure absent a showing that separate counsel

might have obtained a more advantageous settlement, does not 

show detriment. State Farm Fire and Casualty Co. v. Jioras, 24

Cal.App.4th 1619, 1628-29 (1994). On the other hand, detrimental

reliance would be indicated by placing counsel in a conflict of

interest position in the preparation and pretrial conduct of the

defense and depriving the party of separate counsel at the

insurer’s expense, or of an opportunity to request such counsel 

(pursuant to San Diego Federal Credit Union v. Cumis Ins.

Society, Inc., 162 Cal.App.3d 358 (1984)) until trial was at hand

and it would have been too late for an attorney representing

solely the interests of the insured to have replaced the attorney

who was representing the insurer's interests as well. Stonewall

Ins. Co. v. City of Palos Verdes Estates, 46 Cal.App.4th 1810,

1838-39 (1996) (where three years passed after the reservation of

rights without a declaratory relief action). 

Cal. Civ. Code § 2860(b) provides in part:

For purposes of this section, a conflict of interest

does not exist as to allegations or facts in the litigation

for which the insurer denies coverage; however, when an

insurer reserves its rights on a given issue and the

outcome of that coverage issue can be controlled by

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counsel first retained by the insurer for the defense

of the claim, a conflict of interest may exist....

A mere reservation of rights does not necessarily create a

conflict of interest that requires the appointment of independent

counsel; rather, it depends on the nature of the coverage issue

and its relationship to the issues in the underlying case.

Blanchard v. State Farm Fire and Casualty Co., 2 Cal.App.4th 345,

(1991) (where the insurer accepted defense of the insured

contractor in a construction defects action and reserved its

right to deny coverage for damages excluded by the policy

language (specifically, the (uncovered) cost of replacing faulty

workmanship, as distinct from (covered) costs of replacing

damaged property), it was held that it was appropriate for the

insurer not to have provided independent counsel because unlike

Cumis, in which the underlying suit against the insured contained

allegations in part that the conduct of the insured was

intentional and thus would not be covered, and in which the

attorney selected by the insurer would have to deal with clearly

divergent interests, in Blanchard the issue upon which coverage

turned was independent of the issues in the underlying case). A

conflict of interest does not arise unless the outcome of the

coverage issue can be controlled by counsel first retained by the

insurer for the defense of the underlying claim. Id.

The conflict must be actual and significant, not merely

potential and theoretical; no right to cumis counsel arises where

the issue is independent of and extrinsic to the issues in the

underlying action such that the retained attorney was not in fact

subject to conflicting interests and had no actual incentive to

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attach liability to the insured. Gulf Ins. Co. v. Berger, Kahn,

Shafton, Moss, Figler, Simon & Gladstone, 79 Cal.App.4th 114, 130

(2000) (where the theory of liability was not such that liability

could have been transferred from covered claims to uncovered

claims).

Here, the issue of misrepresentation by G&P regarding who

was a driver has not been shown to be an issue in the underlying

tort actions which ICW defended. In the underlying actions, it

was to the advantage both of G&P and ICW to minimize the

liability of G&P; there is no showing that the defense attorney

could have controlled the outcome of the coverage issue to the

detriment of the insured. 

The question of the existence of a conflict is a question of

law unless there is a dispute over an underlying fact. Blanchard,

2 Cal.App.4th at 350-51.

 FINDINGS OF FACT

I. Introduction

After hearing the proofs of the parties, considering the

testimony of all witnesses, the exhibits received into evidence,

the statements and arguments of counsel, the stipulations of the

parties, and all the submissions concerning proposed findings of

fact and conclusions of law submitted by the parties, the Court

enters the following findings of fact and conclusions of law. In

making a finding of fact, the Court intends to rely on all

evidence in the record that is consistent with or supports the

Court’s finding. If the Court has mistakenly categorized a

finding as factual or legal, the Court intends the substance of

the finding to predominate. To the extent that any finding of

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fact may be interpreted or construed as a conclusion of law, or

any conclusion of law may be interpreted or construed as a

finding of fact, it is the Court’s intention that such

construction or interpretation be adopted.

II. Jurisdiction

It is undisputed that the citizenship of the parties is

diverse and that the amount in controversy exceeds $75,000.00,

exclusive of interest. The Court has jurisdiction pursuant to 28

U.S.C. § 1332.

Further, the parties have presented an actual and

justiciable controversy regarding the respective rights and

responsibilities of Clarendon and ICW under policies of insurance

issued by the parties. Granting declaratory relief would serve

the useful purposes of clarifying both the legal relations of the

parties and the nature and extent of any the controversy

remaining before the Court. The Court exercises its discretion to

determine the parties’ claims for declaratory relief and thereby

to declare the rights of the parties.

III. Facts

A. Undisputed Facts

The parties stipulated in the joint pretrial statement/order

of May 14, 2004, that all facts set forth in the Court’s June 30,

2000, order under the heading “I. FACTS,” sections A through D,

are deemed admitted and/or are the law of the case except to the

extent listed in sections III and IV of the order of May 14,

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7 The Court notes that this stipulation is unclear because sections III

and IV of the May 14, 2004 pretrial statement, which was later adopted as the

order governing the trial, were “UNDISPUTED FACTS” and “DISPUTED FACTUAL

ISSUES,” respectively. Section V of the May 2004 order was “DISPUTED

EVIDENTIARY ISSUES.” Clearly the parties did not intend that undisputed facts

from Judge Coyle’s order be rendered disputed simply because they were later

referred to as undisputed facts in the pretrial order. Thus, the Court

concludes that the designation of sections III and IV as exceptions was

erroneous; the parties must have intended to designate sections IV and V

instead of III and IV. The Court thus interprets the stipulation in the May

2004 order as agreeing that the facts in Judge Coyle’s order of June 30, 2000,

were undisputed except to the extent listed in section IV and V of the May

2004 order.

52

2004.”7 The parties further agreed in the order of May 14 that

specific facts were uncontested. Thus, the undisputed facts are

as follows:

1. Insurance Company of the West (ICW) is a California

corporation with its national headquarters in San Diego,

California.

2. On or about January 13, 1998, G&P Transport (G&P) was a

motor carrier and the owner of a 1997 Kenworth tractor, VIN

1XKADB9XIVR741771 (the tractor), and a refrigerated trailer unit

(the trailer). 

3. On or about January 13, 1998, there was a written lease

agreement between G&P and H&G Transport (H&G) for the use of the

tractor. 

4. On or about January 13, 1998, while being operated by

Inderjit Singh, the 1997 Kenworth tractor, with a refrigerated

trailer in tow, was involved in a vehicular accident involving a

1994 International tractor being operated by Craig McAlexander, a

1996 blue Chevrolet Cavalier (the Cavalier) being operated by

Richard Moore and occupied by passenger Mary Ellen Moore, and a

1975 tan Chevrolet being operated by William Hatley near Shawnee

in Pottawatomie County, Oklahoma (the accident). At the time of

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the accident, Inderjit Singh was twenty-two years old, and the

tractor was displaying placards listing the federal operating

authority of H&G, with the permission of H&G and pursuant to a

written lease agreement between H&G and G&P. G&P was hauling

cargo for H&G transport under H&G’s federal operating authority

(ICC permit) because G&P did not have its own authority. Richard

Moore suffered fatal injuries as a result of the accident. Mary

Ellen Moore was a passenger in the Cavalier. It is alleged that

Mary Ellen Moore, Craig McAlexander, and William Hatley sustained

injuries as a result of the accident.

5. On or about May 4, 1998, an action was filed by Mary

Ellen Moore styled Mary Ellen Moore Individually and Mary Ellen

Moore as Administratrix of Richard Harris Moore, deceased v. H&G

Transport Inc. and G&P Transport, Inc., case number CV-98-233, in

the District Court of Pottawatomie County, Oklahoma (the Moore

action). On our about March 18, 1999, Craig McAlexander filed a

complaint in intervention, naming as defendants H&G, G&P, ICW,

and Clarendon. Subsequently, Moore joined ICW and Clarendon as

party defendants. The action settled pursuant to a written

settlement (the Moore settlement agreement) entered into by both

Clarendon and ICW. ICW paid a total of $510,000.00 towards the

settlement, and Clarendon paid a total of $540,000.00 towards the

settlement. Further, ICW paid $33,320.26 in fees and costs in

defending the Moore action. ICW has refused to reimburse

Clarendon’s costs and expenses incurred in defending H&G in the

Moore action and has refused to reimburse the payments made by

Clarendon to settle the Moore action.

6. On or about June 2, 1998, an action was filed by Mr.

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Wiliam Hatley styled William Hatley Individually and dba A-Hote

Wrecker Service v. Inderjit Singh, Parampreet Singh, H&G

Transport Inc., G&P Transport and ICW, case number CV-98-289, in

the District Court of Pottawatomie County, Oklahoma (the Hatley

action). The action settled, with ICW paying a total of

$21,750.00 towards the settlement and $7,277.50 for environmental

clean-up fees in connection with the accident.

7. On or about January 6, 1998, Parampreet Pannu submitted

an application for insurance on behalf of G&P (the application).

8. Rosemary Mirko, an owner of RAM Commercial Insurance

Services (RAM), a retail insurance brokerage, signed and helped

prepare the application. It is the usual practice of Ms. Mirko to

ask the applicant who would be driving the vehicles. Mirko would

then run a motor vehicle report (MVR) for all disclosed drivers.

On January 6, 1998, Mirko sent the application by facsimile and

mail to Kleiner, Fields & Burton (KFB), a wholesale insurance

agency that acted as the middleman between retail agents and ICW.

After receiving G&P’s application, KFB forwarded it to ICW.

9. Inderjit Singh is not listed as a driver for G&P on the

application. The section of the application entitled “Driver’s

Schedule” lists only Parampreet Pannu (Pannu) as the driver of

the listed 1997 Kenworth. At the time of the application,

Inderjit Singh was twenty-two years old.

10. Under ICW’s underwriting guidelines, the minimum age for

a driver was twenty-three, and age twenty-five or older was

preferred; drivers were required to have a minimum of two years

of experience in commercial over-the-road driving. ICW’s

underwriting guidelines required that drivers’ MVR’s be “received

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and approved before qualifying to drive.” This meant that the

retail agent was to send any disclosed drivers’ MVR’s to KFB for

approval. 

11. ICW issued liability policy number XHO1557531-00 to G&P

with effective dates of January 6, 1998, through January 6, 1999

(the ICW policy or the policy). The tractor was a specifically

described auto on the ICW policy. The policy was issued under

ICW’s small fleet trucking program.

12. Both the ICW and the Clarendon policies were issued and

delivered in California and contain several endorsements which

conform the policies to California law. Both of the scheduled

vehicles on the ICW policy were described as being principally

garaged in Turlock, California. The VIN number for the first

scheduled auto on the ICW policy matches that of the truck

involved in the accident.

13. ICW did not cancel the policy or issue a named driver

exclusion after learning that Inderjit Singh was a driver for

G&P. ICW continued to insure G&P until the ICW policy expired by

its own terms.

14. On or about October 9, 1997, Clarendon issued to H&G

insurance policy number T07-702350 (the Clarendon policy), a

commercial automobile liability insurance policy which was in

full force and effect on the day of the accident. The Clarendon

policy contained an “Endorsement for Motor Carrier Policies of

Insurance For Public Liability Under Sections 29 and 30 of the

Motor Carrier Act of 1980" (MCS-90 endorsement), which was in

effect at the time of the accident.

///

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B. Disputed Facts

1. Coverage under the ICW policy was $750,000.00 per

accident. The policy provided:

CONCEALMENT, MISREPRESENTATION OR FRAUD

This Coverage Form is void in any case of fraud by

you at any time as it relates to this Coverage Form. It

is also void if you or any other “insured,” at any time, 

intentionally conceal or misrepresent a material fact 

concerning:

a. This Coverage Form;

b. The covered “auto”;

c. Your interest in the covered “auto”, or

d. A claim under this Coverage Form.

2. The ICW policy was underwritten as part of the small

fleet trucking program, the underwriting guidelines of which were

developed by ICW and KFB and provided that there be included on

the schedule of drivers on the application all drivers who would

be operating the equipment, including owners and part-time

drivers; drivers’ minimum age was twenty-three years; applicants

or insureds must require as a minimum in their hiring practices

two years of commercial over-the-road driving experience; and any

motor vehicle record (MVR) of the drivers be received, be

acceptable, and be approved before qualifying to drive. 

3. The guidelines set a motor vehicle report (MVR) point

system whereby violations of law, accidents, and failures to

appear were assigned point values; four points required a driver

exclusion, and three probation, which might prompt an exclusion

for further violations. Nevertheless, the limits were negotiated

in various circumstances; occasionally ICW permitted coverage of

drivers who were otherwise unacceptable and charged a higher

premium or imposed other conditions; sometimes a policy was

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issued to an insured who employed an unacceptable driver, and the

driver would be specifically excluded. 

4. The purpose of the age requirement was to obtain mature

drivers, and the purpose of the experience requirement was risk

control.

5. The evidence established by a preponderance that the ICW

underwriting guidelines were not inflexible, were not invariably

or carefully observed or followed in the underwriting process,

were not attended to in connection with the claims process, and

were also subject to negotiation; the evidence established by a

preponderance that ICW and KFB were sloppy and lax in their

business practices.

6. Rosemary Mirko acted on behalf of RAM, which in turn

acted as G&P’s broker and agent but not as the agent of the

insurer.

7. RAM did not have the authority to bind coverage on behalf

of ICW.

8. KFB generally acted as ICW’s broker and managing general

agent; KFB was also a broker or general agent for Clarendon and

had underwritten H&G’s Clarendon transportation policy. 

9. KFB had the authority to issue ICW policies and bind

coverage, subject to being overruled by ICW if ICW determined to

reject bound coverage as not within the guidelines.

10. The evidence establishes by a preponderance that Mirko

spoke with Gurdial Singh Gill (Gill), whom Mirko knew through

business that RAM had done with H&G Trucking, a company to whom

Gill had leased a truck. However, the evidence does not establish

the time, place, or manner of the conversation; the precise

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questions uttered by Mirko; or the responses thereto.

11. In completing the application process, Mirko used to

some extent a standard form provided by KFB that was written in

English and that was not translated into Punjabi, the principal

language spoken by Gill and Pannu. No interpreter assisted during

the application process for the ICW policy.

12. Mirko was the only direct participant in the process of

taking the application from G&P who testified in person at trial;

testimony given by deposition was limited to short excerpts;

thus, the evidence provided a limited context for the drawing of

inferences regarding the application process. 

13. The evidence did not establish by a preponderance that

either Gill or Pannu understood, spoke, or read English; the

evidence did not establish that either of them could understand

Mirko, understand the policy or application therefor, or

communicate reliably or clearly with Mirko respect to the matters

included in the application for the policy. 

14. The limited testimony presented to the Court, even when

considered in light of the other evidence, did not establish that

Mirko did, or was able to, communicate the matters on the

application to Gill or Pannu clearly or accurately for them to

understand the substance of what was being communicated to them

or recorded on the application form. 

15. The application form did not specifically request the

listing of independent contractors, subcontractors, driver’s

helpers, trainees, co-drivers, or all drivers. However, it asked

whether the applicant used subhaulers or owner-operators, and it

had a schedule for the listing of multiple drivers that had

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columns for the date of birth, driver’s license information, and

full- or part-time status of each driver. It directed completion

of the equipment and drivers’ list forms. 

16. The application form did not specifically state that the

applicant had to list the driver’s commercial driving experience

or require the identification of all principal owners; it did ask

if the applicant agreed promptly to report all driver and vehicle

changes to the agent; it also had a driver’s schedule with space

to list drivers, and the only driver listed was Pannu.

17. The evidence did not establish by a preponderance that

Mirko asked for all the drivers of the vehicles, the age or years

of experience of all the drivers or of every driver, or for a

report of any or all changes in drivers or vehicles.

18. The evidence did not establish by a preponderance that

Mirko, or anyone acting on behalf of RAM, KFB, or ICW, informed

or instructed any applicant of a duty promptly to report all

driver changes or all vehicle changes. 

19. The Court rejects Mirko’s testimony that she simply read

the questions on the form and received answers. The evidence did

not establish by a preponderance that Mirko had a clear memory of

the details of the application process, including the precise

questions asked, the precise answers given, who gave her what

information, or whether the conversations regarding the

application proceeded in person or over the telephone. 

20. The Court finds not worthy of belief Mirko’s position

that communication with Gill and/or Pannu was not difficult and

that speaking slowly and spelling words was sufficient to

effectuate communication. 

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21. The evidence did not establish that Mirko understood or

believed that the guidelines or requirements regarding age and

experience for drivers were important or material; the evidence

did not establish that Mirko knew or understood at the time she

participated in filling out the application that there was any

driver of G&P who was not disclosed on the application.

22. At all pertinent times, H&G was a corporation engaged in

the commercial transportation of property in interstate and

intrastate commerce.

23. The evidence does not establish by a preponderance the

precise time of the formation of G&P as a business entity. The

application listed the form of the entity as a partnership, and

it was signed by Pannu. 

24. Mirko understood that the policy was being obtained for

a business that would be called G&P, the partners of which would

be Gill and Pannu.

25. Gill told Mirko that he would not be driving because of

kidney problems. The underwriting guidelines provided that if a

principal owner of a prospective insured did not meet the

guidelines, the account should be declined. Although pursuant to

the underwriting guidelines and customary underwriting practices,

it was necessary to obtain MVR’s for all owners or partners, no

effort was made to ascertain the MVR of Gill.

26. The application form was not part of the policy,

incorporated therein, or attached to the policy sent to the

insured, but it asked the applicant if he agreed to report all

driver and vehicle changes to the agent. Although Mirko testified

that standard form correspondence sent out to the insured from

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RAM with the policy reminded the insured to report all drivers,

the evidence did not establish by a preponderance that

correspondence with such an admonition was sent to G&P.

27. On or about January 8, 1998, the application was

submitted to KFB with an MVR of Pannu, which reflected his birth

date of April 6, 1974, which made him twenty-three years old; the

MVR did not indicate Pannu’s experience, and it reflected

issuance of a license on December 9, 1997. When questioned by

Martha Escobar of KFB, Mirko informed Escobar that for four to

five years, Pannu had been driving for H&G.

28. The evidence did not establish by a preponderance that

ICW knew, or should have known, that Pannu did not meet any ICW

underwriting guidelines at the time that coverage was bound for

G&P. 

29. The customary practice of KFB and ICW was for KFB to

forward a copy of an application for insurance to ICW for review,

but it was not uncommon for ICW to receive copies of an

application several days after coverage had already been bound by

KFB.

30. On or before January 8, 1998, the application was

reviewed by Sherry Barbot and/or Karen Klase of ICW’s

underwriting department.

31. On or before January 8, 1998, Karen Klase confirmed that

coverage for G&P was bound pursuant to ICW policy No. XHO

1557531-00, with effective dates of January 6, 1998, through

January 6, 1999 (the ICW policy).

32. The declarations section of the ICW policy provides in

relevant part as follows:

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ITEM TWO-SCHEDULE OF COVERAGES AND COVERED AUTOS

This policy provides only those coverages where a charge

is shown in the premium column below. Each of these 

coverages will apply only to those “autos” shown as covered 

“autos.” “Autos” are shown as covered “autos” for a

particular coverage by the entry of one or more of the

symbols from the “COVERED AUTOS” Section of the Truckers

Coverage From next to thename of the coverage.

Under Item Two of the declarations of the ICW policy, the

symbol “46" is indicated next to “Liability,” under the heading

captioned “Covered Autos.” 

Section I of the policy provides in relevant part:

SECTION I-COVERED AUTOS

ITEM TWO of the Declarations shows the “autos” that are 

covered “autos” for each of your coverages. The following

numerical symbols describe the “autos” that may be covered

“autos”. The symbols entered next to a coverage on the

Declarations designate the only “autos” that are covered

“autos.” 

A. DESCRIPTION OF COVERED AUTO DESIGNATION SYMBOLS

 SYMBOL DESCRIPTION

 * * *

46 = SPECIFICALLY DESCRIBED “AUTOS”.

Only those “autos” described in ITEM THREE of the

Declarations for which a premium charge is shown

(and for Liability Coverage any “trailers” you don’t own 

while attached to any power unit described in 

ITEM THREE). 

Item Three of the declaration page of the ICW policy refers

to Schedule I-97, which lists the following vehicles:

97KENWORTH#1xkadb9x1vr741771

00 UNID #U01

The tractor was a specifically described auto in the ICW

policy.

The ICW policy provides in relevant part:

SECTION V TRUCKERS CONDITIONS

B. GENERAL CONDITIONS

 * * *

 2. CONCEALMENT

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 This Coverage Form is void in any case of fraud

 by you at any time as it relates to this Coverage

 Form. It is also void if you or any other “insured”

 at any time intentionally conceal or misrepresent

 a material fact concerning:

a. This Coverage Form;

 b. The covered “auto”;

 c. Your interest in the covered “auto”; or

 d. A claim under this Coverage Form.

32. The evidence did not establish by a preponderance that

Inderjit Singh was employed by, or was a driver for, G&P at the

time of the application for the insurance policy; the evidence

did not establish by a preponderance that Gill, Pannu, or G&P

understood, believed, or knew that Inderjit was an employee of

G&P before the time of the application for insurance.

33. The evidence established that Inderjit Singh was driving

for G&P at the time of the accident.

34. The evidence did not establish by a preponderance that

Gill or Pannu knew or understood that they had been asked to

disclose all drivers, including Inderjit.

35. The evidence did not establish by a preponderance that

Gill or Pannu knew or understood when submitting the application,

or at any time during the application process, that they were

omitting desired information regarding drivers or Inderjit.

36. The evidence did not establish by a preponderance that

Gill or Pannu knew or understood at any time during the

application process, when submitting the application, or at any

time thereafter, that they made an untrue statement regarding

drivers or Inderjit.

37. The evidence did not establish by a preponderance that

Mirko knew or understood that information regarding drivers was

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omitted from the application.

38. The evidence did not establish by a preponderance that

there was any knowing or intentional concealment or failure by

G&P, Gill, or Pannu to disclose any fact concerning the identity

of drivers during the application process or thereafter.

39. The evidence did not establish by a preponderance that

there was any knowing or intentional concealment or failure by

G&P, Gill, or Pannu to disclose any fact concerning the age of

any driver during the application process or thereafter. 

40. The evidence did not establish by a preponderance that

there was any knowing or intentional concealment or failure by

G&P, Gill, or Pannu to disclose any fact concerning the

experience of any driver during the application process or

thereafter.

41. The evidence did not establish by a preponderance that

Gill, Pannu, or G&P concealed or failed to disclose any fact

regarding any driver with the intent to induce reliance by ICW.

42. The evidence did not establish by a preponderance that

Gill, Pannu, or G&P concealed or failed to disclose any fact

regarding any driver for the purpose of obtaining insurance or

for inducing ICW to write the policy.

43. The evidence did not reveal sufficient circumstances

surrounding the coverage of H&G by Clarendon to provide a context

for the drawing of inferences by the Court; the evidence did not

establish by a preponderance that any failure to disclose drivers

in connection with Clarendon’s coverage of H&G was intentional.

44. The evidence established by a preponderance that on or

about January 22, 1998, ICW was aware of the accident and that

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Inderjit Singh had driven for G&P and had been involved in the

accident even though he was not listed on the ICW policy. The

Court credits the evidence to this effect and discredits

testimony and evidence that would support a contrary conclusion.

45. The Court credits the testimony of Ronald Schwarz,

President of KFB, to the effect within a few days of the

accident, Sherry Barbot, ICW’s underwriting manager, contacted

Schwarz of KFB to complain that Inderjit Singh, the driver during

the accident, was not disclosed as a driver on the application.

46. The Court credits the testimony of Rosemary Mirko and

related documentation that Mirko sent Inderjit’s MVR to KFB on

January 28, 1998.

47. At all pertinent times, Karen Kirk was the senior claims

representative of ICW assigned to the loss from the accident on

January 13, 1998. Her duties involved determining whether

coverage for an accident was excluded, including determining

whether the driver was listed in a named driver exclusion and

identifying whether any potential policy exclusions might be

applicable. Kirk nevertheless was unaware of ICW’s underwriting

guidelines until after the inception of this litigation. Her

duties included forwarding claims abstracts to the underwriting

manager, Sherry Barbot, who would then review any changes in

risks for the underwriting department.

48. ICW claimed that it would issue a named driver exclusion

for any driver it considered unacceptable, regardless of whether

or not that driver was still employed by the insured; however, 

ICW did not issue a named driver exclusion for Inderjit Singh.

49. On or about January 23, 1998, Kirk telephoned Inderjit

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Singh (Inderjit). In the conversation on January 23, 1998, Kirk

did not ask Inderjit when he began driving trucks for G&P or any

other questions regarding his commercial or over-the-road

experience.

50. Although ICW and its agents believed after the accident

that at the time of the accident Inderjit was driving for G&P,

and although the employment status of Inderjit at the time of the

application was unknown to ICW or its agents, no inquiry

regarding or investigation of Inderjit’s employment status as of

the time of the application was undertaken by ICW or its agents

after the accident.

51. Although Kirk claimed that she was told by Inderjit that

he had been terminated by G&P and was no longer employed, her

notes do not reflect any discussion of Inderjit’s employment

status with Inderjit or anyone else.

52. It was Kirk’s custom to keep a running computerized log

identifying ICW’s activities in handling a claim and noting any

facts or issues pertaining to coverage; however, none of the

notes provided by ICW refer to Inderjit’s employment status;

further, none of Kirk’s pre-litigation computerized log notes

provided by ICW identify Inderjit Singh’s status as an

undisclosed driver to be a potential coverage issue.

53. On or about March 10, 1998, Kirk again spoke with

Inderjit, but the conversation did not include mention of

Inderjit’s employment status, history of driving with G&P, or his

driving experience.

54. The Court rejects the evidence tending to show that Kirk

learned in her conversations with Inderjit or from other sources

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that he was no longer driving for G&P.

55. The testimony of Karen Kirk was inconsistent, vague, and

lacked specifics. The evidence did not establish by a

preponderance that by March 10, 1998, or in March 1998, Kirk or

anyone else had informed Sherry Barbot, underwriting manager of

ICW, that Inderjit was no longer working for G&P. 

56. Because the accident involved a significant loss, Karen

Kirk was required to submit quarterly reports that would discuss

coverage issues. None of the quarterly reports on the accident

and loss occasioned thereby prepared by ICW ever discussed

Inderjit’s employment status or his qualifications under ICW’s

underwriting guidelines, identified misrepresentation as a

potential ground for disclaiming coverage, or suggested that

G&P’s failure to disclose Inderjit Singh on the application might

serve as a basis for disclaiming coverage.

57. ICW’s investigation of the accident included retention

of GAB Robins, who interviewed Inderjit and provided ICW with a

written report dated January 27, 1998, which reflected Inderjit’s

date of birth as August 13, 1975, and which did not reflect any

discussion of Inderjit’s employment status or history of driving

with G&P; it indicated that he had a Class A license since August

1997 and also that he had been a commercial truck driver since

8/77 (apparently an error). ICW did not attempt after the

accident to learn the employment status of Inderjit at the time

of the insurance application. 

58. The Court credits Klase’s testimony that she and Barbot

discussed cancelling the policy because Inderjit was not on the

application and was an unacceptable risk. The Court also credits

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Klase’s testimony that during the term of the policy, she and

Barbot discussed not renewing the policy, instead of canceling

it, because of the named insured problem.

59. The credible evidence does not establish that any

discussion at ICW of Inderjit’s no longer driving for G&P

occurred before October 1998.

60. As of January 23, 1998, no one was driving for G&P under

the ICW policy because the only covered vehicle was totaled in

the accident. 

61. The evidence established by a preponderance that after

the accident, ICW was not happy about having written or writing

the risk. Barbot wanted to cancel the policy after learning of

the unreported driver and the loss. She offered as an explanation

for not cancelling that it was too late (beyond sixty days after

policy inception), it would have looked vengeful, and it might

have precipitated an investigation by the insurance authorities.

However, ICW had had notice of the loss and the unreported driver

during the sixty days following inception of the policy; ICW knew

it could have cancelled the policy for any reason within the

first sixty days. ICW had two opportunities to cancel the policy

(upon the requests of the insured and the finance company) and

nevertheless did not cancel the policy.

62. Although ICW’s normal procedure upon learning that an

unscheduled driver who did not meet guidelines was involved in an

accident was to insist on a named driver exclusion or

cancellation, ICW neither cancelled the policy nor sought a named

driver exclusion. It was the customary practice of KFB and ICW to

make a decision with respect to renewal of a policy within five

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business days or a week of learning of an unacceptable risk. 

63. The Common Policy Conditions portion of the policy

provided that ICW could cancel the policy by mailing or

delivering to the insured written notice of the cancellation at

least ten days before the effective date of cancellation if it

canceled for nonpayment of premium, or thirty days before the

effective date of cancellation if it canceled for any other

reason; the notice of cancellation would state the effective date

of cancellation, and the policy period would end on that date.

64. The California Changes--Cancellation and Nonrenewal

endorsement to the policy provided that as to policies in effect

for more than sixty days, the insurer might cancel the policy

only upon the occurrence of enumerated occurrences, including

nonpayment of premium and discovery of any violations of state

laws or regulations establishing safety standards by the insured

or its representative which materially increased any of the risks

insured against.

65. G&P requested that ICW cancel the policy on or about

February 4, 1998, and again on March 5, 1998.

66. On or about February 4, 1998, pursuant to the G&P’s

request and a loss policy release prepared by Rosemary Mirko of

RAM dated January 21, 1998, RAM directed KFB to cancel the ICW

policy because the only covered vehicle was totaled in the

accident.

67. ICW and its agents understood that they were legally

entitled to, and could have, cancelled the policy at that time

and would have had no obligation to reinstate the policy, even if

the insured subsequently requested it. However, the policy was

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not cancelled.

68. On March 4, 1998, Mirko and Shannon Gwinn of RAM

directed KFB to process the cancellation because the insured had

not notified them of having purchased another vehicle.

69. Imperial Premium Finance, Inc., the company that was

financing G&P’s payment of the premium on the ICW policy, sent to

RAM a notice of intention to cancel dated February 17, 1998, with

an effective date of cancellation of March 5, 1998, because of a

delinquency in payment.

70. ICW and its agents understood that they were legally

entitled to, and could have, initiated cancellation procedures at

that time and would have had no obligation to reinstate the

policy, even if the insured subsequently requested it; they could

have ignored the request for reinstatement and proceeded to

cancel the policy.

71. On or about March 5, 1998, the finance company again

instructed ICW to cancel the ICW policy for nonpayment.

72. ICW and its agents understood that once they received a

request to cancel a policy from a premium finance company, they

were not obligated to reinstate the policy, even if the finance

company subsequently requested that they do so.

73. On March 5, 1998, Shannon Gwinn of RAM faxed a memo to

Martha Escobar of KFB directing KFB to discard the previous day’s

memo because the insured had purchased another vehicle. Escobar

replied that notice of cancellation for nonpayment of the premium

had issued from the finance company, and she asked for

clarification of whether or not she should add the vehicle.

74. An endorsement to the ICW policy effective March 5,

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1998, added a 1998 Volvo and a 1998 utility to the policy.

75. KFB prepared a notice of cancellation, dated March 10,

1998, which was to be effective March 28, 1998.

76. On or about March 11, 1998, RAM replied to the inquiry

of Escobar of KFB, informing her that the insured had just paid

and that reinstatement would follow and be processed as soon as

possible. 

77. On March 12, 1998, RAM was informed by a facsimile

transmission from the finance company that the delinquent payment

was received on March 12, 1998, and the company requested

reinstatement. A formal notice of request to insured for

reinstatement was sent out to RAM by the finance company on March

13, 1998.

78. The cancellation that had been directed was not

effected. ICW chose to honor the premium finance company’s

request for reinstatement even though it understood that it was

not obligated to do so.

79. A request for cancellation by the insured or the premium

finance company would permit cancellation of the policy, even

over any subsequent objection by either the insured or the

premium finance company.

80. Any fear on the part of KFB or ICW personnel or agents

that they would be perceived to be acting in bad faith if they

cancelled the contract was without objective basis.

81. The Court finds that neither KFB nor ICW personnel or

agents had a genuine or sincere, subjective fear of appearing to

have acted in bad faith by cancelling the policy after the

accident.

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82. Documentation of any California operating authority or

PUC endorsement for G&P with respect to the ICW policy was

lacking. The evidence established by a preponderance that the

insured was not entitled to thirty days’ notice of cancellation.

83. The evidence did not establish by a preponderance the

driving experience of Inderjit. 

84. To cancel a policy because of an underage driver or

noncompliance with underwriting rules would normally have

required a discussion between KFB and the carrier as to whether

the policy should be canceled.

85. Although there was limited testimony to the effect that

the ICW policy would not have issued had Pannu and Inderjit been

the drivers, neither this testimony nor the other evidence,

including but not limited to guidelines, practices, and conduct

of the insurance entities and representatives involved,

established by a preponderance that the policy would not have

issued had Inderjit been disclosed as a driver, or that the

policy would not have issued had Inderjit’s age and experience

been disclosed.

86. After G&P requested to add a 1998 Volvo tractor to the

ICW policy on or about March 5, 1998, KFB retained inspectors, in

this instance MLK, to go to the facility of G&P and to report,

inter alia, anything contrary to the application. The report of

MLK revealed that the only person to drive the 1998 Volvo tractor

would be Gurdial Gill.

87. Gill had represented that he would not be driving. As an

owner, however, he could potentially drive the truck. ICW

requested an MVR for Gill. Gill’s MVR reflected several moving

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violations and was not adequate to meet the underwriting

guidelines.

88. The evidence did not establish by a preponderance that

on April 22, 1998, Gill misrepresented to MLK Inspections his

status as the only driver.

89. ICW did not issue a named driver exclusion for Gill or

require him to sign any warranty that he would not drive for G&P;

further, it proceeded to continue the coverage in effect under

those circumstances.

90. On or about June 11, 1998, the ICW policy was amended to

add a 1996 Kenworth Tractor.

91. On or about July 8, 1998, ICW asked KFB to identify the

persons who would be driving the 1996 Kenworth; KFB requested RAM

to identify the drivers, and on or about July 11, 1998, RAM faxed

the MVR of Tarlok Singh to KFB. 

92. The evidence did not establish by a preponderance that

an MVR of Inderjit was faxed to KFB at that time. The evidence

did not establish by a preponderance that KFB advised ICW in July

1998 that Inderjit Singh would be driving the 1996 Kenworth. The

evidence did not establish by a preponderance that Inderjit Singh

was sought to be added as a driver to a policy in the summer of

1998. 

93. Between June 11, 1998, and early July 1998, neither ICW

nor KFB was advised of the identity of the driver(s) for the 1996

Kenworth.

94. Neither ICW nor any person or entity on its behalf

issued a named driver exclusion with respect to Inderjit Singh.

95. At some time during the term of the policy, the file was

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marked by ICW for nonrenewal. In October 1998, Barbot decided not

to renew G&P’s policy because of an owner with a poor MVR.

96. The evidence did not establish by a preponderance that

an applicant’s use of Inderjit as a driver would have affected

ICW’s decision to enter into the contract. 

97. The evidence did not establish by a preponderance that

an applicant’s use of Inderjit as a driver would have affected

ICW’s decision to enter into the contract at a particular premium

rate.

98. On behalf of ICW, Kirk requested contribution from

Clarendon towards a settlement of approximately $21,000.00 paid

by ICW. Clarendon refused to share in the settlement.

99. The settlement agreement regarding the Moore action

specifically provided:

Both [ICW] and Clarendon National Insurance Co. 

make such payment with full reservation of rights

against one another. Both insurers, [ICW and Clarendon], 

specifically reserve the right to argue that they 

are entitled to reimbursement for some or all of 

the monies paid respectively to the Plaintiffs.

No insurer shall be treated as a “voluntary payor.”

Each insurer has denied that it provides any coverage.

The execution of this agreement is not an admission of 

coverage.

100. Between January 21, 1998, and January 28, 2000, ICW did

not disclaim coverage or reserve its rights to disclaim coverage

based on the fact that Inderjit Singh was operating the truck.

101. In a letter from ICW to Clarendon dated November 10,

1998, ICW argued that Clarendon provided primary coverage by

virtue of its MCS-90 endorsement; ICW did not indicate that ICW

contemplated declining the Hatley claim based on a material

misrepresentation by G&P.

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102. After Judge Coyle’s June 30, 2000 order, ICW alleged

for the first time that the reason it did not decline coverage or

cancel the ICW policy upon learning about Inderjit Singh was

because Inderjit told Kirk that he was no longer employed by G&P.

103. In support of ICW’s motion for new trial, Kirk

submitted a declaration dated July 13, 2000, wherein she stated

that the issue of her conversation about Inderjit Singh’s

employment status did not come up in her deposition of January

12, 2000, and did not come up until a conversation she had with

Mr. Wagoner on July 10, 2000.

104. ICW’s underwriting file does not contain any notations

of a conversation involving anyone at ICW regarding the coverage

implications of Inderjit Singh’s driving.

105. The only reservation of rights letter issued by ICW was

issued on January 28, 2000, approximately two weeks after Karen

Kirk’s January 12, 2000, deposition.

106. The reservation of rights letter issued approximately

two years after ICW was notified of the accident, one year and

seven months after the filing of the Hatley action, and one year

and eight months after the filing of the Moore action.

107. By letter dated February 14, 2000, Gill responded to

the reservation of rights letter.

108. The reservation of rights letter was the first document

generated by ICW (apart from those generated by counsel in this

litigation) in which ICW indicated that Inderjit’s status as the

driver created any coverage issues.

109. The evidence established by a preponderance that it was

not uncommon for insured trucking concerns to have changes or

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additions in drivers during the life of a policy.

110. The evidence did not establish by a preponderance when

ICW learned of facts concerning Inderjit’s having driven with or

for Gill before the accident. 

111. In failing to rescind earlier or to issue an earlier

reservation of rights, or in participating in the Moore and

Hatley actions in any respect, neither ICW nor any of its agents

intended to forego a coverage defense based on concealment or

misrepresentation by G&P regarding Inderjit being a driver or

regarding Inderjit’s age or driving experience.

112. Neither ICW nor any of its agents intended that G&P or

Clarendon rely on its failure to rescind, or its participation

in, or payments made regarding, the Moore action and/or the

Hatley action, as a binding representation of coverage. 

113. ICW did not waive its coverage defense.

114. Clarendon defended H&G in the Moore and Hatley actions

despite its conclusion that it had no duty to defend subject to a

reservation of rights.

115. ICW settled the Hatley action on November 17, 1998, for

$21,750.00, and on April 7, 1998, paid $7,277.50 in settlement of

an environmental cleanup claim. 

116. On February 28, 2000, Clarendon and ICW settled the

Moore action (including the McAlexander and Arkansas Workers’

Compensation Commission petitions in intervention) for

$1,050,000.00; ICW paid $510,000.00, and Clarendon paid

$540,000.00.

117. G&P did not retain independent counsel in the Moore and

Hatley actions.

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 The Court believes that Judge Coyle necessarily decided this issue, but the Court adds this finding in an

abundance of caution.

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118. The evidence did not establish by a preponderance that

G&P was prejudiced by ICW’s failure to rescind.

119. The evidence did not establish by a preponderance that

G&P reasonably relied on ICW’s failure to issue a reservation of

rights.

120. The evidence did not establish by a preponderance that

G&P detrimentally relied on ICW’s failure to issue a reservation

of rights.

121. ICW was not estopped from raising an alleged

concealment or misrepresentation regarding Inderjit Singh as a

defense to coverage. 

122. There is no showing of any manifest injustice or any

intervening change in the law, evidence, or other circumstances

bearing upon Judge Coyle’s previous determination that the

trailer was not a covered vehicle under the Clarendon policy.

123. In connection with the ICW policy, in June 1998 ICW

processed and mailed a Motor Carrier Automobile Bodily Injury and

Property Damage Liability Certificate of Insurance (Form MC 91X)

and issued an MCS-90 endorsement.

124. It was ICW’s understanding that the MCS-90 increased

ICW’s exposure, but ICW did not charge a higher premium for the

issuance of the MCS-90.

125. Clarendon did not act as a volunteer in its

participation in and settlement of the state court actions.8

CONCLUSIONS OF LAW

1. On or about January 6, 1998, G&P through Gill and Pannu

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applied for insurance coverage in the form of the ICW policy.

2. The policy provided that an intentional, fraudulent, and

material misrepresentation or concealment would void the policy;

reasonably construed, this requires for a defense to coverage not

an innocent or negligent misrepresentation or concealment, but

rather an intentional and fraudulent misrepresentation or

concealment.

3. The policy thus provided for a different standard from

that stated in Cal. Ins. Code § 331.

4. On or about January 6, 1998, Gill and/or Pannu on behalf

of G&P did not misrepresent or conceal the status of Inderjit

Singh as a driver on the application for insurance.

5. Gill and/or Pannu on behalf of G&P did not knowingly,

intentionally, recklessly, with the intent to obtain coverage,

with the intent to deceive or defraud, or with the intent to

induce reliance by ICW, misrepresent, conceal, or fail to

disclose facts concerning drivers or Inderjit in connection with

the application for the ICW policy. 

6. There was no knowledge or belief on the part of Gill,

Pannu, G&P, or Mirko that there had been any misrepresentation,

concealment, or failure of disclosure.

7. Considering the probable and reasonable influence of the

facts upon ICW, the evidence did not establish by a preponderance

that a failure to disclose Inderjit as a driver and/or his age

and/or experience would have affected ICW’s decision to enter

into the contract; the disclosure or nondisclosure of Inderjit

Singh as a driver was not material with respect to the decision

to issue the ICW policy.

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8. Considering the probable and reasonable influence of the

facts upon ICW, the evidence did not establish by a preponderance

that a failure to disclose Inderjit as a driver and/or his age

and/or experience would have affected ICW’s decision to enter

into the contract at a particular premium rate; the disclosure or

nondisclosure of Inderjit Singh as a driver was not material with

respect to the decision to enter into the contract at a

particular premium rate. 

9. ICW did not meet its burden of establishing a defense to

coverage on the ICW policy on the basis of material

misrepresentation and/or concealment.

10. ICW did not waive its coverage defense.

11. ICW was not estopped from asserting its coverage

defense.

12. Clarendon did not act as a volunteer in contributing

towards settlement of the Moore action.

13. Judge Coyle’s previous determination that the trailer

was not a covered vehicle under the Clarendon policy was not

clearly erroneous; no manifest injustice or intervening change in

the law, evidence, or other circumstances bearing on the

determination has been shown. Because in the order of June 30,

2000, Judge Coyle implicitly decided that the trailer was not a

covered vehicle under the Clarendon policy, ICW is foreclosed

under the doctrine of the law of the case from raising this

issue. United States v. Lummi Indian Tribe, 235 F.3d 443, 452

(9th Cir. 2000).

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 JUDGMENT AND DECLARATION OF THE PARTIES’ RIGHTS

 AND OBLIGATIONS

The content and form of the judgment to follow in this case

were disputed in a motion to alter or amend judgment, which Judge

Coyle denied because of mootness due to the anticipated trial.

However, the Court notes that the parties reserved the right to

stipulate to amounts expended in the defense of the Moore action.

In the interest of the orderly administration of justice, by

separate order the Court will direct the parties to meet and

confer regarding the form and content of the judgment, to

stipulate if possible to a draft of a judgment declaring the

parties’ rights and obligations, and to inform the Court of the

status of these efforts and other aspects of this case.

IT IS SO ORDERED.

Dated: July 6, 2006 /s/ Sandra M. Snyder 

icido3 UNITED STATES MAGISTRATE JUDGE

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