Court Opinion

ID: 4170851
Source: CourtListenerOpinion
Date Created: 2017-05-22 20:06:02.194291+00
Date Added: 2024-06-11T14:24:15.274156
License: Public Domain

Filed 5/10/17 Certified for Publication 5/22/17 (order attached)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                    SECOND APPELLATE DISTRICT
                                DIVISION TWO

SOUTHERN INSURANCE COMPANY,                               B278412

              Petitioner,                                 (WCAB No. ADJ6865421)

        v.

WORKERS‟ COMPENSATION
APPEALS BOARD, EJ DISTRIBUTION
CORPORATION et al.,

              Respondents.

      PROCEEDINGS to review a decision of the Workers‟
Compensation Appeals Board. Annulled and remanded with
directions.
      Stockwell, Harris, Woolverton & Muehl, Alexander G.
Abdoulin and George Woolverton for Petitioner.
      Margaret W. Hosel and Anne Schmitz for Respondent
Workers‟ Compensation Appeals Board.
      Department of Industrial Relations, Christopher Jagard,
Steven A. McGinty, and Sarosh Qaiser for Respondent Christine
Baker, Director of Industrial Relations as Administrator of the
Uninsured Employers Benefits Trust Fund.
      Glauber Berenson and Timothy Chan for Respondent David
Berrios-Segovia.
      A workers‟ compensation insurance policy was issued based
on the express representation that the covered employer‟s
employees did not travel out of state. After an employee was
injured out of state, the insurer notified the employer that it was
rescinding the policy because of the employer‟s misrepresentation
and returned the premium. The issue of insurance coverage went
to mandatory arbitration wherein the arbitrator concluded that,
as a matter of law, the insurer could not rescind the policy and
that the policy was in effect. The Workers‟ Compensation
Appeals Board (appeals board) affirmed the arbitrator‟s decision.
      Contrary to the arbitrator‟s ruling, a workers‟
compensation insurance policy may be rescinded. (Ins. Code,
§ 650.) A rescission is enforced by a civil action for relief based on
rescission (Civ. Code, § 1692) or by asserting rescission as a
defense. (Resure, Inc. v. Superior Court (1996) 42 Cal.App.4th
156, 165-166 (Resure).)1 Because the arbitrator and the appeals
board did not address and determine whether rescission was a
meritorious defense to the employee‟s claim, we annul the
appeals board‟s decision and remand the case with directions to
hear and determine whether the insurer was entitled to rescind,
and did rescind, the policy.
                   FACTUAL BACKGROUND
Insurance procurement
      On December 23, 2008, EJ Distribution Corporation (EJ)
applied for workers‟ compensation insurance. The application
indicated EJ‟s business as “Concession Trucking company moves
containers, no whse [sic], no loading and unloading, under 50 mil

________________________________________________________
1     “When a contract has been rescinded in whole or in part,
any party to the contract may seek relief based upon such
rescission by (a) bringing an action . . . or (b) asserting such
rescission by way of defense or cross-complaint.” (Civ. Code,
§ 1692.)

                                  2
rt.” The application also indicated that EJ‟s employees did not
travel out of state. The online application prepared by EJ‟s
insurance agent described EJ‟s operations as “local hauling.” The
online application also indicated that EJ‟s employees did not
travel out of state and did not have a radius of travel greater
than 200 miles.
      Workers‟ compensation insurance policy number
WSI0006904-01 (hereafter “the policy”) was issued by Southern
Insurance Company2 for an annual period beginning on January
1, 2009.
The subject claim
       On April 6, 2009, EJ‟s employee, David Berrios-Segovia
(Segovia), injured his back lifting a latch to his truck while on a
trip to Tennessee for his employer EJ. Segovia filed a workers‟
compensation claim on May 13, 2009.
       On June 12, 2009, Southern‟s attorneys sent a letter to EJ
stating that “Southern is rescinding the policy.” The decision to
rescind was based on material misrepresentations or the
concealment of material facts by EJ in the application for the
policy, specifically that its employees did not travel out of state
and that its operations did not exceed a radius of travel of 200
miles. The letter noted that Segovia‟s claim showed those
representations were not true as Segovia‟s injury occurred in
Tennessee. The letter also claimed Southern would not have
issued the policy had the true facts been known. Southern
returned the premiums paid by EJ in the sum of $19,743.03.
       Southern‟s underwriting file included a document entitled
“POLICY TERMINATION / CANCELLATION /

________________________________________________________
2
       The subject injury claim is administered by Markel doing
business as FirstComp on behalf of Southern Insurance Company
(collectively Southern).

                                 3
REINSTATEMENT NOTICE” issued on June 15, 2009. The
document stated:
     “_ X _ Termination/Cancellation/Nonrenewal
            The coverage provided by the policy number shown
            above is being __ __ nonrenewed or __X__
            terminated/canceled, __X__ flat, __ __ pro rata, or __
            __ short rate, effective 1/01/2009 12:01 a.m. standard
            time at the insured‟s mailing address for the
            following reason(s): Substantial change in risk or
            Increase in Hazard. Flat Cancel.”

      In light of Southern‟s position that the policy was rescinded
leaving EJ uninsured, the Uninsured Employers Benefits Trust
Fund (UEBTF) was joined as a defendant in Segovia‟s workers‟
compensation claim.
                    PROCEDURAL HISTORY
The arbitration
      The matter was submitted to mandatory arbitration as a
dispute involving insurance coverage pursuant to Labor Code
section 5275, subdivision (a)(1).3
       Southern called an underwriter as a witness who testified
that Southern never insured long-haul trucking in its business
division. In addition, the underwriter testified that, had
Southern known that EJ traveled outside of 200 miles or out of
state, Southern would not have issued the policy. The
underwriter, however, confirmed that the policy itself, in fact all
workers‟ compensation policies, did not contain an exclusion
based on location.
       Southern also called as a witness a special investigator
working for the insurer who testified that EJ exceeded the

________________________________________________________
3
      “(a) Disputes involving the following issues shall be
submitted for arbitration: [¶] (1) Insurance coverage.” (Lab.
Code, § 5275, subd. (a)(1).)

                                 4
200-mile radius and that operations extending beyond the 200-
mile radius were not a recent development, but was something
that had been done in the past. Prior to January of 2009, EJ
engaged in trucking operations outside of the state of California
with employees traveling to various states, such as Utah and
Tennessee. The investigator testified that notes of a conversation
with EJ by prior investigators confirmed that EJ engaged in out-
of-state operations before the inception of the policy on January
1, 2009. However, the investigator did not have firsthand
knowledge of EJ‟s operations at the time EJ filled out the
application. The investigator stated that he did not uncover
anything specific in his investigation as to EJ‟s operations at the
time the application was submitted.
The rulings of the arbitrator and appeals board
       The arbitrator found: There was “no retroactive rescission”
of the policy; Segovia‟s claim for his April 6, 2009 injury was
covered by the policy; and the policy was prospectively cancelled
under Insurance Code section 676.8, subdivision (b)(5)4 as of June
15, 2009, and not before. The arbitrator dismissed UEBTF as a
defendant in the matter.
       The arbitrator gave three reasons for his ruling that there
was “no retroactive rescission” of the policy.
       First, the arbitrator found that the “only remedy” for
Southern upon discovering misrepresentation of out-of-state
operations was cancellation of the policy pursuant to subdivision
________________________________________________________
4
       “(b) After a policy is in effect, no notice of cancellation shall
be effective unless it complies with the notice requirements of
this section and is based upon the occurrence, after the effective
date of the policy, of one or more of the following: [¶] . . .[¶] (5)
Material misrepresentation by the policyholder or its agent.”
(Ins. Code, § 676.8, subd. (b)(5).) Further statutory references are
to the Insurance Code unless indicated otherwise.

                                   5
(b)(5) of section 676.8.5 The arbitrator ruled that there “is
nothing in Insurance Code Section [676.8] that permits a
workers‟ compensation insurer to retroactively rescind a policy
that has been incepted from day one.” The arbitrator found that
Southern did not comply with section 676.8 “when it unilaterally
retroactively rescinded the policy to the inception date of the
policy.”
       Second, the arbitrator ruled that there is “no mechanism in
place in California for a workers‟ compensation insurer to
unilaterally retroactively rescind a policy especially if a claim is
pending under that policy.” Not entirely excluding rescission of a
workers‟ compensation policy, the arbitrator explained the
insurer cannot “retroactively rescind a workers‟ compensation
policy without authorization from a judge in Superior Court, a
workers‟ compensation judge, or a WCAB arbitrator.”
       Third, the arbitrator was concerned over leaving the
injured employee without coverage by what the arbitrator termed
a “unilateral, retroactive” rescission of the policy by the insurer.
       As we explain below, each of the reasons given by the
arbitrator is in error.
       Southern petitioned for reconsideration.

________________________________________________________
5
        Section 676.8 provides in pertinent part: “(a) This section
applies only to policies of workers' compensation insurance. [¶]
(b) After a policy is in effect, no notice of cancellation shall be
effective unless it complies with the notice requirements of this
section and is based upon the occurrence, after the effective date
of the policy, of one or more of the following: [¶] . . . [¶] (5)
Material misrepresentation by the policyholder or its agent.
[¶] . . .[¶] (c) A policy shall not be canceled for the conditions
specified in paragraph (1), (2), (5), or (6) of subdivision (b) except
upon 10 days' written notice to the policyholder by the insurer.”

                                   6
       The arbitrator recommended that reconsideration be
denied. In addition to quoting from his opinion on the decision,
the arbitrator noted that the employer‟s representation that its
truck drivers did not travel outside of the State of California
became false only upon Segovia‟s filing of his claim in May of
2009. The arbitrator was not convinced by the testimony of
Southern‟s investigator that EJ had its non-owner employees
drive outside the State of California at the time the policy was
applied for in December 2008. Relying on section 359‟s
entitlement to rescind the contract “„from the time the
representation becomes false,‟” the arbitrator found that
Southern could only rescind the policy prospectively. The
arbitrator stated that the record did not indicate when EJ began
sending its truck drivers out of state, meaning the falsity of the
policy application may not have occurred until Segovia‟s injury in
Tennessee on April 6, 2009.
       The appeals board adopted and incorporated the
arbitrator‟s report, with the exception of the finding that
Southern had waived the jurisdictional issue, and denied
reconsideration.
Petition for a writ of review
       Defendant Southern petitioned this court for a writ of
review on October 20, 2016. The petition presented four
questions for review:
             “1. Whether Labor Code [section] 5275
       provides the Workers Compensation Appeals Board
       with Subject Matter Jurisdiction over rescission of a
       Workers Compensation Insurance Policy?

            “2. Whether Rescission of a Workers
      Compensation Insurance Policy is Permitted and if
      so, How is it Effectuated?

                                7
            “3. Do Cancellation Statutes Under Insurance
      Code [section] 676.8 Control Rescission of a Workers‟
      Compensation Policy or Prevent Rescission of Such
      Policy?

            “4. Whether the Statutory Scheme or Public
      Policy Considerations Warrant Preclusion of Contract
      Rescission in Workers Compensation Claims?”

     We granted the petition for a writ of review on January 10,
2017. We requested that the parties brief issues relating to the
rescission of the policy in this case.6
                            DISCUSSION
I. Subject matter jurisdiction
      Section 4 of article XIV of the California Constitution vests
plenary power in the Legislature to create and enforce a complete
system of workers‟ compensation.7 Based upon this
________________________________________________________
6     These issues were: “1. Can a workers‟ compensation
insurance policy be rescinded under the authority of Insurance
Code section 650? [¶] 2. In this case, the applicant filed the
claim before the insurer attempted to rescind the contract.
Insurance Code section 650 provides that the right to rescind
may be exercised at any time previous to the commencement of
an action on the contract. Does this provision preclude the
insurer‟s attempted rescission? [¶] 3. May the insurer assert
rescission as a defense to the applicant‟s claim? (Civ. Code,
§ 1692, subd. (b).)”

7     “The Legislature is hereby expressly vested with plenary
power, unlimited by any provision of this Constitution, to create,
and enforce a complete system of workers‟ compensation, by
appropriate legislation . . . to compensate any or all of their
workers for injury or disability, and their dependents for death
incurred or sustained by the said workers in the course of their
employment, irrespective of the fault of any party.” (Cal. Const.,
art. XIV, § 4.)

                                 8
constitutional mandate, the Legislature enacted section 5300 of
the Labor Code, which provides the appeals board with exclusive
jurisdiction over actions to enforce against the employer or an
insurer any liability for compensation imposed upon the
employer. (Lab. Code, § 5300, subd. (b).) “The appeals board is
vested with full power, authority and jurisdiction to try and
determine finally all the matters specified in Section 5300 subject
only to the review by the courts as specified in this division.”
(Lab. Code, § 5301.) “The Workers‟ Compensation Appeals Board
. . . shall exercise all judicial powers vested in it under this code.”
(Lab. Code, § 111.)
        Given these broad powers, and the specific statutory
authority providing for arbitration of coverage disputes (see fn.
3), Southern concedes that insurance coverage is within the
jurisdiction of the appeals board. Nonetheless, Southern asserts
that the appeals board does not have subject matter jurisdiction
over a contractual dispute between an insurer and its insured.
However, where, as here, coverage is disputed on the ground that
there is no longer a contract of insurance in existence, it is
obviously necessary to rule on the defense asserted in order to
determine whether there is coverage. “There can be no doubt but
that the Commission is vested by constitutional and legislative
power to hear and determine every issue raised by the parties to
this controversy, including the validity of the policy and the
question of fraud alleged in its procurement and that the parties
are not required to invoke either a court of law or equity in the
determination of said questions. [Citations.]” (General Acci. Fire
& Life Assurance Corp. v. Industrial Acci. Com. (1925) 196 Cal.
179, 190-191.) Thus, while Southern is free to litigate
contractual disputes with its insured in a court of law, if
Southern disputes workers‟ compensation insurance coverage
because it claims there is no contract, it must submit to the

                                   9
jurisdiction of the appeals board on the issue of coverage even if
that entails a ruling on whether the insurance contract is (or
was) in effect.
II. Rescission of a workers’ compensation insurance
policy
       A. The statutory framework
       Section 676.8 is contained in chapter 11, part 1, division 1
of the Insurance Code. Chapter 11 is entitled Cancellation and
Failure to Renew Certain Property Insurance. Section 676.8 is
specifically limited to workers‟ compensation insurance and it
addresses only the cancellation of a policy. It does not even
inferentially address rescission.
       Chapter 9 of part 1, division 1 of the Insurance Code is
entitled Rescission. Chapter 9 has only two sections, one of
which (section 650) applies to this case.8 Section 650 provides
that “[w]henever a right to rescind a contract of insurance is
given to the insurer by any provision of this part such right may
be exercised at any time previous to the commencement of an
action on the contract. The rescission shall apply to all insureds
under the contract, including additional insureds, unless the
contract provides otherwise.”
       Section 650 applies to workers‟ compensation insurance
policies. Addressing section 650, as we must, in its context and
within the overall statutory scheme (People v. Canty (2004) 32
Cal.4th 1266, 1276) we find that there are three reasons for this.
       First, there is nothing in chapter 9 or in section 650
specifically that provides that section 650 does not apply to
workers‟ compensation insurance policies. By contrast,
subdivision (a) of section 675 specifically exempts workers‟

________________________________________________________
8
      The second section in the rescission chapter applies only to
the rescission of an automobile liability policy. (§ 651.)

                                 10
compensation insurance from the provisions of chapter 11 which
deal with the cancellation of certain insurance policies.
       Second, chapter 9 and section 650 do not single out workers
compensation insurance for special treatment. Section 676.8, on
the other hand, specifically governs the cancellation of such
policies. This is indicative of the intent that the general
provisions regarding rescission set forth in section 650 should
govern workers‟ compensation insurance policies.
       Third, there is no provision anywhere in the pertinent
statutes that can be construed to preclude the rescission of
workers‟ compensation insurance policies.
       UEBTF claims that the right to rescind is protected by
section 6759 but that workers‟ compensation insurance is
specifically excluded from section 675.10 Based upon this
interpretation of section 675, UEBTF contends that a workers‟
compensation insurance policy cannot be rescinded. The premise
of this argument, however, is in error since rescission is provided
for in chapter 9, not chapter 3, and section 675 makes no mention
of chapter 9.
       UEBTF also contends that rescission is precluded because
section 676.8 does not provide for protection of the right to
rescind a workers‟ compensation insurance policy. However,

________________________________________________________
9     “This chapter shall not be construed so as to modify or
negate any of the provisions of Chapter 3 (commencing with
Section 330) of Part 1 of Division 1, nor to destroy any rights or
remedies therein provided.” (§ 675, subd. (b).) Chapter 3 deals
with concealment and recognizes the right to rescind a policy
upon a showing of concealment. (§ 331.)

10   Subdivision (a) of section 675 excludes workers‟
compensation insurance from the provisions of chapter 11.

                                 11
section 676.8 deals with cancellation only and is in a chapter that
governs cancellation, not rescission.
       The somewhat peculiar limitation of rescission to the period
prior to the filing of an action on the insurance contract in section
650, is explained by the fact that the former equitable suit for
rescission, now abolished, could not be brought if there was an
adequate remedy at law. The adequate remedy at law was an
action on the insurance contract. That is, if the policy holder
brought an action on the contract, the carrier could assert
rescission as a defense in that action. (Resure, supra, 42
Cal.App.4th at pp. 165-166.)11 Thus, section 650 is an echo of the
________________________________________________________
11     “When Insurance Code section 650 was enacted, the
distinction between an action on the contract at law and an
action for equitable rescission was of great significance because of
the artificial separation between law and equity. Equity would
not assume jurisdiction when the plaintiff had a clear remedy at
law. [Citations.] It followed that once an action to enforce a
contract was commenced at law, the party holding a right to
rescind was expected to raise that as a defense rather than bring
a new action in equity. [Citation.] [¶] The rule that equitable
rescission would not be permitted where there was an adequate
remedy at law, taken together with the rule that an applicant‟s
fraud could be raised as a defense to an action on the policy,
clarifies what is meant by Insurance Code section 650‟s limitation
on the right of an insurer to rescind the policy to the time
„previous to the commencement of an action on the contract.‟ The
Legislature intended that the insurer be precluded from
rescinding once the insured had proceeded with an action to
enforce the insurance contract at law. . . . The point was merely
to guarantee that resort to equity was not needlessly made where
the insurer had ample opportunity to raise the same issues in
defense of the action on the policy. As we have indicated in our
earlier discussion, California law affords that opportunity to
insurers where the insured fires the first shot.” (Resure, supra,
42 Cal.App.4th at p. 166.)

                                 12
past reality that an equitable suit for rescission could not be
brought in the face of a pending action at law. As Resure
explains, section 650 does not affect the current state of the law
which is that rescission can always be asserted as a defense to
the action on the contract. (See fn. 11.)
       UEBTF contends that once a workers‟ compensation claim
has been filed, section 650 precludes rescission. However, the
filing of a workers‟ compensation claim is not the equivalent of an
action on the contract. The function that an “action on the
contract” serves in section 650 is a legal remedy that precludes
the filing of an equitable suit for rescission. The action on the
contract also serves as an appropriate vehicle for the assertion of
rescission as a defense.
       A workers compensation claim is not the equivalent of a
remedy at law. For one, a workers‟ compensation claim is not
filed, pursued or adjudicated in a law court making it different
from a legal remedy.
       We note that the arbitrator appears to have been
unfavorably impressed by the fact that Southern‟s rescission was
“unilateral,” though rescission is routinely a unilateral act. After
the equitable action to have a rescission adjudged was abolished
in 1961, “the statutes now deal solely with unilateral rescission
by notice and offer to restore the consideration. [Citations.]” (1
Witkin, Summary of Cal. Law (10th ed. 2005), Contracts, § 930,
pp. 1026-1027, original italics, citing inter alia Runyan v. Pacific
Air Indus. (1970) 2 Cal.3d 304, 312.) There is a difference
between effecting a rescission and enforcing a rescission by a civil
action. A party effecting a rescission necessarily does so
unilaterally. We turn to this next.

                                13
      B. Rescission as a defense
      A rescission is effected under Civil Code section 1691 by
giving notice of rescission and restoring, or offering to restore,
everything of value received under the contract.12
      Once a contract has been rescinded in accordance with the
statutory procedure under Civil Code section 1691, any party to
the contract may seek legal or equitable relief based upon the
rescission. (Runyan v. Pac. Air Indus. (1970) 2 Cal.3d 304, 313-
314 & Paularena v. Superior Court of San Diego County (1965)
231 Cal.App.2d 906, 913 both citing to 3 Cal. Law Revision Com.
Rep. (1961) p. D-7.) Civil Code section 1692 sets forth the
remedies available in an action to enforce a rescission.13
      The arbitrator seemed to conflate the effectuation of a
rescission under Civil Code section 1691 with an action for relief
based on the rescission. In this case, Southern effected a
rescission but did not file an action for relief based on the
rescission, as it might have, for declaratory relief, to name one
________________________________________________________
12    “Subject to Section 1693, to effect a rescission a party to the
contract must, promptly upon discovering the facts which entitle
him to rescind if he is free from duress, menace, undue influence
or disability and is aware of his right to rescind: [¶] (a) Give
notice of rescission to the party as to whom he rescinds; and [¶]
(b) Restore to the other party everything of value which he has
received from him under the contract or offer to restore the same
upon condition that the other party do likewise, unless the latter
is unable or positively refuses to do so.” (Civ. Code, § 1691.)

13     “A claim for damages is not inconsistent with a claim for
relief based upon rescission. The aggrieved party shall be
awarded complete relief, including restitution of benefits, if any,
conferred by him as a result of the transaction and any
consequential damages to which he is entitled; but such relief
shall not include duplicate or inconsistent items of recovery.”
(Civ. Code, § 1692.)

                                 14
example. That is, the effectuation of a rescission under Civil
Code section 1691 is not the equivalent of a judgment in a civil
action providing for relief based on a rescission.
       Southern also misses the distinction between the
effectuation of a rescission under Civil Code section 1691 and the
enforcement of a rescission when it states that once a party has
done as set forth in section 1691, “the rescission is complete.”
       The thought that performing the acts set forth in Civil
Code section 1691 effectively discharged Southern‟s obligations
under the contract is incorrect. A judgment finding that
Southern‟s rescission was effective following an action filed to
enforce the rescission under Civil Code section 1692, on the other
hand, would be the discharge that Southern seeks. The same
finding could be entered if Southern asserts rescission as a
defense to the workers‟ compensation claim. Of course, such a
finding would not be entered until the facts were tried and
determined in the workers‟ compensation hearing. It should be
unnecessary to point out that there must be grounds for the
rescission, fraud being one of them (Civ. Code, § 1689, subd.
(b)(1)), and that Southern cannot unilaterally decide, with
binding effect on all the world, whether any of the grounds set
forth in Civil Code section 1689 apply to this case. The point is
that it is possible, as section 1692 itself recognizes, that
notwithstanding Southern‟s assertion that it rescinded the
contract, the rescission was not effective.14
      The appeals board generally agrees that a workers‟
compensation insurance policy can be rescinded under the

________________________________________________________
14    “If in an action or proceeding a party seeks relief based
upon rescission and the court determines that the contract has not
been rescinded, the court may grant any party to the action any
other relief to which he may be entitled under the
circumstances.” (Civ. Code, § 1692, italics added.)

                                15
authority of section 650. However, the appeals board contends,
and rightly so, that rescission should not be used for the improper
purpose of obtaining impermissible modifications to a workers‟
compensation insurance policy.
        The answer to the appeals board‟s concern is that if
rescission is asserted as a defense to the claim in a workers‟
compensation proceeding, the appeals board itself can ensure
that the rescission is not used as a subterfuge to evade the laws
governing workers‟ compensation insurance.
        There is also the concern over the injured worker who has
filed a workers‟ compensation claim but is faced with an insurer
who has acted to rescind the policy. The answer here is that the
insurer cannot be certain that the rescission will be enforced and
that the insurer is therefore well advised to avoid drastic
decisions about coverage until the validity of the rescission has
been adjudged.
        C. Rescission in this case
        The arbitrator explicitly ruled that Southern could not
rescind the policy. Putting the same point another way, the
arbitrator found that Southern‟s attempted rescission was legally
ineffective. Given this ruling, we assume the arbitrator gave
little or no consideration to the facts with which Southern sought
to justify its rescission of the policy or to the facts that pointed to
a contrary conclusion.
        Though in the report on the petition for reconsideration the
arbitrator addressed some of the facts pertinent to rescission, this
analysis of the facts did not inform the decision that was made,
that as a matter of law, Southern could not rescind the policy. It
appears that contrary evidence, that Southern did effectively, and
prospectively, cancel the policy as of June 15, 2009, based on EJ‟s
misrepresentation, was given little attention.

                                  16
       The gist of the factual views set forth in the report on the
petition for reconsideration was that there was no evidence that,
as of the time that EJ entered into the policy, EJ was engaged in
transportation out of state and beyond 200 miles.
       There was, however, evidence from which it can be
reasonably inferred that EJ knew when it entered into the policy
that representations as to the nature of its transportation
business were false. Southern‟s special investigator testified that
a prior investigator confirmed that EJ engaged in out-of-state
operations prior to the inception of the policy on January 1, 2009.
Although Southern‟s special investigator did not have personal
knowledge of EJ‟s operations at the time EJ completed its
insurance application, there were business records referenced by
the investigator that tended to show that EJ conducted out-of-
state operations possibly during the insurance application
process.
       Regardless, the report on the petition for reconsideration
stated that “[t]here is no doubt that at some point the employer
in this case concealed the fact that its employee truck drivers
drive out of the State of California.” It was for this reason that
the conclusion was reached that the policy was cancelled
prospectively as of June 15, 2009. Although the appeals board
contends that there were no material misrepresentations in this
case, this is at odds with the arbitrator‟s view.
       Given there were misrepresentations, the issue yet to be
decided is whether EJ concealed material facts from Southern
when it negotiated and entered into the policy. There is also no
decision of record on whether the misrepresentation was material
since the insurer must prove that the insured concealed or
misrepresented a material fact on the insurance application. (LA
Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156
Cal.App.4th 1259, 1266.) “Materiality is to be determined not by

                                17
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 inquiries.” (§ 334.)
      The conclusion is unavoidable that the issue whether
Southern‟s rescission was legally effective remains factually open
and unresolved.
                          DISPOSITION
      The decision of the appeals board affirming the findings
and award of the arbitrator is annulled and the matter is
remanded to the appeals board for further proceedings consistent
with this opinion.
      NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

                        __________________________, Acting P. J.
                        CHAVEZ
We concur:

__________________________, J.
HOFFSTADT

__________________________, J.*
GOODMAN

____________________________________________________________
* Retired Judge of the Los Angeles Superior Court, assigned by
the Chief Justice pursuant to article VI, section 6 of the
California Constitution.

                                 18
Filed 5/22/17

                          CERTIFIED FOR PUBLICATION
       IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                              SECOND APPELLATE DISTRICT
                                    DIVISION TWO

SOUTHERN INSURANCE COMPANY,                   B278412

                Petitioner,                   (WCAB No. ADJ6865421)

       v.                                     ORDER FOR PUBLICATION

WORKERS‟ COMPENSATION
APPEALS BOARD, EJ DISTRIBUTION
CORPORATION et al.,

                Respondents.

THE COURT:*

       The opinion in the above entitled matter filed on May 10, 2017, was not
certified for publication.

       For good cause it now appears that the opinion should be published in
the Official Reports and it is so ordered.

* CHAVEZ, Acting P. J., HOFFSTADT, J., GOODMAN, J.†

†Retired Judge of the Los Angeles Superior Court, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.