Can Fire Insurer Cancel Policy Due To Falsified Application?

James E. Mitchell acquired a commercial building in 2000. His insurance brokers submitted his fire insurance application to Debra Messina of Excess and Surplus Lines Insurance Brokers Inc., an authorized underwriter for United National Insurance Co.

Mitchell's application said the building totaled 3,420 square feet; it would be used as a "video production studio and offices"; the business had a $20,000 payroll and generated $300,000 in receipts; there was no existing insurance on the building; there were no uncorrected fire code violations; and it had a burglar alarm.

In fact, the building was less than 2,000 square feet; it was only used to film a music video for two or three days; it was leased to a tenant operating a garment business generating $6,500 in receipts; the building was insured under a state assigned-risk plan (an insurer of "last resort"); the building was subject to a city abatement action for combustible debris, dry weeds, broken windows, damaged or missing doors; and there was no burglar alarm.

According to Mitchell, before the building was damaged by fire, he met Carl Robinson, who had a prospective buyer for the property. Mitchell gave Robinson the building keys.

On Nov. 22, 2000, while Mitchell was on a trip to Chicago, Robinson set fire to the building and was killed in the arson blaze. When Mitchell filed a fire insurance claim, United National Insurance Co. denied payment. The reason was the policy had been rescinded due to Mitchell's material misrepresentations on his insurance application.

Mitchell sued United National and his insurance brokers. He admitted "inaccuracies" on the application form, but claimed they were not material and were the fault of his insurance brokers. He alleged underwriter Debra Messina should have inspected the building.

If you were the judge would you allow the fire insurance company to cancel Mitchell's policy based on his alleged application inaccuracies?

The judge said yes!

An insurer is allowed to cancel a fire insurance policy after it is issued if misrepresentations were made on the policy application, the judge began. However, the insurer is not allowed to cancel a policy for a minor error on the application, he added.

But in this case there were significant misrepresentations on the application that allow the insurer to rescind the policy even in the event of a negligent or unintentional misrepresentation, the judge ruled. An insurer has no duty to investigate the truth of the representations made in an insurance policy application, but can deny coverage when the truth is discovered, he concluded.

Based on the 2005 California Court of Appeal decision in Mitchell v. United National Insurance Co., 25 Cal.Rptr.3d 627.