Mitchell v. United Nat. Ins. Co.

• Decision Date: 08 March 2005
• Docket Number: No. B170364.,B170364.
• Citation: 127 Cal.App.4th 457,25 Cal.Rptr.3d 627
• Court: California Court of Appeals Court of Appeals
• Parties: James E. MITCHELL, Individually and as Trustee of the Mitchell Family Trust, Plaintiff and Appellant, v. UNITED NATIONAL INSURANCE COMPANY, Defendant and Respondent.

25 Cal.Rptr.3d 627

127 Cal.App.4th 457

James E. MITCHELL, Individually and as Trustee of the Mitchell Family Trust, Plaintiff and Appellant, v. UNITED NATIONAL INSURANCE COMPANY, Defendant and Respondent.

No. B170364.

Court of Appeal, Second District, Division 5.

March 8, 2005.

Law Office of Mann & Elias; Imad Y. Elias, Beverly Hills, for Plaintiff and Appellant.

Nielsen, Haley & Abbott LLP; James C. Nielsen, San Francisco, August L. Lohuaru, Los Angeles, for Defendant and Respondent.

MOSK, J.

We hold that an insurer may, under Insurance Code sections 331 and 359, rescind a fire insurance policy based on an insured's negligent or unintentional misrepresentation of a material fact in an insurance application, notwithstanding the willful misrepresentation clause included in the required standard form fire insurance policy (Ins. Code § § 2070 and 2071). Because there was undisputed evidence that the insurer relied upon the misstatements of material facts in the insured's application for insurance, we affirm the summary judgment.

BACKGROUND

Plaintiff and appellant James E. Mitchell, individually and as Trustee of the Mitchell Family Trust (Mitchell), appeals the trial court's entry of summary judgment in favor of defendant and respondent United National Insurance Company (United National) in Mitchell's action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. Mitchell individually was the named insured under an insurance policy issued by United National that provided coverage for a commercial building owned by the Mitchell Family Trust (the building).

During the policy period, the building was destroyed by arson. The arsonist, an acquaintance of Mitchell's, perished in the fire. In the ensuing investigation, United National discovered several purported misrepresentations in Mitchell's application for insurance, rescinded the policy, and offered to return Mitchell's premium. Mitchell refused to accept the return of his premium and filed this action. United National moved for summary judgment on two alternative grounds: material misrepresentations in the application for insurance gave United National the right, under Insurance Code sections 331 and 359, to rescind the policy; and the policy's dishonest act exclusion barred coverage because Mitchell's representative, to whom Mitchell had entrusted the property, intentionally set fire to the property. The trial court granted summary judgment on both grounds.

Mitchell purchased the building in February 2000 in the name of his trust. On April 11, 2000, Mitchell's brokers submitted an application for insurance to Debra Messina of Excess & Surplus Lines Insurance Brokers, Inc., an authorized underwriter for United National. The application stated that (1) the property to be insured consisted of a 3,420-square-foot commercial building; (2) the building was to be used by Mitchell as a "video production studio and offices"; (3) the business to be conducted in the building had $20,000 in payroll and generated $300,000 in receipts; (4) there was no existing insurance on the building; (5) the building had no uncorrected fire code violations; (6) the building had a burglar alarm; and (7) Records & Records & Filmworks, Inc. (later changed to James E. Mitchell) was the purchaser of the building.

In fact, (1) the building was less than 2,000 square feet; (2) the business conducted in the building had no officers or employees, was used only to film a music video for two days in May or June of 2000, and was leased to a tenant who operated a garment business; (3) the business in the building generated approximately $6,500 in receipts from February 2000 to the time of the fire; (4) the building was insured by the California FAIR Plan, an insurer of "last resort"; (5) the building was subject to a City of Los Angeles abatement order stating that the building could not be occupied without a clearance or repaired without a permit and contained such deficiencies as being open to unauthorized entry, littered with combustible debris, excessive dry weeds or vegetation, broken windows, damaged or missing doors, damaged exterior wall covering, damaged interior wall and ceiling covering, and deteriorated flooring (and no permit had been obtained for corrective work on these deficiencies); (6) the building had no burglar alarm; and (7) the building was owned by the Mitchell Family Trust.

In July 2000, Mitchell rented the property to a tenant who operated a garment manufacturing business. In August 2000, a city inspector cited the tenant for failure to obtain a certificate of occupancy, and Mitchell was forced to release the tenant from the lease and return most of the rent payments. The property was vacant on November 22, 2000, the date of the fire.

According to Mitchell, before the property was damaged by the fire, he met Carl Robinson, who represented himself as a business consultant with a prospective buyer for the property, and gave Robinson the keys to the property for the purpose of showing it to the prospective buyer. On November 22, 2000, while Mitchell was in Chicago, Robinson set fire to the building and was killed in the ensuing blaze.

Mitchell filed a claim for losses under the policy. United National denied the claim on the ground that it had rescinded the policy based on material misrepresentations in Mitchell's application for insurance. Mitchell filed this action against United National and the brokers who assisted Mitchell in preparing the application for insurance.¹ In his first amended complaint, Mitchell admitted that the application for insurance submitted to United National "contained inaccuracies" that caused United National to rescind the policy, but claimed that those inaccuracies were not material and were solely the fault of his brokers.

In its motion for summary judgment, United National argued that Mitchell had made material misrepresentations in his application for insurance and that United National was entitled, under Insurance Code sections 331 and 359, to rescind the policy. United National maintained that the materiality of the representations was determined under a subjective standard from the insurance underwriter's perspective, and not upon an objective "reasonable insurer" standard. United National's motion was supported primarily by the declaration of its underwriter, Debra Messina, who stated that she issued an insurance policy for the building based on the representations contained in Mitchell's application for insurance. Ms. Messina further stated in her declaration that the size and condition of the building, as well as its proposed use as an owner-occupied business, were important factors in rating the risk to be insured against and in deciding whether or not to issue an insurance policy. She declared that had she known that there were uncorrected fire code violations, that the building was substantially smaller than had been represented in the insurance application, and that the property was not to be used as studios and offices for Mitchell's own music video company, she either would have underwritten the policy differently or declined to underwrite it altogether. She also stated that the existence of prior insurance coverage under the California FAIR Plan was an important underwriting consideration because such coverage indicated past problems in acquiring insurance. She explained that the California FAIR Plan is an insurer of "last resort," affording coverage to property owners who have been rejected by traditional insurance carriers and who are thus unable to obtain insurance in the normal market. She stated that she would have undertaken further investigation had she known the property was insured under the California FAIR Plan.

Mitchell's opposition to United National's motion was supported by his own declaration and the declaration of an expert, Kelly Rossi, an insurance broker. In his declaration, Mitchell stated that he intended to use the property to make music videos and that he showed the property on several occasions to recording artists for this purpose, but that he was only able to rent the property for two to three days for one music video. Mitchell further stated that he had no knowledge of any uncorrected code violations with respect to the property or that the proper permits had not been obtained for repairs and improvements made to the property.

Ms. Rossi stated in her declaration that the purported misrepresentations in Mitchell's application for insurance "were not material to Messina in her underwriting of this policy." With regard to coverage under the California FAIR Plan policy, Ms. Rossi opined that "Messina did not believe this matter to be material" because the representation that there was no insurance on the property "is as big or even bigger `red flag'" than coverage under the FAIR Plan. Ms. Rossi also said that as to the changes in the use of the building and absence of a central alarm system, Ms. Messina should have conducted further inquiry. Mitchell argued that the failure to do so constituted a waiver of these issues.

United National filed evidentiary objections to Mitchell's declaration, arguing that the declaration contradicted Mitchell's prior sworn testimony. United National objected to Ms. Rossi's declaration as improperly based on speculation and conjecture. The trial court sustained in part the objections to Mitchell's declaration and all of the objections to Ms. Rossi's declaration, noting that Ms. Rossi "purported to state as fact that which she had no competence to declare. She doesn't know what was in Ms. Messina's mind, and she is incompetent to testify to what was subjectively material to Ms. Messina."

The trial court granted summary judgment in United National's favor, finding "as a matter of law on the undisputed facts that the information sought by United's underwriter and denied to it by plaintiff's false answers...