Scottsdale v. California Military Dept.: an insurer can rescind a policy despite an additional insured’s reliance
Insurance rescission for a misrepresentation in the application can wipe out coverage for an additional insured who relied on the policy. In Scottsdale Ins. Co. v. California Military Dept., a published decision, the Fourth District, Division Three, held that an insurer’s failure to investigate one suspect fact did not waive rescission based on a different misrepresentation, and that the owner’s reliance on the policy did not bar rescission.
What happened in Scottsdale Ins. Co. v. California Military Dept.
The California Military Department (CMD) hired TL Veterans Construction, Inc. to renovate two buildings at the Joint Forces Training Base in Los Alamitos. The roughly $3 million contract, awarded in February 2021, included asbestos abatement. TL Veterans gave CMD a certificate of liability insurance reflecting primary and excess policies it had obtained from Scottsdale Insurance Company.
According to the undisputed facts, TL Veterans’ applications to Scottsdale misstated its business. Its 2021 application listed gross receipts of $300,000, described its largest project as a county office remodel of $105,869, and answered “No” when asked whether it did work involving asbestos or “medical and/or industrial life.” In 2020, it had been awarded a roughly $2.2 million state contract to replace the roof of skilled nursing facilities in Norwalk. Its 2022 renewal application repeated the receipts figure, described a $135,000 school remodel as its largest project, and again denied asbestos and medical work, though the Los Alamitos project included asbestos abatement.
In September 2021, Scottsdale received a water-intrusion claim from the Norwalk project, which showed TL Veterans was working on a building that housed patients. Scottsdale denied that claim under policy exclusions. On May 27, 2022, TL Veterans notified Scottsdale of a fire at the Los Alamitos project, caused by crews leaving a powered light fixture on flammable roofing materials, that destroyed one of the buildings. TL Veterans accepted responsibility. After investigating, Scottsdale demanded rescission, and in January 2023 TL Veterans agreed to rescind the policies.
Scottsdale then sued for a declaration confirming the rescission. CMD, claiming under the policies as an additional insured, cross-complained. In a separate lawsuit, CMD obtained a default judgment of $9,787,124 against TL Veterans. The Orange County Superior Court (Judge William D. Claster) granted Scottsdale’s summary judgment motion, declaring the policies rescinded and void from the start, and CMD appealed.
Does an insurer waive rescission by failing to investigate?
CMD did not dispute that the 2022 application contained material misrepresentations. It argued that Scottsdale waived rescission under Insurance Code section 336 by not investigating the Norwalk claim. Reviewing de novo, the court disagreed. The court accepted that the Norwalk claim showed TL Veterans was working on a medical building, and assumed it should have suggested larger projects, but nothing in it suggested asbestos removal, and that misrepresentation was an independent ground for rescission.
The court rejected CMD’s view that notice of one misrepresentation waives all of them. It stated the general rule this way:
“an insurer may waive its right to the accurate disclosure of particular material facts without waiving its right to the accurate disclosure of other material facts.”
The court read section 336’s reference to neglecting to inquire into “such facts” as limiting a waiver to the particular facts neglected. It distinguished Rutherford v. Prudential Ins. Co. as a case involving an application riddled with known falsehoods, which this one was not.
Can a third party’s reliance on a policy bar rescission?
CMD’s second argument relied on the equitable rule of Meyers v. Merillion, which denies rescission when the rights of others have intervened. The court held that rule does not apply here, because Scottsdale’s right to rescind was statutory. Insurance Code section 650 provides that the right “may be exercised at any time previous to the commencement of an action on the contract,” and that “[t]he rescission shall apply to all insureds under the contract, including additional insureds, unless the contract provides otherwise.” The court concluded: “The Meyers rule, therefore, does not apply where an insurer rescinds a policy based on a material misrepresentation or concealment by the insured.”
The court acknowledged the hard result. It wrote that “[n]either party to this appeal did anything wrong under the law,” and that the statutory rule “immunizes the insurer by permitting it to rely on the insured’s representations in the contract, even to the detriment of innocent third parties.” Whether that rule should change for large construction contracts, the court said, is for the Legislature. The judgment was affirmed.
What this means for owners and additional insureds
Under this decision, CMD’s reliance on the policies, reflected in the certificate of insurance TL Veterans provided, did not prevent rescission, and section 650 applies a rescission to additional insureds unless the policy provides otherwise. The court observed that CMD, though not required to, could have sent Scottsdale a description of the project so the insurer was on notice of the work being performed.
Key takeaways
- Under Insurance Code section 336, an insurer’s waiver by failure to investigate is limited to the particular facts it neglected.
- A misrepresentation the insurer had no reason to suspect, here asbestos work, remained an independent ground for rescission.
- The equitable Meyers v. Merillion third-party-reliance rule does not limit an insurer’s statutory right to rescind for misrepresentation or concealment.
- Insurance Code section 650 allows rescission any time before an action on the contract, and the rescission applies to additional insureds unless the policy provides otherwise.
Why this case shows the value of appellate counsel
For an owner or public entity that relied on a contractor’s coverage, Scottsdale means a rescission can leave a large judgment against an uninsured contractor. The case was decided on summary judgment, on undisputed facts and questions of statutory interpretation, and the Court of Appeal reviewed it de novo. Appeals like this one turn on how a party frames waiver and reliance arguments against the statutory text, and on what the summary judgment record shows the insurer knew and when. A party facing a rescission ruling may want an appellate lawyer to review the record and the arguments early, before the deadline to appeal runs. Learn more about our appellate practice and civil litigation.
What this post is not. This post is attorney advertising and general information about a court decision. It is not legal advice, and reading it does not create an attorney-client relationship. Every case turns on its own facts and record, and appellate deadlines are short and often jurisdictional — talk to appellate counsel about your case promptly.
Facing a ruling you may need to appeal or challenge by writ? Yisrael Gelb · yisrael@gelblawapc.com · (323) 632-6864