“Notice of Cancellation” Meets California Requirements for Notice of Rescission

A California federal court has held a “Notice of Cancellation” was sufficient to meet the substantive requirements of rescission in California, where the notice informed the insured of misrepresentations on the application and was accompanied by a return premium. Clear Blue Specialty Ins. Co. v. Ozy Media, Inc., 2022 WL 4097338 (N.D. Cal. Sept. 7, 2022).

The insureds, a media company and its directors and officers, submitted a directors and officers insurance application that contained outdated financial information and represented that, in the last three years, the company had not been involved in any civil, criminal, or administrative proceedings alleging violations of any federal or state securities statutes. After a newspaper reported on financial fraud allegedly committed by two of the company’s directors—which prompted SEC subpoenas—the insurer sent a cancellation notice to rescind the policy. After the cancellation notice was sent, the insureds noticed claims to their insurer associated with the subpoenas and the financial fraud. In response, the insurer initiated this action seeking a declaration that its insurance contract was void due to the media company’s material misrepresentations.

The insureds argued in their motion to dismiss that the insurer had waived its right to rescind by sending a cancellation notice instead of a rescission notice. The court rejected this argument because, even though the notice was titled a “Notice of Cancellation of the Policy,” the notice otherwise met the substantive requirements for rescission: it notified the company of its misrepresentations and returned the entire paid premium.

The court ultimately denied the insured’s motion to dismiss on the grounds that the court could not adjudicate the policyholder’s knowledge of facts at the pleading stage.