Insurer May Rescind Policy Where Insured Failed to Disclose Pending Investigation

Applying California law, the United States Court of Appeals for the Ninth Circuit has held that an insurer was entitled to rescind a directors and officers liability insurance policy where the insured failed to disclose a pending investigation in response to an application question.  Western World Ins. Co. v. Professional Collection Consultants, 2018 WL 259309 (9th Cir. Jan. 2, 2018).

Prior to the insured company’s having applied for a D&O policy, the U.S. government issued subpoenas in a federal criminal investigation to the company.  The subsequently-completed application asked the insured to answer whether “[n]one of the individuals to be insured . . . have a basis to believe that any wrongful act, event, matter, fact, circumstance, situation, or transaction might reasonably be expected to result in or be the basis of a future claim.”  The insured marked “no.”  The insured later pled guilty to federal criminal charges arising from the investigation.  The insurer filed this action to effect rescission of the policy based upon a material misrepresentation by the insured in response to the application question.  The district court granted summary judgment to the insurer, and the company appealed.

The court of appeals affirmed the district court’s grant of summary judgment to the insurer.  The company argued that it “thought the federal investigation was over” and therefore that it did not have to disclose the investigation on the application.  The court disagreed, noting that “the only reasonable conclusion is that the federal criminal investigation, even if closed or on hold, nonetheless might lead to a claim under the policy.”