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A workers' compensation insurance policy can be rescinded if the employer made material misrepresentations of fact when entering into the policy, the California Court of Appeal ruled. If a contract is rescinded, it is as if the contract never existed. The insurer, therefore, would not be obligated to pay a pending claim.
The court reversed decisions of an arbitrator and the Workers' Compensation Appeals Board that, while the insurer could cancel the policy going forward once the misrepresentation was discovered, California law prohibited rescission of the policy. If an insurer cancels a policy, as opposed to rescinding it, that insurer is still obligated to pay any pending claims.
On Dec. 23, 2008, EJ Distribution Corporation, a California-based trucking company, applied for workers' compensation insurance with the Southern Insurance Company. The application indicated that EJ's employees did not travel out of state. Southern issued a workers' compensation insurance policy for an annual period beginning on Jan. 1, 2009.
On April 6, 2009, David Berrios-Segovia, an EJ employee, injured his back lifting a latch to his truck while on a trip to Tennessee. He filed a workers' compensation claim on May 13, 2009.
[SHRM members-only HR Q&A: When should an employee who was injured on the job be paid for time to attend related doctor's appointments?]
On June 12, 2009, Southern's attorneys sent a letter to EJ stating that "Southern is rescinding the policy" and therefore would not pay the employee's claim. The decision to rescind was based on material misrepresentations or the concealment of material facts by EJ in the application for the policy—specifically that its employees did not travel out of state. The letter also claimed Southern would not have issued the policy had it known the truth. Southern returned the premiums paid by EJ.
Following the terms of the contract, the dispute was submitted to arbitration. Southern called as a witness an underwriter who testified that Southern never insured long-haul trucking in its business division. In addition, the underwriter testified that, had Southern known that EJ traveled out of state, Southern would not have issued the policy.
The arbitrator, however, found that California law prohibited the "retroactive rescission" of the policy. Berrios-Segovia's claim for his April 6, 2009, injury was therefore covered, although the policy could be prospectively cancelled. The arbitrator ruled that there is "no mechanism in place in California for a workers' compensation insurer to unilaterally retroactively rescind a policy especially if a claim is pending under that policy." The appeals board affirmed the arbitrator's conclusions and Southern sought review in the court of appeal. The court reversed.
California Insurance Code Allows Rescission of Workers' Compensation Policy
The court found that the arbitrator and the appeals board had been incorrect in their interpretation of state law. California's insurance code provides that an insurance contract may be rescinded and does not make any exception for workers' compensation policies, the court said. To rescind, the insurer must give notice of the rescission and restore, or offer to restore, everything of value received under the contract. One ground for rescission is that the insured party concealed or misrepresented a material fact on the insurance application.
The court concluded that there was ample evidence that EJ knew when it entered into the policy that representations as to the nature of its transportation business were false. The court went on to state however, that, "Given there were misrepresentations, the issue yet to be decided is whether EJ concealed materiaI facts from Southern when it negotiated and entered into the policy." A material misrepresentation is a misstatement made during the application process that is so important that, had the truth been known, the insurance company would not have issued the policy, the court noted.
The court sent the case back to the arbitrator to determine whether rescission was appropriate under the circumstances.
Southern Ins. Co. v. Workers' Compensation Appeals Bd., Calif. Ct. App., No. B278412 (May 10, 2017).
Professional Pointer: This case illustrates what should be a given for employers: Lying to your insurance carrier is a bad idea.
Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.
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