Whenever homeowners and business owners contact Merlin Law Group’s Los Angeles office to select a new insurer, I always remind them that the doctrine of uberrimae fidei imposes a duty of utmost good faith to tell the truth when filling out their new insurance application. This is especially important for potential insureds who have a history of claims. If you don’t provide essential information when asked directly on the application, be prepared to swallow the insurance company’s Jagged Little Pill.
Failure to provide accurate information on your application is never forgiven: If an insured omits claim history or other risk information, they risk having a carrier deny the claim based on the misrepresentation. Most carriers will even waive the policy entirely. In cases where carriers suspect a policy misrepresentation, they will likely retain outside counsel to participate in the lengthy and time-consuming process of an Examination Under Oath to determine the basis for the representation in the application. Failure to follow this process will violate the policy̵7;s cooperation clause and result in a denied claim.
A recent unpublished opinion of the Ninth Circuit Court of Appeals is discussed uberrimae fidei.1 The Court of Appeals reversed the trial court’s summary judgment in favor of Great Lakes Insurance against its insured, Tamara Lee Smith, holding that the You Oughta Know standard may not apply when preparing a joint insurance application in California.
The facts of the case are fairly straightforward: Great Lakes Insurance denied Mrs. Smith’s boat loss claim after the boat struck rocks and sank in Chahue Bay, Mexico in December 2019. The denial was because Great Lakes claimed that Mrs. Smith made a material misrepresentation on her insurance application because she failed to disclose that the boating partner and her paramour – John Jay Kerchelich – had previously been convicted of a misdemeanor offense under California Water Code §13387(c) for improperly dredging a shoreline in an unrelated incident on Lake Elsinore .
Mrs. Smith did not disclose Kerchelich’s prior misconduct simply because she was unaware of it. However, she was not forgiven by the Honorable André Birotte Jr., of the United States District Court for the Central District of California, who agreed with Great Lakes Insurance that Mrs. Smith made a material representation when she did not disclose the facts – although it was undisputed that she did not know of Mr Kerchelich’s conviction.
In reversing and remanding the grant of summary judgment, the appellate judges noted that Great Lakes failed to show that Mrs. Smith knew about the misdemeanor conviction or should have known about it because of her previous relationship. In other words, the Court of Appeals disagreed with the facts to support the You Oughta Know standard:
Great Lakes relies on out-of-circuit cases to argue that the duty of good faith requires disclosure of material facts that the claimant should have known. Looks Quintero v. Geico Marine Ins. Co.983 F.3d 1264, 1271 (11th Cir. 2020) (stating that uberrimae fidei requires disclosure of “all material facts which are ‘within or ought to be within the knowledge of one party and of which the other party has no actual or presumed knowledge'” (quote Steelmet, Inc. v. Caribe Towing Corp.747 F.2d 689, 695 (11th Cir. 1984), reh’g granted in part, denied in part, 779 F.2d 1485 (11th Cir. 1986))).
Ironically, it was Great Lakes Insurance that filed suit first – ab initio – to invalidate the policy in its entirety, only to have the appeals court deny their argument. California jurisprudence generally protects an “innocent insured” even if they stand toe-to-toe with the not-so-innocent insured. Since there was no indication that Mrs. Smith knew of the conviction or that she intentionally failed to disclose it, the appeals court concluded that there was no evidence that Mrs. Smith had breached the duty of utmost good faith – uberrimae fidei.
While this unpublished opinion provides valuable insight into how a carrier obtains information after a claim and responds, it is not a perfect opinion for the insured. After remand, the Court of Appeal remarked:
And there has so far been no fact-finding by the district court as to whether Smith should have known the information, or whether she failed to make a reasonable inquiry into whether Kerchelich was telling the truth. In the absence of such fact-finding or further development of the record, we cannot say that Smith breached the duty of utmost good faith in filling out the insurance application.
Once the case is back in district court, it may be Great Lakes Insurance arguing for Mrs. Smith “You Learn” and having an affirmative duty to ask Kerchelich—the boat’s co-owner—about his criminal history and affirmatively disclose the information under the doctrine of uberrimae fidei. The bottom line is that Great Lakes likely would have issued her the policy with this disclosure but at a higher premium.
1 Great Lakes Ins. SEE v. Smith, no. 21-56231, 2022 US App. LEXIS 23468 (9th c. 22 August 2022).