A recent California Court of Appeals decision deals with the issue of how and when an insurance carrier can rescind a workers’ compensation policy.
Studies prepared for CHSWC have shown that California is plagued with a large amount of employer premium fraud (see link at the end of this post). Sometimes it may be the hiding and misrepresentation of payroll data. Or it may be misrepresentations of the nature of work done by employees.
So clarity about how and when a policy may be rescinded is critical.
In Southern Insurance Co. v. WCAB (see link to the case at the bottom of this post) the misrepresentation was about the distances trucking employees would be driving.
The employer, EJ Distribution (“EJ”), filed an online application with Southern Insurance Company in December 2008. Interestingly, the application was prepared by EJ’s insurance agent. The application listed the business as “local hauling” and also that EJ’s employees did not travel out of state or in excess of a radius of 200 miles.
However, the insurance policy itself did not have an exclusion based on location of injury.
Southern was not pleased when it received a claim that an EJ trucker had hurt his back while on a trip to Tennessee for EJ.
So Southern sent a letter to EJ rescinding the policy on the grounds of material misrepresentation or concealment of material facts in the application for insurance. Southern returned the policy premium paid by EJ.
A later investigation by EJ determined that EJ had been doing trucking operations beyond 200 miles for some time, but there was a lack of specific data uncovered as to when those out of state operations actually started. So Southern apparently did not have direct proof that out of state service was underway at the time of the January 1, 2009 policy inception.
Since Southern took the position that EJ was uninsured due to the recission, the WCAB joined the Uninsured Employers Benefit Trust Fund (formerly the UEF, now known as the UEBTF). Thereafter the matter was sent to mandatory arbitration as required by Labor Code section 5275(a)(1).
The arbitrator ruled against Southern. Southern’s appealed to the WCAB but lost there, and then filed a petition for writ, which brought the matter to the California Court of Appeal, 2nd District Division Two.
The disposition by the Court of Appeal annuls the findings and award of the arbitrator and remands the matter to the WCAB for further proceedings.
The Court of Appeal notes that under Civil Code 1691 a recission is effected by giving notice of recission and restoring everything of value received. Southern Insurance did that.
According to the court, however, that is not the end of things. Southern could have filed an action for declaratory relief to seek a judgment discharging its obligations under the contract. Or, in the workers’ comp context, Southern could assert recission as a defense to the comp claim.
But the WCAB has jurisdiction over that. So the facts must be determined. As the Court of Appeal says,
“…Southern cannot unilaterally decide, with binding effect on all the world, whether any of the grounds set forth in Civil Code section 1689 apply to this case. The point is that it is possible, as section 1692 itself recognizes, that notwithstanding Southern’s assertion that it rescinded the contract, the recession was not effective.”
The court notes that it will be up to the WCAB to “ensure that the recission is not used as a subterfuge to evade the laws governing workers’ compensation insurance.”
The fact that the workers’ comp policy itself did not specify geographic workplace limits is not controlling. And clearly the court is holding that retroactive recission can be done under some circumstances.
Clearly unsatisfied that the arbitrator gave sufficient consideration to the alleged facts which Southern claimed as a basis for its recission, the Court of Appeal sets up the issue to be determined by the WCAB on remand as follows:
“Given there were misrepresentations, the issue yet to be decided is whether EJ concealed material facts from Southern when it negotiated and entered into the policy. There is also no decision of record on whether the misrepresentation was material since the insurer must prove that the insured concealed or misrepresented a material fact on the insurance application.”
This case is important because it wrestles with the statutory framework of recisssion under various Civil Code and Insurance Code sections. Warning: Non-lawyers will likely find the court’s statutory analysis quite dense.
Here is a link to the 2007 CHSWC report on employer fraud in California:
And here is the opinion in Southern Insurance Company v. WCAB (2017) (note that prior to May 22, 2017 the case was designated as an unpublished opinion; on May 22. 2017 the Court of Appeal issued an order that the opinion be published in official reports after all):