“Post Loss Underwriting” - How the Equitable Remedy of Rescission Was Changed to a Tort

An Insurance Oxymoron

How the Equitable Remedy of Rescission Was Changed to a Tort

The plaintiff’s bar has coined the phrase “post loss underwriting” to change the victim of a misrepresentation into a villain. Rescission is not underwriting of any kind. Rescission is an equitable remedy provided to the parties to an insurance contract by statute when one party to the contract has been deceived by the other. The purpose of rescission is not to punish but to restore the parties status quo ante. The deceiver should never be allowed to profit from deceit.

Insurers must, while insuring millions of risks, accept the word of the prospective insured when making a decision to insure or not insure a particular risk. By so doing, the insurer fulfills the covenant of good faith and fair dealing. The insured that conceals or misrepresents a material fact breaches that covenant. Requiring insurers to conduct a thorough investigation of every application for insurance in order to determine the truthfulness of the facts asserted in the application, would make modern insurance impossible, exceedingly expensive and eliminate the covenant of good faith in the insuring process. In California:

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks [citations]. … [Imperial Casualty & Indemnity Company v. Levon Sogomonian, 198 Cal. App. 3d 169 (1988)].