Section 336 of the Insurance Code defines “waiver” as:
The right to information of material facts may be waived, either (a) by the terms of insurance or (b) by neglect to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated.
This section demonstrates that although parties are required to disclose material information, there are circumstances where informing the other party of certain material facts may not be required because of waiver. The consequence of waiver is that a party’s failure to inform the other party of those material facts will not result in a rescission of the policy, as in most other cases of concealment or misrepresentation.
In Colony Ins. Co. v. Crusader Ins. Co., both Colony Insurance Company and Crusader Insurance Company insured a building in Los Angeles. From December 17, 2003 to December 17, 2004, Crusader insured the building. After that, Colony insured the building. Positive Investments, Inc., led by President Rao Yalamanchili, controlled the building. Before the building was insured by either company, in February 2002 a code enforcement unit for the City of Los Angeles’s Housing Department issued to Positive Investments a two-day order to repair “critical habitability violations” at the building. In April 2002, an inspector from the city’s Code Enforcement Division issued a “Notice to Comply,” citing the building for a number of health and safety violations. Another “Notice to Comply” was issued in September 2002.
In November 2003, Yalamanchili applied for insurance on the building with Crusader. In response to a question concerning whether a governmental department had ever inspected the building, Yalamanchili answered that the building had been inspected in 1999 and 2000, but did not mention any inspections since then. He responded negatively to a question whether a governmental department had ever informed him of deficiencies or code violations, and also answered “no” to questions regarding whether the building had been cited for code violations or cited by a regulator in the last three years. In December 2003, Crusader issued Yalamanchili a special multi-peril liability policy that insured claims by tenants of substandard or uninhabitable living conditions. The policy explicitly stated that coverage was issued in reliance on the applicant’s representations in the application. At the time the policy was issued, Crusader had no knowledge of the insured’s omissions of material information in the application.
In November 2005, Positive Investments was sued by the building’s tenants. Crusader agreed to defend the action under a reservation of rights. In June 2006, the tenants amended their complaint to include the citations issued to Positive Investments in February, April, and September 2002. In October 2006, Crusader denied coverage for the tenants’ claim on the basis of material “misrepresentations and/or concealments” in the insurance application.
In May 2007, Colony sued Crusader, seeking a declaration that the misrepresentations were not material, as well as payment from Crusader for its portion of the defense costs in the lawsuit against the tenants. Yalamanchili conceded that the 2002 citations should have been included in the application, but he attempted to distinguish the meaning of the word “violation” with a mere recommendation by the city. The underwriter of Crusader’s insurance policies, Mark Neiman, testified that Crusader had special internal guidelines which required that for all new and renewal quotes, the company must attempt to verify, though public records, either the existence or lack of any citation issued against the applicant building. Neiman stated that he attempted to comply with the guidelines through a website, however the website only listed inspections through January 2000. He also testified if the three citations from 2002 had been revealed, he would not have approved the building’s insurance application.
The trial court found that Yalamanchili failed to provide information which was “clearly and unambiguously called for” in the Crusader application, in particular, the notices issued by the city three different times in 2002. In reviewing Yalamanchili’s application, Crusader reasonably relied on his statements denying the issuance of any notices of building deficiencies. After trial, Colony raised the argument that Crusader had waived its right to deny coverage, or was estopped from denying coverage, based on a failure to follow its own internal guidelines in investigating Yalamanchili’s statements in his application. The court ruled in favor of Crusader.
On appeal, the court noted that because Colony’s argument for waiver or estoppel was not litigated at trial, and only arose in post-trial objections, Colony forfeited the right to assert that argument on appeal. Even if Colony had plead those issues at trial, the court found that neither the estoppel nor waiver argument would have been successful. The court stated that “where an insurer has actual knowledge that answers in an application were false, the insurer may be estopped from arguing it was defrauded.” In this case, however, there was no evidence that Crusader had any knowledge of the three citations from 2002. In fact, the trial court explicitly found Crusader first learned of the citations when it read the tenants’ amended complaint. Therefore, Colony could not establish a claim for estoppel since Crusader was not provided with the facts. Colony also argued that Crusader’s internal guidelines prevented it from denying coverage since it was required to investigate applications for older and bigger buildings. The court disagreed, noting that there was no evidence Crusader intended its internal guidelines to be acted upon, or that Yalamanchili actually relied on the guidelines to his detriment.
For its waiver argument, Colony asserted that Crusader waived its right to deny coverage because it failed to follow its guidelines. The court noted that waiver requires the intentional relinquishment of a known right. An insurer waives information about a material fact when it fails to inquire about material facts “distinctly implied” from other available facts. However, the court found that no facts in Yalamanchili’s application alerted Crusader to the 2002 citations. There was not any evidence that Crusader knew Yalamanchili’s answers were untrue at the time it issued the policy. Because Crusader did not know about the material information, it did not waive the right to information of material facts by failing to make an inquiry. This was true especially because there was no evidence showing that a comprehensive investigation would have allowed Crusader to find out about the 2002 citations.
Therefore, the court affirmed the judgment for Crusader.
The bottom line is that to argue the other party waived its right to information of material facts, you must make a showing that those facts (1) are distinctly implied from other available facts, and (2) the other party neglected to inquire about those facts. Here, Crusader had no knowledge at all about the applicant’s misrepresentations until months after it issued the policy, so it did not fail to inquire and therefore it did not waive its right to information of material facts.
