SAN FRANCISCO — The California First District Court of Appeal recently reversed a lower court’s rule that Pacific Specialty Insurance Company was permitted to rescind a rental property liability coverage based on the insured's alleged material misrepresentations on the paperwork.

According to the June 12 decision, Plaintiff and Victor Duarte, who purchased a policy to underwrite a “Owners, Landlords & Tenants Liability Coverage” insurance policy for his Oakland rental property from defendant Pacific Specialty Insurance Company, was sued by his tenants in 2012. After the landlord was denied defense by the insurance company, he turned around and sued Pacific in 2014 for not defending him and wrongfully canceling his policy. 

Fighting back, Pacific argued that it was entitled to pull out of the policy because Duarte allegedly made misrepresentations on his insurance application that made the policy void. But Durante allegedly did not lie on the application, rather he incorrectly answered two reportedly ambiguous questions listed on the policy regarding prior property damages and commercial business conducted on the lot. 

Before remanding Duarte’s motion back to the trial court, the court of appeals discussed how insurance policy interpretation, as seen in Waller v. Truck Insurance Exchange, Inc. (1995), is a question of law. 

“We look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it,” according to the appeals court decision, further noting, “a provision in a policy is considered ambiguous when it is capable of two or more constructions, each of which is reasonable.”

Calling the verbiage, “garbled syntax,” the appeals court noted how the word damage in the insurance policy was phrased with confusion. The appeals court said that if Duarte answered ‘yes’ to specific questions, his application process and policy approval would have been automatically denied.

“In words, a logical way to read this inconsistently worded sentence is to tie everything back to the existence of unrepaired damage," according to the appeals court decision.

The appeals court agreed that Duarte could have interpreted the query as inquiring "whether the property has unrepaired damage associated in some way with previous or pending claims," the appeals court said, which further ruled that “Pacific has not met its burden to show that Duarte made a misrepresentation in his response... because Pacific has not shown that Duarte knew of any unrepaired damage from the identified sources.”

Determining that the trial court ruled incorrectly, the appeals court remanded the matter “for the trial court to rule on Duarte’s summary adjudication motion, which Pacific opposed not only on the ground that it was entitled to rescind the policy, but also on the ground that there was no potential for coverage, an issue that the trial court did not address.”

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