Full Opinion

Filed 10/14/26 CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE SCOTTSDALE INSURANCE COMPANY, G065564 Plaintiff and Respondent, (Super. Ct. No. 30-2024-01411000) v. OPINION CALIFORNIA MILITARY DEPARTMENT, Defendant and Appellant. Appeal from a judgment of the Superior Court of Orange County, William D. Claster, Judge. Affirmed. Rob Bonta, Attorney General, Tamar Pachter, Senior Assistant Attorney General, Brian D. Wesley and Jarrad L. Wood, Deputy Attorneys General, for Defendant and Appellant. Selman Leichenger Edson Hsu Newman & Moore, Sheryl W. Leichenger and Elisabeth M. D’Agostino for Plaintiff and Respondent. This appeal arises from a summary judgment in favor of Scottsdale Insurance Company (Scottsdale) declaring that two policies issued to nonparty TL Veterans Construction, Inc. (TL Veterans) had been rescinded. The present appeal is by the California Military Department (CMD), who sought compensation under the policies as an additional insured. CMD hired TL Veterans to renovate two buildings at the Joint Forces Training Base in Los Alamitos (the Los Alamitos Base project). During the construction, TL Veterans negligently caused a fire, resulting in a total loss of one of the buildings. TL Veterans and CMD made claims on the insurance policies issued by Scottsdale, but Scottsdale’s subsequent investigation revealed that TL Veterans had made material misrepresentations on its application for insurance. Scottsdale rescinded the policies and filed the underlying lawsuit seeking a judicial declaration that they had been effectively rescinded, which the trial court granted. CMD appealed and raises essentially two arguments. First, CMD contends Scottsdale waived its statutory right of rescission by failing to adequately investigate a prior claim TL Veterans had submitted. We conclude, as did the trial court, that the prior claim would not have revealed one of Scottsdale’s primary bases for rescission, which was TL Veterans’ misrepresentation that it was not working with asbestos. In fact, the Los Alamitos project involved asbestos abatement. This was an independent ground for rescission that was not waived. Second, CMD contends that once a third party has taken an economic position based on an insurance policy—here, CMD relying on the policy to award the contract to TL Veterans—the insurer loses the right of rescission. However, CMD cites no precedent for applying such a rule in the context of a misrepresentation on an insurance application. The authorities 2 CMD relies on apply general principles of equity and are inconsistent with Insurance Code section 6501, which permits the insurer to rescind “any time” before a lawsuit is filed to enforce the policy. Accordingly, we affirm. UNDISPUTED FACTS On or about August 24, 2020, TL Veterans entered into a contract with the California Department of General Services for ‘“replacement of roof [sic] of the Skilled Nursing Facilities of the Department of State Hospitals in the City of Norwalk, County of Los Angeles, California . . . .”’ (Norwalk project). In carrying out the Norwalk project, TL Veterans entered into a subcontract with JNH Roofing on or about December 22, 2020, which valued the subcontract at approximately $1 million. The Department of General Services publicly posted a notice of its award of the Norwalk project to TL Veterans on California’s procurement website. The notice stated the amount awarded under the contract was approximately $2.2 million. In January 2021, TL Veterans submitted an insurance application (2021 application) to respondent Scottsdale through its underwriter. The 2021 application identified TL Veterans’ ‘“Exposures”’ as follows: “a. Gross Receipts for the next 12 months? $300,000 [¶] b. What are the Gross Receipts for the last 12 months? $300,000 [¶] c. What are your subcontractor costs for the next 12 months? $90,000.” The 2021 application requested that TL Veterans ‘“Describe in detail your largest project in the last 5 years along with the receipts $$$. (DETAIL REQUIRED FOR CARRIER APPROVAL).”’ TL Veterans responded with ‘“county office remodeling $105,869.”’ The 2021 application did not mention the Norwalk project or reflect the value of its contract. 1 Further statutory references will be to the Insurance Code except as otherwise specified. 3 The 2021 application asked TL Veterans if it had ‘“been involved or do you subcontract any work involving blasting operations, hazardous waste, asbestos, mold, PCB’s or medical and/or industrial life?”’ TL Veterans answered ‘“No.”’ In fact, the Norwalk project involved a skilled nursing facility. Based on the representations contained in the 2021 application, Scottsdale issued primary and excess insurance policies, Policy Nos. RBS0072806 and XLS0115910, effective January 23, 2021, through January 23, 2022, to TL Veterans as the named insured (2021-2022 policies). The primary policy had a limit of $1 million, and the excess policy had a limit of $4 million. Less than a month later, on February 16, 2021, CMD posted a notice of an award of a new contract to TL Veterans for approximately $3 million for the Los Alamitos Base project. The contract included asbestos abatement. TL Veterans provided the CMD with a certificate of liability insurance reflecting the insurance policies it had obtained from Scottsdale. On or about September 8, 2021, Scottsdale received notice of a claim pertaining to alleged water intrusion at a building involved in the Norwalk project (the Norwalk claim). The Norwalk claim described the incident as follows: ‘“TL Veterans Construction, Inc. hired a subcontractor, project [sic]. Demolition of the roof of the building was completed, and the roof was covered by plastic covers while waiting for the new roof materials to be installed by JNH Roofing (subcontractor). When it rained early in the morning on July 26, 2021, water seep [sic] through those plastic covers and flowed down inside the building. Patients from 3 out of 4 units inside the building had to evacuate and were relocated to a different building. Restoration company was immediately hired. Their work includes removing 4 ceiling, removing water, drying wet parts of the building, etc.”’ The Norwalk claim did not state the contract price or subcontractor costs involved in the underlying project. Pursuant to the 2021-2022 policies’ terms, Scottsdale denied coverage for the water intrusion claim under the policies’ open roof and open building exclusion, among other provisions, and TL Veterans did not challenge the denial. On or about January 21, 2022, TL Veterans submitted an application to Scottsdale to renew the insurance policies (2022 application). On the 2022 application, TL Veterans once again misrepresented its gross receipts from the previous 12 months and anticipated receipts for the upcoming 12 months as $300,000. And it similarly misrepresented its largest project over the previous five years as a school remodel in the amount of $135,000. TL Veterans misrepresented that it had not been involved in asbestos or medical work. In fact, the Los Alamitos Base project included asbestos abatement. Based on TL Veterans’ representations, Scottsdale once again issued primary and excess policies in the same amounts. On May 27, 2022, TL Veterans notified Scottsdale of a fire that occurred at the Los Alamitos Base project, seeking coverage under the policies. The fire completely destroyed one of the buildings being renovated, requiring a complete demolition and rebuild. A subsequent investigation revealed that the fire was caused by construction crews leaving a powered light fixture on top of flammable roofing materials that eventually ignited due to the heat from the light fixture. TL Veterans accepted responsibility for causing the fire. After conducting an investigation and discovering TL Veterans’ misrepresentations, on November 7, 2022, Scottsdale sent TL Veterans a letter through counsel demanding that TL Veterans agree to rescind the 5 insurance policies. Scottsdale cited as bases for the rescission that TL Veterans had omitted information in its 2022 application concerning the size of the contracts and the fact that the Los Alamitos project involved asbestos removal. Scottsdale’s letter included a draft complaint that it threatened to file if TL Veterans did not agree to the rescission. After some back and forth, Scottsdale and TL Veterans agreed to rescind the insurance policies on January 19, 2023. PROCEDURAL HISTORY On July 2, 2024, Scottsdale filed the underlying complaint seeking declaratory relief confirming its rescission of the insurance policies. CMD filed a cross-complaint asserting causes of action for promissory estoppel and declaratory relief against Scottsdale. CMD filed a separate lawsuit against TL Veterans and obtained a default judgment in the amount of $9,787,124. The parties agreed to a case management order in which the case would be tried in two phases. The first phase included Scottsdale’s causes of action and CMD’s declaratory relief claim. The second phase included any remaining claims by CMD.2 Scottsdale and CMD filed competing motions for summary judgment/adjudication as to phase one issues. The trial court granted Scottsdale’s motion, declaring the insurance policies rescinded and deemed void ab initio. Afterward, CMD voluntarily dismissed its remaining claims without prejudice, leaving no claims to be resolved. The court thus entered judgment in favor of Scottsdale. CMD timely appealed. 2 There was, at that time, a pending motion to amend CMD’s cross-complaint to add additional causes of action. 6 DISCUSSION CMD does not dispute that TL Veterans, the insured, made material misrepresentations in its 2022 application. In particular, TL Veterans grossly misrepresented the size of the projects it was taking on, and it misrepresented the fact that it was performing asbestos abatement. CMD recognizes this would ordinarily give the insurer a right to rescind the contract. However, it argues the right to rescind was lost for two reasons. First, Scottsdale waived the right by failing to adequately investigate the Norwalk claim, which would have revealed TL Veterans’ misrepresentations. Second, Scottsdale was prevented from rescinding the contract due to CMD’s economic reliance on the policies. We address each argument in turn under a de novo standard of review. (Hamburg v. Wal-Mart Stores, Inc. (2004) 116 Cal.App.4th 497, 502 [“Summary judgments are reviewed de novo”].) I. SCOTTSDALE DID NOT WAIVE THE RIGHT TO RESCIND A. Legal Principles An insurer is entitled to material information bearing on the insured’s risk. Section 332 provides, “Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.” Section 330 states, “Neglect to communicate that which a party knows, and ought to communicate, is concealment.” “[A]n insurer does not have the duty to investigate the insured’s statements made in an insurance application and to verify the accuracy of the representations. [Citation.] Rather, it is the insured’s duty to divulge fully all he or she knows.” (American Way Cellular, Inc. v. Travelers Property Casualty Co. of America 7 (2013) 216 Cal.App.4th 1040, 1051 (American Way); Mitchell v. United National Ins. Co. (2005) 127 Cal.App.4th 457, 477 (Mitchell) [“an insurer has the right to rely on the insured’s answers to questions in the insurance application without verifying their accuracy”].) The obligation to accurately communicate material information is fundamental to an insurer’s ability to exercise judgment concerning whether to take on the risk of the insured. (Old Line Life Ins. Co. v. Superior Court (1991) 229 Cal.App.3d 1600, 1604 (Old Line) [“‘[An insurance company] 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’”].) The failure to provide material information, either through concealment or misrepresentation, entitles the other party to rescind the contract. Section 331 provides, “Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.” Similarly, section 359 provides, “If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.” “Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this part such right may be exercised at any time previous to the commencement of an action on the contract. The rescission shall apply to all insureds under the contract, including additional insureds, unless the contract provides otherwise.” (§ 650.) An “action on the contract” means “an action brought at law to enforce the insurance policy.” (Resure, Inc. v. Superior Court (1996) 42 Cal.App.4th 156, 167 (Resure).) When a policy is rescinded under these provisions, it is deemed void ab initio—as if it never existed. (LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1267.) 8 However, the right to obtain material information may be waived. “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.” (§ 336.) The critical term in that statute is “distinctly implied,” which one court has described as “obvious leads.” (Old Line, supra, 229 Cal.App.3d at p. 1606.) An example of waiver is found in DiPasqua v. California etc. Life Ins. Co. (1951) 106 Cal.App.2d 281 (DiPasqua). There, the insured answered, in an application for life insurance, that he had not consulted a physician in the prior 5 years, nor had he been a patient in a hospital. (Id. at pp. 283– 284.) Neither fact was true. However, another answer in the insured’s application referred to a diagnosis of vertigo made by a doctor within the last year, and an independent investigative report by the insurer disclosed that the insured had recently been confined to a hospital. (Ibid.) Under these circumstances, the court upheld the enforceability of the insurance policy. B. CMD’s Waiver Argument CMD contends Scottsdale waived the right to rescind when it failed to conduct an investigation upon receiving TL Veterans’ Norwalk claim. The Norwalk claim communicated to Scottsdale that TL Veterans was performing a roof removal on a four-unit skilled nursing facility that housed patients. The Norwalk claim made no reference to the size of the contract. Nevertheless, according to CMD, this should have tipped Scottsdale off that TL Veterans had lied about the size of its projects and lied about not being involved in projects involving “medical . . . life.” We grant that this information clearly tipped Scottsdale off that TL Veterans was working on a medical building. Whether it “distinctly 9 implied” TL Veterans was working on much larger projects than the $135,000 school remodel it previously disclosed is arguable. However, the trial court found that even assuming Scottsdale should have known TL Veterans was working on larger projects, nothing in the Norwalk claim revealed TL Veterans was working on a project involving asbestos removal, and that misrepresentation was an independent basis for rescinding the policy. We agree with this analysis. By the time TL Veterans submitted its 2022 application, it had been working on the Los Alamitos Base project for almost a year. That project involved asbestos abatement. Yet TL Veterans claimed on its 2022 application that it was not working with asbestos. There is no dispute this was a material misrepresentation. CMD’s position is that once Scottsdale was on notice of any misrepresentation in the 2022 application, its failure to investigate waived all misrepresentations in the 2022 application. To support its position, CMD relies on Rutherford v. Prudential Ins. Co. (1965) 234 Cal.App.2d 719 (Rutherford). Rutherford involved a life insurance policy. The decedent died from a heart attack, and when the spouse made a claim on the policy, the insurer rescinded it. (Rutherford, supra, 234 Cal.App.2d at pp. 721–722.) The insurer discovered that the decedent’s application contained multiple serious falsehoods, some of which were contradictions within the application itself, and others were contradicted by information the insurer had in its file. Moreover, the application form, which was filled out by a doctor hired by the insurer, was incomplete. (Id. at pp. 734–735.) The Rutherford court began its discussion of waiver by stating, “There seems to be some confusion in the authorities in California as to 10 whether, where the insurer has information from which it knows or should know that any of the insured’s representations are untrue, the insurer is under any duty to investigate to determine whether any other misrepresentations have been made.” (Id. at p. 733.) It then discussed two cases in support of its interpretation that an insurer is obligated to investigate representations not known to be false, Turner v. Redwood Mutual Life Assn. of Fresno (1936) 13 Cal.App.2d 573, 578 and DiPasqua, supra, 106 Cal.App.2d 281 at p. 284. The Rutherford court then discussed three cases that contradict that proposition, including S. F Lathing Co. v. Penn M. L. Ins. Co. (1956) 144 Cal.App.2d 181, 187 (S. F.), which plainly stated, “‘Appellant asserts that [insurer] knowing that one of the assured’s answers was incorrect and having discovered one error was bound to investigate the truth of all other statements. It may be conceded that if the insurer had actual notice of the material misrepresentation it could not rescind on the ground of that misrepresentation. [Citation.] But the insurer with knowledge that one of the applicant’s answers is erroneous may, if it chooses, waive that fact and is not thereby estopped from raising other misrepresentations.’” (Id. at p. 734.) The Rutherford court concluded that the application in that case was so riddled with inaccuracies that the insurer was bound to investigate all of the facts stated within, even those not suspected to be false. (Rutherford, supra, 234 Cal.App.2d at p. 735.) Rutherford stands for the proposition that an insurance application riddled with known falsehoods puts the insurer on notice that even facts not known to be false must be investigated. That rule has no application here. There were no obvious falsehoods in TL Veterans’ application, and the Norwalk claim put one, or at most two factual representations in question. 11 Instead, the general rule is that an insurer may waive its right to the accurate disclosure of particular material facts without waiving its right to the accurate disclosure of other material facts. (S.F., supra, 144 Cal.App.2d at p. 187; see also Mitchell, supra, 127 Cal.App.4th at p. 477 [“Even if the failure to investigate this issue caused [the insurer] to waive the right to rescind its policy based on [the insured’s] misrepresentation concerning” one fact, “it had ample grounds for rescinding the policy based on other misrepresentations in [the insured’s] application”]; Frederick v. Federal Life Ins. Co. (1936) 13 Cal.App.2d 585, 588 [“The fact that [the insurer] might have overlooked or considered as inconsequential an incorrect or incomplete answer contained in the application does not prevent [the insurer’s] defense against [other] fraudulent statements, the falsity of which was discovered after the issuance of the policy”]; 6 Couch on Insurance (3d ed. 1997) § 85:3 [“A waiver has no greater effect than was intended by the insurer or was manifested by its conduct. Accordingly, an insurer having knowledge that one of the applicant’s answers is erroneous may, if it chooses, waive its rights as to that statement yet still raise the defense that other statements of the insured were false”].) This follows from the rule that “an insurer has the right to rely on the insured’s answers to questions in the insurance application without verifying their accuracy.” (Mitchell, at p. 477; see also American Way, supra, 216 Cal.App.4th at p. 1051.) This general rule also derives from the statutory language of section 336, which governs waivers. That section implies a waiver where the insurer neglects to investigate “such facts.” That language indicates the waiver is limited to the particular facts neglected. Finally, the general rule comports with the commonsense notion that some facts are more important than others, and an insurer should be 12 free to conduct an efficient business that prioritizes investigating more important facts but saves money by accepting the risk of loss associated with less consequential facts. As applied to this case, Scottsdale was free to waive the right to rescind based on TL Veterans’ work on a medical building if it deemed the investigation not worth the effort, yet not waive rescission in the more consequential scenario where TL Veterans was involved with asbestos abatement. Those scenarios present starkly different risk profiles, and Scottsdale was entitled to treat them independently. Because TL Veterans misrepresented the material fact that it was working with asbestos, Scottsdale had the right to rescind the policy on that basis. Nothing in the Norwalk claim distinctly implied that TL Veterans was conducting asbestos abatement, and thus Scottsdale did not waive its right of recission on that basis. C. Third-Party Prejudice Next, CMD contends Scottsdale’s right to rescind was lost once CMD acted in reliance on the policy by awarding the Los Alamitos Base project to TL Veterans. In support of its contention, CMD relies on a principle announced in Meyers v. Merillion (1897) 118 Cal. 352, 356 (Meyers): “Where the rights of others have intervened, and the circumstances have so far changed that rescission may not be decreed without injury to those parties and their rights, rescission will be denied and the complaining party left to his action at law for damages for the fraud.” Meyers involved a dispute between two business partners. One bought out the other. Later, the seller tried to rescind the sales agreement on the ground that the buyer fraudulently induced the agreement by persuading him to part with his interest for less than what it was worth. Our high court held rescission could not be had because the buyer had subsequently brought on new partners, and 13 rescission of the sales agreement would interfere with the rights of the new partners. (Id. at p. 356.) This was especially the case because the plaintiff plainly had an adequate remedy at law: the difference between the sales price and the actual market value. (Id. at p. 357.) Although Meyers had nothing to do with insurance, the doctrine has been applied in two insurance-related cases, though none involving rescission based on a misrepresentation of a material fact in an application for insurance. Angle v. United States Fid. & Guar. Co. (1962) 201 Cal.App.2d 758 involved a dispute between two different insurers. The two insurers had provided a fire insurance policy, though the second one did so without knowledge of the first. (Id. at pp. 759-760.) After a fire destroyed the insured property, the second insurer discovered the other insurance policy and issued a new policy, backdated to before the fire, which provided less coverage (though still enough, between the two policies, to fully cover the insured). (Id. at p. 760.) “The crucial issue involved in this case is whether there can be a rescission of an insurance policy after the event giving rise to the liability occurred, when the effect of such rescission would be to increase the pro rata liability of another insurance company.” (Id. at p. 761.) Relying on the doctrine announced in Meyers, the answer was a resounding no. (Id. at p. 763.) Gill v. Rich (2005) 128 Cal.App.4th 1254 involved a dispute between physician members of an interindemnity arrangement (through which hundreds of physicians pooled resources into a trust as an alternative to medical malpractice insurance) and the receiver eventually appointed to operate the trust. The physicians claimed they had been fraudulently induced to remain in the group through material misrepresentations of the solvency 14 of the trust and sought rescission of their membership agreement on that ground. (Id. at p. 1269.) However, the court denied rescission on the ground that third parties would be harmed—other members of the interindemnity agreement who relied on the physicians’ contributions, and patients with malpractice claims who relied on the fund for reimbursement. (Id. at pp. 1267–1268.) Because this was not a case where an insured made a misrepresentation to an insurer, the Gill court did not discuss the Insurance Code provisions dealing with rescission at all, instead relying on general contract and equity principles to deny rescission. The fundamental problem with applying the Meyers doctrine in this case is that the rescission here was not a creature of equity or general contract principles, but instead a statutory right. Applying the Meyers doctrine here would be inconsistent with the applicable statutory language. Section 650 states, “Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this part such right may be exercised at any time previous to the commencement of an action on the contract. The rescission shall apply to all insureds under the contract, including additional insureds, unless the contract provides otherwise.” (Italics added.) The rescission here was a right given “by any provision of this part” (i.e., §§ 331, 359).3 Accordingly, it was exercisable “at any time” prior to an “action on the contract,” which has been construed as “an action brought at law to enforce the insurance policy.” (Resure, supra, 42 Cal.App.4th at p. 167.) There is no dispute the rescission here occurred before any action on the contract. As to third parties, not only is there no limitation based on third-party economic interests, but the statute expressly contemplates that certain third parties 3 Insurance Code, Division 1, Part 1, includes sections 100 through 679.75. 15 will lose their rights: “The rescission shall apply to . . . additional insureds . . . .” (§ 650.) An additional insured is, essentially, what CMD is claiming to be. As our high court explained in Philadelphia Indemnity Ins. Co. v. Montes- Harris (2006) 40 Cal.4th 151, 157, “When an insurer opts to rescind a liability policy on this basis, and does so in conformity with all of the requirements imposed by law (e.g., Ins. Code, § 650), the insurer generally may avoid liability on the policy to the insured or to any third party injured by the insured.” (Italics added.) The Meyers rule, therefore, does not apply where an insurer rescinds a policy based on a material misrepresentation or concealment by the insured. Accordingly, Scottsdale did not lose its right to rescind when CMD relied on the policies it issued. Cases like this—where a loss must be allocated between two innocent parties—are challenging. Neither party to this appeal did anything wrong under the law. And both parties, though not required to, could have done more. Scottsdale could have investigated further, and CMD, being so reliant on the 2021-2022 policy, could have sent Scottsdale a description of the Los Alamitos Base project to ensure it was on notice of what the insured party was performing. In this case, the rule set by the California Legislature immunizes the insurer by permitting it to rely on the insured’s representations in the contract, even to the detriment of innocent third parties. (§ 650.) Whether that rule should be changed in the context of large construction contracts involves a difficult balancing of policies. On the one hand are the policies favoring making victims whole and ensuring insurance policies can be relied on. On the other hand, any additional burden of investigation placed on insurers would make the business of insurance more costly and, ultimately, 16 less accessible to the public. Given these competing policy considerations and the ongoing difficulties our state has been facing in other segments of the insurance industry, it is particularly appropriate for the California Legislature to strike that balance, not the Judiciary. DISPOSITION The judgment is affirmed. Scottsdale shall recover its costs incurred on appeal. DELANEY, J. WE CONCUR: MOORE, ACTING P. J. SCHWARM, J.* *Judge of the Orange County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution. 17