Unpublished Disposition, 934 F.2d 324 (9th Cir. 1983)

This is an appeal from the district court's grant of summary judgment in favor of an insurer and an insurance broker in an action arising out of the insurer's failure to pay a claim. For the reasons set forth below, we vacate and remand.

MEMORANDUM^* 

FACTS AND PRIOR PROCEEDINGS

Ervin Pfefferman, his son, Samuel, and their partnership, Ervin Pfefferman & Son ("Pfeffermans") are wholesale diamond dealers. Malcolm Blair, John Taylor, and Dennis Jennings are the lead underwriters at Lloyd's of London ("Lloyd's") on a $3,000,000 jewellers block insurance policy provided to the Pfeffermans by Eyl & Gordon Insurance Brokers of California, Inc. and Michael Zelichov ("Brokers").

In 1983 the Pfeffermans exchanged so-called "favored" trade notes, i.e., notes payable issued by diamond dealers to each other and representing purported exchanges of merchandise, with another wholesale diamond dealer. The trade notes stated that an exchange of merchandise had taken place when in fact no such exchange had occurred. On October 11, 1983, the Pfeffermans took their trade note to a bank where they had it discounted for cash. When the bank later demanded payment on the note, it discovered that no diamonds had changed hands.

At an unspecified date subsequent to the above transaction, the Pfeffermans requested and obtained a short-term renewal (i.e., a 30-day extension) of their jewellers block insurance policy. Shortly thereafter, on December 27, 1983, an alleged theft occurred of the Pfeffermans' inventory.

The Pfeffermans filed a claim with Lloyd's, stating that they had suffered a loss in excess of $4,000,000. Because of the extremely poor state of the Pfefferman's record keeping, however, Lloyd's declined to pay off on the claim until it could ascertain the full extent of its insured's loss. The Pfeffermans thereupon filed the instant diversity action, naming both Lloyd's and Brokers as defendants. The gist of their complaint was that Lloyd's' refusal to pay, and Brokers' failure to obtain a requested $1,000,000 increase in the stock portion of the policy prior to the alleged theft, constituted acts of fraud against, and breaches of various duties owed to, the Pfeffermans.

In 1986, Sam and Ervin Pfefferman pleaded guilty to felony bank fraud under 18 U.S.C. § 1014 for their misuse of the above favored trade note. When the facts surrounding the bank fraud came to light, Lloyd's refused to honor the terms of the jewellers block insurance policy and subsequently moved for summary judgment, arguing that the Pfeffermans' misconduct leading to their convictions entitled Lloyd's to rescind the contract of insurance. The district court agreed and granted the motion. Brokers then filed their own motion for summary judgment, arguing that they could not be held liable to the Pfeffermans for failing to obtain additional coverage on a rescinded policy. The district court granted that motion as well and the Pfeffermans have appealed.

DISCUSSION¹ 

An applicant for insurance or renewal of an existing insurance policy is required under California law to communicate to its insurer any and all facts material to that insurance. Cal.Ins.Code Sec. 332 (West 1972). The concealment of a material fact entitles the insurer to rescind the contract. Cal.Ins.Code Sec. 331 (West 1972); Rallod Transp. Co. v. Continental Ins. Co., 727 F.2d 851, 853 (9th Cir. 1984) (construing California law). "Materiality is determined by the probable and reasonable effect that truthful disclosure would have had upon the insurer in determining the advantages of the proposed contract." Holz Rubber Co., Inc. v. American Star Ins. Co., 14 Cal. 3d 45, 61, 120 Cal. Rptr. 415, 425, 533 P.2d 1055, 1065 (1975); Cal.Ins.Code Sec. 334 (West 1972).

In order to make that determination, a trier of fact "must decide whether the insurer was misled into accepting the risk or fixing the premium of insurance." Id. Thus, whether a particular piece of information was material to a contract of insurance necessarily presents a mixed question of law and fact, see generally Cummings v. Farmers Ins. Exch., 202 Cal. App. 3d 1407, 1417, 249 Cal. Rptr. 568, 573 (Cal.Ct.App.1988) (citing federal cases so holding), that is ordinarily left for the jury to decide. See Chainery, Inc. v. Fireman's Fund Ins. Co., 260 Cal. Rptr. 33, 36 (Cal.Ct.App.1989).

The rationale behind the district court's ruling may be summarized as follows: The Pfeffermans' bank fraud convictions stemmed, at least in part, from a misrepresentation of their inventory; Lloyd's as the insurer of that inventory was entitled to accurate information thereon; this tangential relationship between the Pfeffermans' misconduct and their contract of insurance was a material fact which, not having been communicated to Lloyd's, constituted a ground for rescission.

While a jury might reasonably conclude that the Pfeffermans' failure to communicate the above information to Lloyd's could have misled the insurer to accept a risk it might not otherwise have accepted, at least for the premium charged, we cannot agree with the district court's conclusion that "reasonable minds could not differ" regarding the materiality of that concealment to the renewal of the insurance in question. Cf. Cummings, 202 Cal. App. 3d at 1417, 249 Cal. Rptr. at 573. For example, had the Pfeffermans been convicted of income tax evasion for underreporting their business' income, or of forging stock certificates issued by a diamond company, their misconduct arguably would be neither more nor less tangential to their insurance contract than the conduct of which Lloyd's complains, but reasonable minds could certainly differ as to the materiality of that misconduct to the insurance.

Our research has disclosed no reported decisions of the California courts holding as a matter of law that misconduct only tangentially related to an insurance contract entitles an insurer to rescind that contract. Accordingly, we hold that the district court erred in its conclusion that no genuine issues of material fact existed on this issue.² 

Because we conclude that Lloyd's was not entitled to summary judgment on its rescission claim, it necessarily follows that Brokers were not entitled to summary judgment, either. Cf. Industrial Casualty & Indem. Co. v. Sogomonian, 198 Cal. App. 3d 169, 184, 243 Cal. Rptr. 639, 647 (Cal.Ct.App.) (rescission based on concealment of material fact extinguishes rights of insured to prosecute pending and related claims), as modified, 198 Cal. App. 3d 859d (1988).

The decision of the district court is hereby

VACATED AND REMANDED.