• Southern Ins. Co. v. Workers' Compensation Appeals Board (2nd App. Dist. 2017) ___ Cal. App. 5th ___, 2017 DJDAR 4660, Case No. B278412
  • August 15, 2017
  • UNDERLYING CLAIM

    EJ Distribution ("EJ") applied for workers' compensation insurance representing that its business was a trucking company that moved containers with no loading or unloading. EJ also represented on the application that it only performed local hauling and that its employees did not travel out of state and did not have a travel radius of more than 200 miles. Southern Insurance Company ("Southern") issued a workers' compensation policy to EJ. Subsequently, an EJ employee, David Segovia, injured his back lifting a latch on the back of his truck while on a trip to Tennessee for EJ. Segovia filed a workers' compensation claim. Southern sent a letter to EJ informing it that Southern was rescinding the policy based on material misrepresentations in the application, namely that the employees did not travel out of state and that operations did not exceed a 200 mile radius. Southern returned the policy premium. Due to Southern's position, the Uninsured Employers Benefits Trust Fund was joined as a defendant in the workers' compensation claim.

    The matter was submitted to mandatory arbitration under Labor Code section 5275 (a)(1) as a dispute involving insurance coverage. Southern presented testimony from an underwriter to the effect that Southern did not insure long-haul truckers and would not have insured EJ had it known that EJ traveled out of state and beyond a 200 mile radius. A special investigator hired by Southern testified that EJ engaged in out of state operations before inception of the policy, although he did not uncover any evidence of out of state operations at the time the application was submitted.

    The arbitrator found that Southern could not retroactively rescind the policy. First, the arbitrator found that the only remedy available to Southern was cancellation of the policy under Insurance Code section 676.8 (b)(5) as nothing in that code section permits retroactive rescission by a workers' compensation carrier. Second, the arbitrator found that there is no mechanism for a workers' compensation insurer in California to unilaterally and retroactively rescind its policy. Finally, the arbitrator expressed concern over leaving the employee without coverage.

    Southern moved for reconsideration. The arbitrator recommended that reconsideration be denied, noting that the testimony of Southern's investigator was not convincing and the record did not show when EJ began sending drivers out of state. Since the falsity may not have occurred until the day of the accident, retroactive rescission was not justified. The appeals board adopted the arbitrator's report and denied reconsideration. Southern petitioned for and was granted a writ of review.

    APPELLATE COURT'S RULING

    The appellate court first addressed the question of jurisdiction. Southern conceded that under Labor Code section 5275 (a)(1), insurance coverage is within the jurisdiction of the appeals board. However, Southern contended the appeals board does not have subject matter jurisdiction over contractual disputes such as the question of the validity of Southern's rescission of the policy. The appellate court disagreed, noting "where, as here, coverage is disputed on the ground that there is no longer a contract of insurance in existence, it is obviously necessary to rule on the defense asserted in order to determine whether there is coverage...Thus while Southern is free to litigate contractual disputes with its insured in a court of law, if Southern disputes workers' compensation insurance coverage because it claims there is no contact, it must submit to the jurisdiction of the appeals board on the issue of coverage even if that entails a ruling on whether the insurance contract is (or was) in effect."

    The appellate court next addressed the issue of whether rescission is a remedy applicable to workers' compensation policies. The court noted that although Insurance Code section 676.8 provides cancellation of such policies, it in no way addresses the issue of rescission of such policies. However, Insurance Code section 650 permits rescission of insurance policies. Although that code section does not specifically mention workers' compensation policies, the appellate court determined it applies to such policies by failing to exclude them. Furthermore, although Insurance Code section 650 precludes rescission once an action on the contract has been filed, rescission was not precluded in the present case since, as the appellate court noted, "the filing of a workers' compensation claim is not the equivalent of an action on the contract. The function that an 'action on the contract' serves in section 650 is a legal remedy that precludes the filing of an equitable suit for rescission. The action on the contract also serves as an appropriate vehicle for the assertion of rescission as a defense. A workers' compensation claim is not the equivalent of a remedy at law."

    Finally, the appellate court addressed the issue of whether a rescission of the policy had been effectuated. Under Civil Code section 1691, rescission is effected by providing notice and restoring the premium. Once this occurs, either party may seek legal or equitable relief based on the rescission. In the present case, although Southern had effected the rescission, it did not file an action for relief seeking a judgment that its rescission was effective, an action necessary to definitively discharge Southern's duties. The appellate court cautioned that the insurer "is well advised to avoid drastic decisions about coverage until the validity of the rescission has been adjudged." However, the appellate court concluded that it appeared the arbitrator had given little or no consideration to the facts presented which justified rescission, including evidence from which it could be reasonably inferred that EJ knew at the time it entered into the policy that its statements regarding the nature of its transportation business were false. As such, the appellate court ruled that the decision of the appeals board affirming the findings and award of the arbitrator be annulled and the matter remanded to decide whether EJ concealed material facts when it entered into the policy, thus warranting rescission of the policy by Southern.

    EFFECTS OF THE COURT'S RULING

    First, the appellate court's ruling is significant in that it determined that the issue of rescission of a workers' compensation policy falls within the subject matter jurisdiction of the workers' compensation appeals board. Although the Labor Code specifically provides that coverage issues are within the board's jurisdiction, rescission is not a coverage issue. It is also reasonable to conclude that an appeals board would be much more likely than a court of law to find against the insurer on this issue to ensure that coverage is in place for the injured worker. Therefore, this holding puts insurers at a disadvantage when it comes to establishing rescission in a workers' compensation context once the claim has been made and the insurer is subject to the jurisdiction of the appeals board. It is of note, however, that the court did not appear to hold that the jurisdiction of the appeals board is exclusive. Instead, by reiterating the established principle that "any party to the contract may seek legal or equitable relief based upon the rescission (citation)," it can be presumed the court recognized that the appeals board's jurisdiction is concurrent with that of a court of law. The insurer should therefore consider immediately filing a civil action on a claim of rescission so it can take advantage of the rule to the effect that when two tribunals have concurrent jurisdiction, the one first assuming jurisdiction retains it to the exclusion of all others in which the action could have been initiated. (Scott v. Industrial Accident Commission (1976) 46 Cal.2d 76,81.)

    The court's remaining findings are in line with the clear statutory language to the effect that workers' compensation policies can be retroactively rescinded and that insurers are not limited to a cancellation remedy.