California Court: Insurer May Rescind a Policy for a Material Fact It Never Asked About

According to the opinion, Starr’s application asked about the aircraft, its pilots, maintenance arrangements, and liens or loans secured by the aircraft. It did not ask about the source of the funds used to buy the aircraft, Passport’s financial condition, or the finances of its members. Starr also had not investigated the source of the purchase funds when underwriting the policy.¹

Passport argued that a fact Starr never asked about could not have been material to Starr. The Court of Appeal rejected that theory.

The Santa Barbara County jury found for Passport. The resulting judgment included $3,990,000 in policy benefits, $15,000,000 in punitive damages, approximately $1.048 million in prejudgment interest, approximately $1.417 million in attorney fees, and $125,971.01 in costs—approximately $21.58 million in total.¹

That figure illustrates the practical effect of rescission: once the policy was rescinded, the judgment built on it was reversed.

The court read Insurance Code sections 332, 334, and 336 together and stated that “the materiality of a concealed fact does not depend on the insurer’s inquiry or the reasonableness of any investigation it conducts.”¹

In plain English, section 332 imposes an affirmative duty on each party to communicate, in good faith, facts within its knowledge that are or that it believes to be material to the contract and that the other party does not have the means of ascertaining. The court therefore rejected the argument that the application form alone defines the outer boundary of disclosure.³

The opinion also recognizes limits. Citing section 336 and prior cases, it explains that an insurer may waive its right to disclosure in some circumstances—for example, by failing to follow up obvious leads or where a fact is distinctly implied from other facts revealed.⁵

Under section 334, materiality is judged by the probable and reasonable influence of the facts on the party receiving the information. The court framed the question not as whether Starr asked, but whether Starr’s underwriting decision would have been different had the true facts been disclosed.⁴

Relying on prior case law, the court described the test as whether the information would have caused the underwriter to reject the application, charge a higher premium, or amend the policy terms.

In Passport 420, the court held the undisclosed source of the purchase funds material as a matter of law. Because the use of embezzled funds greatly increased the risk of government seizure—the very risk the endorsement covered—the court concluded that a rational insurer would decline the risk, exclude seizure, or charge more.¹

Insurance Code section 331 provides that concealment entitles the injured party to rescind. The court concluded that the source of the purchase funds was material, that Passport was legally charged with Avenatti’s knowledge, that Passport therefore concealed a material fact, and that Starr was entitled to equitable rescission.²

The judgment was reversed. Passport’s cross-appeal, which concerned the prejudgment-interest calculation, was dismissed as moot.

As a general rule, an agent’s knowledge may be imputed to the principal. The court relied in part on Civil Code section 2332 and agency-law principles.⁶

Passport argued that the “malevolent agent” or adverse-interest exception should prevent imputation. The court disagreed on these facts. Although the embezzlement itself was criminal and adverse, Avenatti used the funds to complete Passport’s aircraft purchase, which initially benefited the LLC, and he was acting as Passport’s manager when Passport obtained the Starr policy.

The decision does not mean that every act or every piece of knowledge held by a rogue employee or manager is automatically imputed to a company; the result depended on the agency relationship and the specific facts concerning how the conduct related to Passport.

The opinion expressly states that Parrish had no actual knowledge of and did not participate in the embezzlement. The problem for Passport was that the relevant knowledge was attributed to the entity through Avenatti’s role as its manager.¹

That distinction matters for businesses that purchase insurance through managers, officers, or other agents.

Because rescission resolved the appeal, the court expressly did not reach Starr’s remaining contentions, including arguments concerning policy exclusions, Insurance Code section 533, bad faith, punitive damages, Brandt attorney fees, and other issues.¹

The opinion therefore does not hold that Starr acted reasonably or in good faith, does not uphold Starr’s exclusions, and does not independently invalidate the punitive-damages award.

When applying for or renewing significant commercial insurance:

Passport 420 does not hold that:

The holding is narrower: California’s statutory disclosure rules can require disclosure of a material fact even when the insurer never expressly asks about that fact. The case arose in Santa Barbara County, but as a published Court of Appeal decision it is citable precedent statewide.

For a related coverage question involving causation rather than policy formation, see California Court Clarifies Insurance Coverage When Construction and Storm Damage Combine.