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When EJ Distribution Corporation applied for workers’ compensation insurance, the application indicated that EJ’s employees did not travel out of state. The online application prepared by its insurance agent described EJ’s operations as “local hauling” and that EJ’s employees did not travel out of state and did not have a radius of travel greater than 200 miles.  Accordingly Southern Insurance issued a workers’ compensation policy beginning on January 1, 2009.

On April 6, 2009, EJ’s employee, David Berrios-Segovia, injured his back while on a trip to Tennessee and filed a workers’ compensation claim on May 13, 2009.

On June 12, 2009, Southern’s attorneys sent a letter to EJ stating that “Southern is rescinding the policy.” The decision to rescind was based on material misrepresentations or the concealment of material facts by EJ in the application for the policy, specifically that its employees did not travel out of state and that its operations did not exceed a radius of travel of 200 miles.

In light of Southern’s position that the policy was rescinded the Uninsured Employers Benefits Trust Fund (UEBTF) was joined as a defendant in Segovia’s workers’ compensation claim.

The coverage issue  was submitted to mandatory arbitration pursuant to Labor Code section 5275, subdivision (a)(1). Southern called an underwriter as a witness who testified that Southern never insured long-haul trucking in its business division. In addition, the underwriter testified that, had Southern known that EJ traveled outside of 200 miles or out of state, Southern would not have issued the policy. The underwriter, however, confirmed that the policy itself, in fact all workers’ compensation policies, did not contain an exclusion based on location.

The arbitrator found: There was “no retroactive rescission” of the policy; Segovia’s claim for his April 6, 2009 injury was covered by the policy; and the policy was prospectively canceled under Insurance Code section 676.8, subdivision (b)(5) as of June 15, 2009, and not before. The arbitrator dismissed UEBTF as a defendant.  Southern’s Petition for Reconsideration by was denied by the WCAB. But the court of appeal reversed in the unpublished case of Southern Ins. Co. v. Workers’ Compensation Appeals Bd.

The opinion noted that Insurance Code Section 676.8 which is entitled Cancellation and Failure to Renew Certain Property Insurance, is specifically limited to workers’ compensation insurance and it addresses only the cancellation of a policy. It does not even inferentially address rescission. But, Section 650 provides that “[w]henever 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.” Section 650 applies to workers’ compensation insurance policies.

UEBTF’s contention that rescission is precluded because section 676.8 does not provide for protection of the right to rescind a workers’ compensation insurance policy was rejected. UEBTF also contended that once a workers’ compensation claim has been filed, section 650 precludes rescission. However, the Court of Appeal ruled that the filing of a workers’ compensation claim is not the equivalent of an action on the contract.

The appeals board generally agreed that a workers’ compensation insurance policy can be rescinded under the authority of section 650. However, the appeals board contends, and rightly so, that rescission should not be used for the improper purpose of obtaining impermissible modifications to a workers’ compensation insurance policy. But, the answer to the appeals board’s concern is that if rescission is asserted as a defense to the claim in a workers’ compensation proceeding, the appeals board itself can ensure that the rescission is not used as a subterfuge to evade the laws governing workers’ compensation insurance.

There is also the concern over the injured worker who has filed a workers’ compensation claim but is faced with an insurer who has acted to rescind the policy. The answer here is that the insurer cannot be certain that the rescission will be enforced and that the insurer is therefore well advised to avoid drastic decisions about coverage until the validity of the rescission has been adjudged.

Contrary to the arbitrator’s ruling, a workers’ compensation insurance policy may be rescinded. The conclusion is unavoidable that the issue whether Southern’s rescission was legally effective remains factually open and unresolved.The decision of the appeals board affirming the findings and award of the arbitrator is annulled and the matter is remanded to the appeals board for further proceedings consistent with this opinion.