Southern Insurance Co. v. Workers' Compensation Appeals Board

Filed 5/10/17 Certified for Publication 5/22/17 (order attached)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

SOUTHERN INSURANCE COMPANY, B278412

Petitioner, (WCAB No. ADJ6865421)

v.

WORKERS‟ COMPENSATION

APPEALS BOARD, EJ DISTRIBUTION

CORPORATION et al.,

Respondents.

PROCEEDINGS to review a decision of the Workers‟

Compensation Appeals Board. Annulled and remanded with

directions.

Stockwell, Harris, Woolverton & Muehl, Alexander G.

Abdoulin and George Woolverton for Petitioner.

Margaret W. Hosel and Anne Schmitz for Respondent

Workers‟ Compensation Appeals Board.

Department of Industrial Relations, Christopher Jagard,

Steven A. McGinty, and Sarosh Qaiser for Respondent Christine

Baker, Director of Industrial Relations as Administrator of the

Uninsured Employers Benefits Trust Fund.

Glauber Berenson and Timothy Chan for Respondent David

Berrios-Segovia.

A workers‟ compensation insurance policy was issued based

on the express representation that the covered employer‟s

employees did not travel out of state. After an employee was

injured out of state, the insurer notified the employer that it was

rescinding the policy because of the employer‟s misrepresentation

and returned the premium. The issue of insurance coverage went

to mandatory arbitration wherein the arbitrator concluded that,

as a matter of law, the insurer could not rescind the policy and

that the policy was in effect. The Workers‟ Compensation

Appeals Board (appeals board) affirmed the arbitrator‟s decision.

Contrary to the arbitrator‟s ruling, a workers‟

compensation insurance policy may be rescinded. (Ins. Code,

§ 650.) A rescission is enforced by a civil action for relief based on

rescission (Civ. Code, § 1692) or by asserting rescission as a

defense. (Resure, Inc. v. Superior Court (1996) 42 Cal.App.4th

156, 165-166 (Resure).)1 Because the arbitrator and the appeals

board did not address and determine whether rescission was a

meritorious defense to the employee‟s claim, we annul the

appeals board‟s decision and remand the case with directions to

hear and determine whether the insurer was entitled to rescind,

and did rescind, the policy.

FACTUAL BACKGROUND

Insurance procurement

On December 23, 2008, EJ Distribution Corporation (EJ)

applied for workers‟ compensation insurance. The application

indicated EJ‟s business as “Concession Trucking company moves

containers, no whse [sic], no loading and unloading, under 50 mil

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1 “When a contract has been rescinded in whole or in part,

any party to the contract may seek relief based upon such

rescission by (a) bringing an action . . . or (b) asserting such

rescission by way of defense or cross-complaint.” (Civ. Code,

§ 1692.)

2

rt.” The application also indicated that EJ‟s employees did not

travel out of state. The online application prepared by EJ‟s

insurance agent described EJ‟s operations as “local hauling.” The

online application also indicated that EJ‟s employees did not

travel out of state and did not have a radius of travel greater

than 200 miles.

Workers‟ compensation insurance policy number

WSI0006904-01 (hereafter “the policy”) was issued by Southern

Insurance Company2 for an annual period beginning on January

1, 2009.

The subject claim

On April 6, 2009, EJ‟s employee, David Berrios-Segovia

(Segovia), injured his back lifting a latch to his truck while on a

trip to Tennessee for his employer EJ. Segovia 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. The letter noted that Segovia‟s claim showed those

representations were not true as Segovia‟s injury occurred in

Tennessee. The letter also claimed Southern would not have

issued the policy had the true facts been known. Southern

returned the premiums paid by EJ in the sum of $19,743.03.

Southern‟s underwriting file included a document entitled

“POLICY TERMINATION / CANCELLATION /

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2

The subject injury claim is administered by Markel doing

business as FirstComp on behalf of Southern Insurance Company

(collectively Southern).

3

REINSTATEMENT NOTICE” issued on June 15, 2009. The

document stated:

“_ X _ Termination/Cancellation/Nonrenewal

The coverage provided by the policy number shown

above is being __ __ nonrenewed or __X__

terminated/canceled, __X__ flat, __ __ pro rata, or __

__ short rate, effective 1/01/2009 12:01 a.m. standard

time at the insured‟s mailing address for the

following reason(s): Substantial change in risk or

Increase in Hazard. Flat Cancel.”

In light of Southern‟s position that the policy was rescinded

leaving EJ uninsured, the Uninsured Employers Benefits Trust

Fund (UEBTF) was joined as a defendant in Segovia‟s workers‟

compensation claim.

PROCEDURAL HISTORY

The arbitration

The matter was submitted to mandatory arbitration as a

dispute involving insurance coverage pursuant to Labor Code

section 5275, subdivision (a)(1).3

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.

Southern also called as a witness a special investigator

working for the insurer who testified that EJ exceeded the

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3

“(a) Disputes involving the following issues shall be

submitted for arbitration: [¶] (1) Insurance coverage.” (Lab.

Code, § 5275, subd. (a)(1).)

4

200-mile radius and that operations extending beyond the 200-

mile radius were not a recent development, but was something

that had been done in the past. Prior to January of 2009, EJ

engaged in trucking operations outside of the state of California

with employees traveling to various states, such as Utah and

Tennessee. The investigator testified that notes of a conversation

with EJ by prior investigators confirmed that EJ engaged in out-

of-state operations before the inception of the policy on January

1, 2009. However, the investigator did not have firsthand

knowledge of EJ‟s operations at the time EJ filled out the

application. The investigator stated that he did not uncover

anything specific in his investigation as to EJ‟s operations at the

time the application was submitted.

The rulings of the arbitrator and appeals board

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 cancelled

under Insurance Code section 676.8, subdivision (b)(5)4 as of June

15, 2009, and not before. The arbitrator dismissed UEBTF as a

defendant in the matter.

The arbitrator gave three reasons for his ruling that there

was “no retroactive rescission” of the policy.

First, the arbitrator found that the “only remedy” for

Southern upon discovering misrepresentation of out-of-state

operations was cancellation of the policy pursuant to subdivision

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4

“(b) After a policy is in effect, no notice of cancellation shall

be effective unless it complies with the notice requirements of

this section and is based upon the occurrence, after the effective

date of the policy, of one or more of the following: [¶] . . .[¶] (5)

Material misrepresentation by the policyholder or its agent.”

(Ins. Code, § 676.8, subd. (b)(5).) Further statutory references are

to the Insurance Code unless indicated otherwise.

5

(b)(5) of section 676.8.5 The arbitrator ruled that there “is

nothing in Insurance Code Section [676.8] that permits a

workers‟ compensation insurer to retroactively rescind a policy

that has been incepted from day one.” The arbitrator found that

Southern did not comply with section 676.8 “when it unilaterally

retroactively rescinded the policy to the inception date of the

policy.”

Second, the arbitrator ruled that there is “no mechanism in

place in California for a workers‟ compensation insurer to

unilaterally retroactively rescind a policy especially if a claim is

pending under that policy.” Not entirely excluding rescission of a

workers‟ compensation policy, the arbitrator explained the

insurer cannot “retroactively rescind a workers‟ compensation

policy without authorization from a judge in Superior Court, a

workers‟ compensation judge, or a WCAB arbitrator.”

Third, the arbitrator was concerned over leaving the

injured employee without coverage by what the arbitrator termed

a “unilateral, retroactive” rescission of the policy by the insurer.

As we explain below, each of the reasons given by the

arbitrator is in error.

Southern petitioned for reconsideration.

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5

Section 676.8 provides in pertinent part: “(a) This section

applies only to policies of workers' compensation insurance. [¶]

(b) After a policy is in effect, no notice of cancellation shall be

effective unless it complies with the notice requirements of this

section and is based upon the occurrence, after the effective date

of the policy, of one or more of the following: [¶] . . . [¶] (5)

Material misrepresentation by the policyholder or its agent.

[¶] . . .[¶] (c) A policy shall not be canceled for the conditions

specified in paragraph (1), (2), (5), or (6) of subdivision (b) except

upon 10 days' written notice to the policyholder by the insurer.”

6

The arbitrator recommended that reconsideration be

denied. In addition to quoting from his opinion on the decision,

the arbitrator noted that the employer‟s representation that its

truck drivers did not travel outside of the State of California

became false only upon Segovia‟s filing of his claim in May of

2009. The arbitrator was not convinced by the testimony of

Southern‟s investigator that EJ had its non-owner employees

drive outside the State of California at the time the policy was

applied for in December 2008. Relying on section 359‟s

entitlement to rescind the contract “„from the time the

representation becomes false,‟” the arbitrator found that

Southern could only rescind the policy prospectively. The

arbitrator stated that the record did not indicate when EJ began

sending its truck drivers out of state, meaning the falsity of the

policy application may not have occurred until Segovia‟s injury in

Tennessee on April 6, 2009.

The appeals board adopted and incorporated the

arbitrator‟s report, with the exception of the finding that

Southern had waived the jurisdictional issue, and denied

reconsideration.

Petition for a writ of review

Defendant Southern petitioned this court for a writ of

review on October 20, 2016. The petition presented four

questions for review:

“1. Whether Labor Code [section] 5275

provides the Workers Compensation Appeals Board

with Subject Matter Jurisdiction over rescission of a

Workers Compensation Insurance Policy?

“2. Whether Rescission of a Workers

Compensation Insurance Policy is Permitted and if

so, How is it Effectuated?

7

“3. Do Cancellation Statutes Under Insurance

Code [section] 676.8 Control Rescission of a Workers‟

Compensation Policy or Prevent Rescission of Such

Policy?

“4. Whether the Statutory Scheme or Public

Policy Considerations Warrant Preclusion of Contract

Rescission in Workers Compensation Claims?”

We granted the petition for a writ of review on January 10,

2017. We requested that the parties brief issues relating to the

rescission of the policy in this case.6

DISCUSSION

I. Subject matter jurisdiction

Section 4 of article XIV of the California Constitution vests

plenary power in the Legislature to create and enforce a complete

system of workers‟ compensation.7 Based upon this

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6 These issues were: “1. Can a workers‟ compensation

insurance policy be rescinded under the authority of Insurance

Code section 650? [¶] 2. In this case, the applicant filed the

claim before the insurer attempted to rescind the contract.

Insurance Code section 650 provides that the right to rescind

may be exercised at any time previous to the commencement of

an action on the contract. Does this provision preclude the

insurer‟s attempted rescission? [¶] 3. May the insurer assert

rescission as a defense to the applicant‟s claim? (Civ. Code,

§ 1692, subd. (b).)”

7 “The Legislature is hereby expressly vested with plenary

power, unlimited by any provision of this Constitution, to create,

and enforce a complete system of workers‟ compensation, by

appropriate legislation . . . to compensate any or all of their

workers for injury or disability, and their dependents for death

incurred or sustained by the said workers in the course of their

employment, irrespective of the fault of any party.” (Cal. Const.,

art. XIV, § 4.)

8

constitutional mandate, the Legislature enacted section 5300 of

the Labor Code, which provides the appeals board with exclusive

jurisdiction over actions to enforce against the employer or an

insurer any liability for compensation imposed upon the

employer. (Lab. Code, § 5300, subd. (b).) “The appeals board is

vested with full power, authority and jurisdiction to try and

determine finally all the matters specified in Section 5300 subject

only to the review by the courts as specified in this division.”

(Lab. Code, § 5301.) “The Workers‟ Compensation Appeals Board

. . . shall exercise all judicial powers vested in it under this code.”

(Lab. Code, § 111.)

Given these broad powers, and the specific statutory

authority providing for arbitration of coverage disputes (see fn.

3), Southern concedes that insurance coverage is within the

jurisdiction of the appeals board. Nonetheless, Southern asserts

that the appeals board does not have subject matter jurisdiction

over a contractual dispute between an insurer and its insured.

However, 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. “There can be no doubt but

that the Commission is vested by constitutional and legislative

power to hear and determine every issue raised by the parties to

this controversy, including the validity of the policy and the

question of fraud alleged in its procurement and that the parties

are not required to invoke either a court of law or equity in the

determination of said questions. [Citations.]” (General Acci. Fire

& Life Assurance Corp. v. Industrial Acci. Com. (1925) 196 Cal.

179, 190-191.) 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 contract, it must submit to the

9

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.

II. Rescission of a workers’ compensation insurance

policy

A. The statutory framework

Section 676.8 is contained in chapter 11, part 1, division 1

of the Insurance Code. Chapter 11 is entitled Cancellation and

Failure to Renew Certain Property Insurance. Section 676.8 is

specifically limited to workers‟ compensation insurance and it

addresses only the cancellation of a policy. It does not even

inferentially address rescission.

Chapter 9 of part 1, division 1 of the Insurance Code is

entitled Rescission. Chapter 9 has only two sections, one of

which (section 650) applies to this case.8 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. The rescission shall apply to all insureds

under the contract, including additional insureds, unless the

contract provides otherwise.”

Section 650 applies to workers‟ compensation insurance

policies. Addressing section 650, as we must, in its context and

within the overall statutory scheme (People v. Canty (2004) 32

Cal.4th 1266, 1276) we find that there are three reasons for this.

First, there is nothing in chapter 9 or in section 650

specifically that provides that section 650 does not apply to

workers‟ compensation insurance policies. By contrast,

subdivision (a) of section 675 specifically exempts workers‟

________________________________________________________

8

The second section in the rescission chapter applies only to

the rescission of an automobile liability policy. (§ 651.)

10

compensation insurance from the provisions of chapter 11 which

deal with the cancellation of certain insurance policies.

Second, chapter 9 and section 650 do not single out workers

compensation insurance for special treatment. Section 676.8, on

the other hand, specifically governs the cancellation of such

policies. This is indicative of the intent that the general

provisions regarding rescission set forth in section 650 should

govern workers‟ compensation insurance policies.

Third, there is no provision anywhere in the pertinent

statutes that can be construed to preclude the rescission of

workers‟ compensation insurance policies.

UEBTF claims that the right to rescind is protected by

section 6759 but that workers‟ compensation insurance is

specifically excluded from section 675.10 Based upon this

interpretation of section 675, UEBTF contends that a workers‟

compensation insurance policy cannot be rescinded. The premise

of this argument, however, is in error since rescission is provided

for in chapter 9, not chapter 3, and section 675 makes no mention

of chapter 9.

UEBTF also contends that rescission is precluded because

section 676.8 does not provide for protection of the right to

rescind a workers‟ compensation insurance policy. However,

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9 “This chapter shall not be construed so as to modify or

negate any of the provisions of Chapter 3 (commencing with

Section 330) of Part 1 of Division 1, nor to destroy any rights or

remedies therein provided.” (§ 675, subd. (b).) Chapter 3 deals

with concealment and recognizes the right to rescind a policy

upon a showing of concealment. (§ 331.)

10 Subdivision (a) of section 675 excludes workers‟

compensation insurance from the provisions of chapter 11.

11

section 676.8 deals with cancellation only and is in a chapter that

governs cancellation, not rescission.

The somewhat peculiar limitation of rescission to the period

prior to the filing of an action on the insurance contract in section

650, is explained by the fact that the former equitable suit for

rescission, now abolished, could not be brought if there was an

adequate remedy at law. The adequate remedy at law was an

action on the insurance contract. That is, if the policy holder

brought an action on the contract, the carrier could assert

rescission as a defense in that action. (Resure, supra, 42

Cal.App.4th at pp. 165-166.)11 Thus, section 650 is an echo of the

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11 “When Insurance Code section 650 was enacted, the

distinction between an action on the contract at law and an

action for equitable rescission was of great significance because of

the artificial separation between law and equity. Equity would

not assume jurisdiction when the plaintiff had a clear remedy at

law. [Citations.] It followed that once an action to enforce a

contract was commenced at law, the party holding a right to

rescind was expected to raise that as a defense rather than bring

a new action in equity. [Citation.] [¶] The rule that equitable

rescission would not be permitted where there was an adequate

remedy at law, taken together with the rule that an applicant‟s

fraud could be raised as a defense to an action on the policy,

clarifies what is meant by Insurance Code section 650‟s limitation

on the right of an insurer to rescind the policy to the time

„previous to the commencement of an action on the contract.‟ The

Legislature intended that the insurer be precluded from

rescinding once the insured had proceeded with an action to

enforce the insurance contract at law. . . . The point was merely

to guarantee that resort to equity was not needlessly made where

the insurer had ample opportunity to raise the same issues in

defense of the action on the policy. As we have indicated in our

earlier discussion, California law affords that opportunity to

insurers where the insured fires the first shot.” (Resure, supra,

42 Cal.App.4th at p. 166.)

12

past reality that an equitable suit for rescission could not be

brought in the face of a pending action at law. As Resure

explains, section 650 does not affect the current state of the law

which is that rescission can always be asserted as a defense to

the action on the contract. (See fn. 11.)

UEBTF contends that once a workers‟ compensation claim

has been filed, section 650 precludes rescission. However, 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. For one, a workers‟ compensation claim is not

filed, pursued or adjudicated in a law court making it different

from a legal remedy.

We note that the arbitrator appears to have been

unfavorably impressed by the fact that Southern‟s rescission was

“unilateral,” though rescission is routinely a unilateral act. After

the equitable action to have a rescission adjudged was abolished

in 1961, “the statutes now deal solely with unilateral rescission

by notice and offer to restore the consideration. [Citations.]” (1

Witkin, Summary of Cal. Law (10th ed. 2005), Contracts, § 930,

pp. 1026-1027, original italics, citing inter alia Runyan v. Pacific

Air Indus. (1970) 2 Cal.3d 304, 312.) There is a difference

between effecting a rescission and enforcing a rescission by a civil

action. A party effecting a rescission necessarily does so

unilaterally. We turn to this next.

13

B. Rescission as a defense

A rescission is effected under Civil Code section 1691 by

giving notice of rescission and restoring, or offering to restore,

everything of value received under the contract.12

Once a contract has been rescinded in accordance with the

statutory procedure under Civil Code section 1691, any party to

the contract may seek legal or equitable relief based upon the

rescission. (Runyan v. Pac. Air Indus. (1970) 2 Cal.3d 304, 313-

314 & Paularena v. Superior Court of San Diego County (1965)

231 Cal.App.2d 906, 913 both citing to 3 Cal. Law Revision Com.

Rep. (1961) p. D-7.) Civil Code section 1692 sets forth the

remedies available in an action to enforce a rescission.13

The arbitrator seemed to conflate the effectuation of a

rescission under Civil Code section 1691 with an action for relief

based on the rescission. In this case, Southern effected a

rescission but did not file an action for relief based on the

rescission, as it might have, for declaratory relief, to name one

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12 “Subject to Section 1693, to effect a rescission a party to the

contract must, promptly upon discovering the facts which entitle

him to rescind if he is free from duress, menace, undue influence

or disability and is aware of his right to rescind: [¶] (a) Give

notice of rescission to the party as to whom he rescinds; and [¶]

(b) Restore to the other party everything of value which he has

received from him under the contract or offer to restore the same

upon condition that the other party do likewise, unless the latter

is unable or positively refuses to do so.” (Civ. Code, § 1691.)

13 “A claim for damages is not inconsistent with a claim for

relief based upon rescission. The aggrieved party shall be

awarded complete relief, including restitution of benefits, if any,

conferred by him as a result of the transaction and any

consequential damages to which he is entitled; but such relief

shall not include duplicate or inconsistent items of recovery.”

(Civ. Code, § 1692.)

14

example. That is, the effectuation of a rescission under Civil

Code section 1691 is not the equivalent of a judgment in a civil

action providing for relief based on a rescission.

Southern also misses the distinction between the

effectuation of a rescission under Civil Code section 1691 and the

enforcement of a rescission when it states that once a party has

done as set forth in section 1691, “the rescission is complete.”

The thought that performing the acts set forth in Civil

Code section 1691 effectively discharged Southern‟s obligations

under the contract is incorrect. A judgment finding that

Southern‟s rescission was effective following an action filed to

enforce the rescission under Civil Code section 1692, on the other

hand, would be the discharge that Southern seeks. The same

finding could be entered if Southern asserts rescission as a

defense to the workers‟ compensation claim. Of course, such a

finding would not be entered until the facts were tried and

determined in the workers‟ compensation hearing. It should be

unnecessary to point out that there must be grounds for the

rescission, fraud being one of them (Civ. Code, § 1689, subd.

(b)(1)), and that Southern cannot unilaterally decide, with

binding effect on all the world, whether any of the grounds set

forth in Civil Code section 1689 apply to this case. The point is

that it is possible, as section 1692 itself recognizes, that

notwithstanding Southern‟s assertion that it rescinded the

contract, the rescission was not effective.14

The appeals board generally agrees that a workers‟

compensation insurance policy can be rescinded under the

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14 “If in an action or proceeding a party seeks relief based

upon rescission and the court determines that the contract has not

been rescinded, the court may grant any party to the action any

other relief to which he may be entitled under the

circumstances.” (Civ. Code, § 1692, italics added.)

15

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.

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.

C. Rescission in this case

The arbitrator explicitly ruled that Southern could not

rescind the policy. Putting the same point another way, the

arbitrator found that Southern‟s attempted rescission was legally

ineffective. Given this ruling, we assume the arbitrator gave

little or no consideration to the facts with which Southern sought

to justify its rescission of the policy or to the facts that pointed to

a contrary conclusion.

Though in the report on the petition for reconsideration the

arbitrator addressed some of the facts pertinent to rescission, this

analysis of the facts did not inform the decision that was made,

that as a matter of law, Southern could not rescind the policy. It

appears that contrary evidence, that Southern did effectively, and

prospectively, cancel the policy as of June 15, 2009, based on EJ‟s

misrepresentation, was given little attention.

16

The gist of the factual views set forth in the report on the

petition for reconsideration was that there was no evidence that,

as of the time that EJ entered into the policy, EJ was engaged in

transportation out of state and beyond 200 miles.

There was, however, evidence from which it can be

reasonably inferred that EJ knew when it entered into the policy

that representations as to the nature of its transportation

business were false. Southern‟s special investigator testified that

a prior investigator confirmed that EJ engaged in out-of-state

operations prior to the inception of the policy on January 1, 2009.

Although Southern‟s special investigator did not have personal

knowledge of EJ‟s operations at the time EJ completed its

insurance application, there were business records referenced by

the investigator that tended to show that EJ conducted out-of-

state operations possibly during the insurance application

process.

Regardless, the report on the petition for reconsideration

stated that “[t]here is no doubt that at some point the employer

in this case concealed the fact that its employee truck drivers

drive out of the State of California.” It was for this reason that

the conclusion was reached that the policy was cancelled

prospectively as of June 15, 2009. Although the appeals board

contends that there were no material misrepresentations in this

case, this is at odds with the arbitrator‟s view.

Given there were misrepresentations, the issue yet to be

decided is whether EJ concealed material facts from Southern

when it negotiated and entered into the policy. There is also no

decision of record on whether the misrepresentation was material

since the insurer must prove that the insured concealed or

misrepresented a material fact on the insurance application. (LA

Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156

Cal.App.4th 1259, 1266.) “Materiality is to be determined not by

17

the event, but solely by the probable and reasonable influence of

the facts upon the party to whom the communication is due, in

forming his estimate of the disadvantages of the proposed

contract, or in making his inquiries.” (§ 334.)

The conclusion is unavoidable that the issue whether

Southern‟s rescission was legally effective remains factually open

and unresolved.

DISPOSITION

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.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

__________________________, Acting P. J.

CHAVEZ

We concur:

__________________________, J.

HOFFSTADT

__________________________, J.*

GOODMAN

____________________________________________________________

* Retired Judge of the Los Angeles Superior Court, assigned by

the Chief Justice pursuant to article VI, section 6 of the

California Constitution.

18

Filed 5/22/17

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

SOUTHERN INSURANCE COMPANY, B278412

Petitioner, (WCAB No. ADJ6865421)

v. ORDER FOR PUBLICATION

WORKERS‟ COMPENSATION

APPEALS BOARD, EJ DISTRIBUTION

CORPORATION et al.,

Respondents.

THE COURT:*

The opinion in the above entitled matter filed on May 10, 2017, was not

certified for publication.

For good cause it now appears that the opinion should be published in

the Official Reports and it is so ordered.

* CHAVEZ, Acting P. J., HOFFSTADT, J., GOODMAN, J.†

†Retired Judge of the Los Angeles Superior Court, assigned by the Chief

Justice pursuant to article VI, section 6 of the California Constitution.