Rescission rights and required policy specifications

The policy records the agreement

The policy is the written instrument setting forth the insurance contract. California Insurance Code section 380 codifies that definition. Section 381 requires it to specify the contracting parties, the property or life insured, the insured's interest in property if not the absolute owner, the risks insured against, the coverage period, and the premium. If the exact premium can be determined only when the contract ends, the policy must instead state the basis and rates for determining and paying the final premium.

For example, a business policy with a premium calculated from final payroll figures cannot simply leave pricing unspecified. It needs the basis and rates. A policy covering a person's limited interest in property must identify that interest; naming the property alone is insufficient. California section 383 makes issuing a policy contrary to section 381's premium requirements, or an agent or broker assisting in arranging that insurance, a misdemeanor.

Rescission unwinds; cancellation ends prospectively

Rescission generally treats the contract as undone from its beginning. Cancellation ends coverage prospectively. Neither term simply means denying one claim while leaving the contract intact. A ground for rescission must exist; discovering an unfavorable risk does not by itself create a right to rescind. Product-specific protections and other applicable restrictions must also be considered.

California section 650 addresses an insurer's rescission right given by a provision of that part of the Insurance Code. Such a right may be exercised before an action on the contract begins. The statutory marker is commencement of an action, not occurrence of a loss or submission of a claim. Rescission applies to all insureds, including additional insureds, unless the contract provides otherwise.

A California automobile rule

Under California section 651, when an insurer gives notice of rescission of an automobile liability policy and the driver requests the grounds, the insurer must furnish the insured a statement of those grounds within 15 days after receiving the request. This is a response deadline, not a 15-day advance-notice rule. If the insurer fails to comply, the insured may apply to the commissioner for a certificate of the desired facts or information.

On an exam, separate three questions: what the policy must say, whether a rescission right exists and can be exercised, and whether the special automobile request procedure applies.