Insurance policies are of course written documents, dependent upon standard conventions of grammar and usage in order to establish their meaning. A recent unpublished opinion from the Ninth Circuit wrestled with the grammar rules involved when an insurance application’s question and answer created a double negative. Even though a literal reading of the application question using the relevant grammar rules arguably establishes the applicant answered the question truthfully, a majority held that the overall context of the question established that the applicant did not answer the question truthfully, and therefore that the insurer was entitled to rescind the policy based on the application misrepresentation. The dissent disagreed, contending that in light of the application question’s actual wording, the applicant had completed the question truthfully, and therefore that the insurer was not entitled to rescission. The Ninth Circuit’s January 2, 2018 opinion in the case can be found here.
In August 2013, FBI agents executed a search warrant at the offices of Professional Collection Consultants (PCC). In the following months, investigators subpoenaed PCC employees and PCC produced volumes of documents to investigators.
In February 2014, PCC applied for directors and officers insurance. PCC submitted an application that included the following question:
None of the individuals to be insured under any Coverage Part (the “Insured Persons”) have a basis to believe that any wrongful act, event, matter, fact, circumstances, situation, or transaction, might reasonably be expected to result in or be the basis of a future claim? __Yes __ No.
PCC answered the question “No.” The insurer issued the policy to PCC and a claim subsequently arose. When the insurer learned of the federal investigation, it filed an action to rescind the policy. The district court granted the insurer’s summary judgment motion for rescission. PCC appealed.
The January 2, 2018 Opinion
In an unpublished January 2, 2018 memorandum opinion, a 2-1 majority (with Judge Marsha Berzon dissenting) affirmed the district court, holding that the insurer was entitled to rescind the policy based on what the insurer characterized as PCC’s application misrepresentation.
In affirming the district court, the majority said that PCC’s answer to the application question “was a material misrepresentation because it was aware of existing circumstances – the federal investigation – that could lead to a claim.”
The majority rejected PCC’s argument that it did not misrepresent the truth because if the application question is read literally, PCC’s “no” answer informed the insurer that PCC was aware of circumstances that could lead to a claim. The majority said that “given the context” of the question, the insurer “reasonably understood PCC’s answer to mean PCC was not aware of any circumstances that could lead to a claim.”
In making this statement about the context, the majority opinion referred to the application form’s instructions, which said that a “yes” answer would require applicant to provide “detailed information” about their answer, which in turn could lead to “substantially different terms and conditions.” PCC had provided not additional information.
The majority also concluded that PCC’s application misrepresentation was material, and ruled that PCC was not entitled to further discovery.
Judge Berzon, in a dissenting opinion, noted that “As a matter of English grammar, the answer checked –‘No’ – was accurate. ‘No’ signified that it was not true that none of the Insured Persons had reason to expect a claim – in other words, that some Insured Persons did have reason to expect a claim.”
Judge Berson added that “the rules of grammar do not bend because of inaccurate reading, or because of inattention to those rules when drafting an application. Whatever the parties’ impressions or attentions, the answer was correct.” Nor does context affect that conclusion, Judge Berzon said; “context may suggest there was poor drafting but it does not change the meaning of a perfectly clear (if inartful) inquiry.”
Judge Berson concluded by saying that “But for my persnicketiness regarding the English language, I would concur in the majority disposition. However, as the answer is literally correct, there was no misrepresentation, and PCC should prevail.”
Every elementary school child (noting here that elementary school is often referred to as “grammar school”) is taught – or should be taught – of the problems created by the use of a double negative. The problem with using (or in this case, inviting the use of) the double negative is that read correctly the use of two negatives creates a positive. As the Oxford Living Dictionary Online puts it, “The rules dictate that the two negative elements cancel each other out to give a positive statement instead, so that the sentence ‘I don’t know nothing’ could literally be interpreted as ‘I do know something’.”
As Judge Berzon put it in her dissent, the way the relevant question was worded here, with its lead-in of “None of the individuals to be insured … have a basis to believe,” PCC’s answer to the question was correct and accurate. The ‘No’ answer signified “it was not true that none of the Insured Persons had reason to expect a claim – in other words, that some Insured Persons did have reason to expect a claim.”
Significantly, it was not just Judge Berzon whose grammatical interpretation of the question and the answer supported this meaning. Clearly, that was the way the majority read the question and the answer as well. It was only by referring to the “context” — that is, not to the question and answer itself, but rather to the surrounding language – that the interpretation the insurer urged could be supported. In other words, the majority could not conclude that PCC had made a misrepresentation based solely on the question and answer.
Maybe I am just as persnickety as Judge Berzon – and seriously, don’t you love that word, persnickety? – but I don’t think the rules of grammar are nearly as malleable at the insurer argues here and as the majority concluded, nor should they be. I agree with Judge Berzon that all the context of the question does is underscore the conclusion that the question was extremely poorly drafted.
To be fair, the insurer involved did not in fact draft the ungrammatical application question. As often happens, the insurer here accepted another insurer’s application in order to expedite the application process. However, the insurer in this case accepted the other insurer’s application, which implicitly suggests either that the insurer here had reviewed it and found it acceptable or that that the insurer was willing to accept it whatever its flaws may be.
Having agreed to accept the application, the insurer here accepted all of the questions as written. The risk that an ungrammatical question would result in a confounding answer is a risk that the insurer took by relying on the poorly written application, and, a result, the consequences resulting from the insurer’s reliance on an ungrammatical application question clearly should fall on the insurer. I don’t see any benefit to anyone for allowing insurers off the hook for their reliance on and use of poorly written applications.
At a minimum, this case is a lesson for the carriers. The fact that all three judges on this panel clearly had a problem with the question and the answer and were left to argue about context suggests that the question is a failure. Any carrier representative who has read this far will recognize that they should now take a look to see if their application replicates the grammatical problems with the application at issue here. Any carrier that fails to correct its application is taking a risk that the next time the judicial authorities involved may not be so willing to give the carrier a pass on grammatical errors.
This case is also a sobering lesson for policyholders. In my view, this type of poorly written application question presents a potential trap for any and every insurance applicant. Policyholders unsure of how to answer poorly written application questions should be sure to consult with their insurance advisors to ensure that they do not inadvertently provide the insurer with a defense to coverage. Insurance advisors should be sure to counsel their clients to help them answer the questions without inadvertently creating defense to coverage for the insurer.
One final note. I know that some readers will say, why all the fuss about grammar, it was clear here the applicant failed to tell the insurer about the investigation, which omission was material to the risk. Why should the policyholder get the benefit of the insurance under these circumstances? To which I say the insurer has the right to draft the application any way they want. The insurer here could have used an application that was grammatically correct. The use of a poorly written application creates risks for everyone, policyholder and insurer alike.
In my view, because the insurer gets to write the application, the risk that a poorly written question might create a misunderstanding should fall on the insurer, so that insurers will take greater care to ensure their applications are not poorly written.
Or to put it another way, if an application question is really that important to an insurer, then it is incumbent on the insurer to make sure the question actually asks what the insurer intends to ask. If it turns out the question doesn’t actually say what the insurer intended it to say, then the insurer ought not to be able to rely on the question and answer as a basis on which to deny coverage.