On April 6, 2009, EJ's employee, David Berrios-Segovia, allegedly injured his back lifting a latch to his truck while on a trip to Tennessee for EJ. Mr. Berrios-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.”

Southern based its decision to rescind on what it said were 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 Mr. Berrios-Segovia's claim showed those representations were not true as his injury allegedly had occurred in Tennessee. The letter also claimed that 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.

In light of Southern's position that the policy was rescinded, leaving EJ uninsured, the California Uninsured Employers Benefits Trust Fund (“UEBTF”) was joined as a defendant in Mr. Berrios-Segovia's workers' compensation claim.

The matter was submitted to mandatory arbitration.

The UEBTF contended that a workers' compensation insurance policy could not be rescinded.

The arbitrator ruled that:

- There was “no retroactive rescission” of the policy;

- Mr. Berrios-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(b)(5) as of June 15, 2009, and not before.

The arbitrator dismissed UEBTF as a defendant in the matter.

The Workers' Compensation Appeals Board agreed that Southern could not rescind its policy, and Southern asked the California Court of Appeal to review that decision.

California Insurance Law

California Insurance Code 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.

The Court of Appeal's Decision

The court annulled the decision of the appeals board affirming the findings and award of the arbitrator.

The court held that, contrary to the arbitrator's ruling, “a workers' compensation insurance policy may be rescinded.” Insurance Code Section 650, the court found, “applies to workers' compensation insurance policies.”

The court also rejected UEBTF's argument that once a workers' compensation claim had been filed, Section 650 precluded rescission, reasoning that “the filing of a workers' compensation claim is not the equivalent of an action on the contract.”

The court concluded that because the arbitrator and the appeals board had not addressed and determined whether rescission was a meritorious defense to Mr. Berrios-Segovia's workers' compensation claim, it remanded the case with directions to hear and determine whether Southern was entitled to rescind, and had rescinded, the policy it had issued to EJ.

The case is Southern Ins. Co. v. Workers' Compensation Appeals Board, No. B278412 (Cal. Ct.App. May 10, 2017). Attorneys involved include: 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.