IN RE: TMIC INSURANCE COMPANY, INC., in Liquidation. Roxani GILLESPIE, as Insurance Commissioner, etc., Plaintiff and Respondent, v. TMIC INSURANCE COMPANY, INC., Defendant and Respondent, Merabank, Defendant and Appellant.
This a consolidated appeal from the orders of the superior court denying three Insurance Code section 1032 applications for orders to show cause in an Insurance Code section 1016 liquidation action. The applications were filed by Merabank, a mortgage guaranty insured, for the payment of claims, or the entitlement to litigate claims, after the Insurance Commissioner rescinded the three respective certificates of insurance for misrepresentation and concealment on behalf of the insurer, TMIC Insurance Company, Inc. (formerly Ticor Mortgage Insurance Company).
Merabank contends: I. TMIC has the burden of proof; II. The borrowers' fraud is not a basis for rescission of the insurance policies; III. TMIC is estopped to rescind the policy; and, IV. Having failed to exclude borrower fraud from its coverage, TMIC may not avoid its insurance obligations on that ground.
The affidavits and documents submitted to the superior court established that, in 1983 and 1984, the Olsens, the Politis and Sandralee Perry, applied for and obtained from Merabank respective loans of $99,000, $500,000 and $1,250,000, secured by three parcels of residential property. These loans were insured by TMIC under individual certificates of insurance after TMIC approved coverage based on application packages containing the relevant information about the creditworthiness of the borrower, the value of the security on the loan and the terms of the sales or loan transaction. The terms of the insurance were contained in a master policy of insurance issued to Merabank after TMIC had investigated the reliability of its lending policies.
Facts Related to The Contract of Insurance
The master policy stated that: “In consideration of the premiums to be paid by the insured as specified in the Certificate, and in reliance upon the statements made in the Application submitted by the insured, [insurer would pay] any loss sustained by reason of the default in payments by a borrower as hereinafter set forth, subject to the following conditions: ․” The application provided: “The lender understands that Ticor will rely upon the information stated in the application and in the supporting documentation in arriving at its decision to insure.”
TMIC's lender manual indicated that the borrower was required to have at least a ten percent equity in the property.
William Firth, Executive Vice President of TMIC who was experienced in the mortgage banking industry and familiar with industry practices, stated that the risk assumed under a contract for mortgage guaranty insurance does not include borrower fraud in the application for insurance. Mr. Firth also stated that the expectation in the industry is that loans will be approved or rejected in one day. For that reason, insurers are forced to rely on the lender-insured to provide it with information in the application which is properly and completely investigated.
Mr. Firth also stated that master policies are only issued to lending institutions after a review of the adequacy of their appraisal, staff and underwriting policies. The lender is responsible for the representations of any third parties which it utilizes to qualify applicants and loan transactions.
Mr. Firth claimed that a loan-to-fair-market-value ratio greater than 95 percent was uninsurable by law (Ins.Code, § 12640.02) and TMIC would not have issued certificates on an illegal loan.
In regard to the Perry loan, Mr. Firth stated that, for purposes of mortgage guaranty insurance, an independent mortgage broker is an “agent” of the lender, and TMIC issued its master policies in consideration that the lender would not rely on third parties to underwrite the loan.
The Facts Related to the Individual Certificates of Insurance
The parties agree that the borrowers submitted fraudulent applications and supporting documents to Merabank which, in turn, submitted the application packets to TMIC.
In the Olsen and Perry loans, the loan-to-value ratio exceeded 95 percent.
In the Olsen loan, the Olsens used false escrow documents to establish an inflated purchase price, allowing the Olsens to purchase the property without the required ten percent down payment and realize an immediate $14,000 cash profit from the purchase.
Merabank's Olsen file indicated that the buyer/seller closing affidavit was never submitted and the request for that document submitted by TMIC was altered with Merabank's knowledge. Notations in the Merabank file showed that Paige Meyers at Merabank noticed the discrepancy, but never disclosed the affidavit's absence to TMIC.
The Politi application was almost totally falsified. Mr. Politi admitted that his son and others used false financial information to obtain the loan. The indications were that the terms of the loan transaction were also falsified and the liens on the property equalled one hundred percent of the property's value. Mr. Politi had no ownership interest in the property and never intended to repay the loan. The promissory note represented to be the majority of the down payment on the property was a forgery and a check for $367,500 was issued to Mr. Politi out of escrow three days before its close.
In pertinent part, documents in Merabank's Politi file showed that Merabank had failed to disclose evidence it had of Mr. Politi's 1982 income which should have alerted the loan officer and TMIC that Mr. Politi was not qualified for the insurance. The Schedule K from Mr. Politi's 1981 tax return was in Merabank's file but not submitted to TMIC with the remainder of the return. It showed that leases relied upon to establish Mr. Politi's financial condition were of questionable value. Merabank's files also contained evidence that the $367,500 check was issued out of escrow before its close, indicating that it was questionable whether there was a down payment made on the property.
Sandralee Perry had no knowledge about the refinancing loan issued to her, and her signature had been forged on the application, probably by her former husband who had interests in the entities providing verification for her financial information. She had no income and no assets. An independent loan broker had been used to obtain this loan.
Affidavits from Merabank's employees and the Merabank file established in pertinent part that the bank's own lending policies were violated in verifying Ms. Perry's supposed corporate interests. The bank questioned the reliability of the appraisal on the property, but never communicated this fact to TMIC. Ms. Perry's personal financial information, including tax returns, submitted to Merabank was internally inconsistent and at odds with the information forwarded to TMIC. A December 1, 1983 letter in Merabank's file indicated that there were excessive liens against the property and discrepancies in a recent purchase price used to establish the value of the property. Mr. Firth asserted if TMIC had possession of the letter, it would not have issued a certificate of insurance. Numerous other documents were in the file indicating discrepancies in the representations submitted in support of the refinancing and creditworthiness of Ms. Perry.
Merabank submitted employee affidavits stating that the bank had complied with the requests of TMIC and proper procedures in submitting the necessary information for insurance to TMIC. With regard to the Perry loan, Merabank claimed that the independent mortgage broker was not its “agent” and it was the custom and practice of savings banks to rely on third parties to qualify applicants.
The related contentions that borrower fraud is not a basis for rescission, TMIC is estopped from rescinding the policy as it has a duty to investigate borrower applications, and borrower fraud is not excluded from the risk assumed under the contract are meritless.
It is well established that material misrepresentation or concealment, though innocent, entitles the injured party to rescission. (Ins.Code, §§ 331, 359; Cal.–West. States etc. Co. v. Feinstein (1940) 15 Cal.2d 413, 423, 101 P.2d 696; Telford v. New York Life Ins. Co. (1937) 9 Cal.2d 103, 105, 69 P.2d 835; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 415, p. 373; 1 Matthew Bender, Cal. Ins. Law & Practice (1988 Rev.) § 8.08, p. 8–37, et seq.; 7 Couch on Insurance (Rev. ed. 1985) § 35:118–35:120, pp. 206–211.) 1
The rationale for the rule allowing rescission is that, despite the absence of an intent to deceive, the insurer has assumed a risk different from that which the applicant led it to suppose it was assuming. (7 Couch on Insurance, supra, § 35:120, pp. 210–211.)
The rule that the insured is not responsible for misinformation if it does not know the true facts or appreciate their significance from Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 916, 109 Cal.Rptr. 473, 513 P.2d 353, and Cohen v. Penn Mut. Life Ins. Co. (1957) 48 Cal.2d 720, 726, 312 P.2d 241, does not apply here. As the decision in Life Ins. Co. of North America v. Capps (9th Cir.1981) 660 F.2d 392, 394, explained, properly phrased, Thompson and Cohen 's exception to the general rule allowing rescission is limited to layman applicants for life insurance who fail “to disclose a material fact when, because he or she fails to appreciate the significance of certain [medical] information, the existence of a condition queried on the application is not known.” (Emphasis in original.)
There is no reason to apply the Thompson rule in a commercial contract between corporations engaged in the business of insurance. (Cohen v. Penn Mut. Life Ins. Co., supra, 48 Cal.2d at p. 726, 312 P.2d 241.) Furthermore, no claim is made here that the material misrepresentations made by the borrowers were innocent.
The decision in Kahn v. Commercial Union Fire Ins. Co. (1936) 16 Cal.App.2d 42, 45, 60 P.2d 177, has no application to the instant facts since the fraud discussed there was submitted in the claim of loss, not in the application.
The superior court interpreted the instant contract of insurance in conformity with TMIC's undisputed evidence that the usage or custom of trade and the parties' course of dealing indicated that Merabank was solely responsible for ascertaining the accuracy of the information contained in the applications and TMIC, due to the need for speedy approval practices, had no duty to investigate the borrower information submitted to it. In conformity with the extrinsic evidence, it also found that borrower fraud in the application is not part of the risk assumed by the insurer. (See Ins.Code, § 12640.02, subd. (a)(2); Insurance Commissioner of the State of California, California Insurance Bulletins, Bulletin No. 84–3 (June 30, 1984) p. 387–388.) 2
The superior court was entitled to rely on extrinsic evidence of usage or custom of trade and the parties' course of dealing where no contrary intent appears from the terms of the contract. (Ins.Code, § 335; Civ.Code, § 1655; Beneficial etc. Ins. Co. v. Kurt Hitke & Co. (1956) 46 Cal.2d 517, 525, 297 P.2d 428; 1 Witkin, Summary of Cal. Law, supra, § 696, pp. 629–631.)
Merabank made no attempt in the superior court to refute Mr. Firth's testimony as to the practice in the industry, and our independent review of the extrinsic evidence and the contract supports the superior court's interpretation of the terms of the agreement. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865–866, 44 Cal.Rptr. 767, 402 P.2d 839; see also, United Guar. Res. Ins. v. American Pioneer Sav. Bank (S.D.Fla.1987) 655 F.Supp. 165, 168.)
TMIC is not estopped from rescinding the certificates because it had no duty to investigate the representations on the application under the terms of the contract of insurance.3
We have determined the rescission was justified under the law in effect at the issuance of the certificates of insurance, and the result under the provisions of Insurance Code section 12640.11 is identical to the result reached under pre-existing law. Therefore, there is no need for this court to consider whether the 1985 amendment to Insurance Code section 12640.11 is retroactive in its effect.
The contentions that TMIC failed to carry its burden of proof and the assertion that TMIC failed to show fraud by the insured in the context of this case amount to nothing more than attempts by Merabank to have this court second-guess the express and implied findings of the superior court.
Apart from whether Merabank's substantial evidence contentions are waived by its failure to file a sufficient brief properly construing the evidence in accordance with the accepted standard of review and fairly stating all of the evidence supporting the orders (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881–882, 92 Cal.Rptr. 162, 479 P.2d 362), the function of an appellate court does not include second-guessing the implied and express factual findings of the trial court if they are supported by substantial evidence. (Cf. Thompson v. Occidental Life Ins. Co., supra, 9 Cal.3d at p. 919, 109 Cal.Rptr. 473, 513 P.2d 353.)
The evidence supports the trial court's conclusions that rescission was proper since the Olsen and Perry loans were illegal pursuant to Insurance Code section 12640.02 as they exceeded the loan-to-value ratio of 95 percent. (Verex Assur., Inc. v. John Hanson Sav. & Loan (9th Cir.1987) 816 F.2d 1296, 1302, fn. 5.) Each loan transaction violated TMIC's requirement that the borrower have a five percent equity in the property and the borrower and transaction information submitted in support of the loan was falsified and material to the risk assumed by the insurer. (Ins.Code, § 359.)
Furthermore, the undisclosed documents discovered in Merabank's files on the loans revealed that information material to the assumed risk was concealed by Merabank's employees, at best negligently, but probably with the intent to deceive. (Ins.Code, §§ 331, 332, 333.) Thus, the evidence of concealment was sufficient to support the rescission, whether or not California law required the intent to deceive.
As for the contention that Insurance Code section 357 requires a reversal of the superior court's orders, that contention is similarly meritless.
Insurance Code section 357 provides: “When an insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer. In neither case is he responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information.”
Insurance Code section 357 does not apply because the contract of insurance imposed on Merabank the duty to ascertain the accuracy of the information it submitted. Furthermore, it failed to state in the applications the information was unverified hearsay.
The contention that TMIC is estopped from rescinding the contract in the Olsen claim since TMIC was on notice that the buyer/seller closing affidavit was missing is to no avail.
The superior court rejected Merabank's assertion that estoppel prevented the rescission since TMIC should have known the affidavit was missing and failed to rescind in a timely fashion.
The TMIC application requests for the buyer/seller affidavits were obliterated while the documents were in Merabank's possession. Paige Meyers noted before closing that the affidavit was missing. Thereafter, an employee of Merabank obliterated indications on Merabank's checklists the affidavits were necessary. The application documents were returned to TMIC with the requests for the affidavit obliterated. A request for an affidavit was not made in every loan.
This evidence supports the superior court's finding that Merabank was knowledgeable of the alteration and TMIC's examination of the altered application after its submission to TMIC did not constitute adequate notice of the affidavit's absence.
Accordingly, the evidence supports the superior court's finding that TMIC was not estopped from rescinding the certificate of insurance.
THE ORDERS UNDER REVIEW ARE AFFIRMED.
1. Insurance Code section 331 states: “Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.”Insurance Code section 359 provides: “If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.”
2. We take judicial notice of the bulletin issued by the Insurance Commissioner of the State of California. (Harris v. Alcohol Bev. etc. Appeals Bd. (1965) 62 Cal.2d 589, 595, 43 Cal.Rptr. 633, 400 P.2d 745.)
3. Byrd v. Mutual Benefit H. & A. Assn. (1946) 73 Cal.App.2d 457, 166 P.2d 901, American Surety Co. v. Heise (1955) 136 Cal.App.2d 689, 693–694, 289 P.2d 103, and Hart v. Prudential Ins. Co. (1941) 47 Cal.App.2d 298, 301, 117 P.2d 930, also do not support Merabank's assertion that an “insurer cannot relieve itself of its duty to investigate an application by the simple expedient of announcing that it will rely on the insured.” Each of these decisions addresses an issue of insurer liability for misrepresentations and concealment by the insurer's agents. There is no factual basis here for assuming that the borrower or the mortgage broker was TMIC's agent.
GOERTZEN, Associate Justice.
McCLOSKY, Acting P.J., and GEORGE, J., concur.