Opinion
No. C-00-2240 EDL
May 21, 2001
I. INTRODUCTION
On March 6, 2001, Plaintiff State Farm Fire Casualty ("State Farm") filed a Motion to Affirm the Stipulated Judgment and Settlement Agreement and to Dismiss Butch and Phyllis Swanson, Seamus McGee and Safeco Insurance Company (collectively "Claimants"). On March 20, 2001, Claimants timely opposed the Motion. On March 27, 2001, State Farm filed its Reply.
The Court held a hearing on May 1, 2001. Douglas Wood and William Fenner appeared on behalf of State Farm. James Byrne and Cynthia Mitchell appeared on behalf of Claimants. Upon consideration of the parties' submissions, the arguments at the hearing, the relevant authorities and the record in this case and good cause appearing, the Court enters the following order.
II. FACTUAL BACKGROUND
The following facts are undisputed, except as specifically noted. On February 25, 1997, Defendant McDevitt purchased a 1979 Bayliner Victoria (the "Boat"). A marine survey, prepared on February 24, 1997 by Peter Minkwitz in connection with the purchase, revealed a number of deficiencies and items needing repair. See Declaration of Lawrence McDevitt ¶ 3 ("McDevitt Decl."). Nevertheless, McDevitt agreed to purchase the Boat "AS IS." Id. ¶ 2.
On that same day, McDevitt applied for a boatowners insurance policy with State Farm. Geri Ryan conducted the application process. See Declaration of Geri Ryan ¶ 2 ("Ryan Decl."). During the application process, McDevitt represented to State Farm a number of facts regarding the Boat which State Farm relied on when deciding whether to insure McDevitt and, if so, for what amount and at what premium. See Mem. of PA in Supp. of Pl.'s Mot. to Affirm the Stipulated J. Settlement Agreement at 1:9-10 ("Pl's Mot.").
On March 2, 1997, State Farm Underwriting Specialist Debra Murray reviewed the completed application and survey. Decl. of Debra Murray ¶ 2 ("Murray Decl."). Murray concluded, based on McDevitt's application and survey, that State Farm would not issue a policy unless it received a signed statement from McDevitt warranting that all the deficiencies identified in the survey had been fixed. See Murray Decl. ¶ 4.
Approximately one week later, McDevitt hired boat mechanic Dillman Benton to perform general repair work. McDevitt did not, however, provide Benton with a copy of the survey. McDevitt Decl. ¶ 8. According to State Farm, the only work Benton performed that satisfied any requirements of the survey was to repair the outdrive raising and lowering rod. Id. Claimants argued, however, that the survey's recommended repairs were completed by either Benton or Denis Richardson, the Boat's prior owner. See Def.'s Mem. of PA in Opp'n to Pl.'s Mot. to Affirm the Stipulated J. Settlement Agreement at 4:1-2 ("Def.'s Opp'n"). Nonetheless, on April 2, 1997, McDevitt wrote a letter to State Farm stating: "All corrections per the surveyor have been rectified." McDevitt Decl. Ex. 4. Thereafter, State Farm issued Boatowners Insurance Policy No. 57-GK-93 11-9 (the "Policy").
On June 15, 1998, a fire destroyed McDevitt's Boat while docked at the Gas House Cove Marina, San Francisco, California. The fire also damaged and/or destroyed three other boats located near McDevitt's Boat. McDevitt filed a claim with State Farm regarding the loss of his Boat. Barra Decl. ¶ 3. Additionally, the other boat owners, Claimants, submitted a claim to State Farm for the loss of their property, allegedly resulting from the fire. Id. ¶ 4.
Subsequently, Agents of the United States Department of Alcohol, Tobacco and Firearms and the San Francisco Police Department Arson Task Force began an investigation to determine the cause of the fire. They concluded that the fire on McDevitt's boat was intentionally set. Barra Decl. ¶ 5. In late July 1998, the San Francisco District Attorney charged McDevitt with felony arson. Id. ¶ 4. McDevitt's criminal case concluded in a plea bargain. See Barra Decl. Ex. 12.
State Farm also retained a team of independent expert fire investigators to determine the cause of the fire. Barra Decl. ¶ 5; Decl. of Paul Petrarca in Supp. of Pl.'s Mot. ¶ 7 ("Petrarca Decl."). Shortly after State Farm was advised that the fire had been intentionally set, it informed McDevitt that it was investigating his claim pursuant to a reservation of rights. Barra Decl. ¶ 10. As part of State Farm's investigation, McDevitt sat for an examination under oath ("EUO") on July 15 and 29, 1999.
In February 1999, State Farm informed Claimants that it was investigating their claimed damages pursuant to a reservation of rights. See Barra Decl. ¶ 11. In March and April 1999, following the conclusion of McDevitt's criminal case, State Farm again informed Claimants that it was investigating their claims subject to a reservation of rights. Barra Decl. ¶¶ 14, 15. In August 1999, State Farm informed Claimants that "certain facts have been learned that have led State Farm to develop concerns whether McDevitt's Policy might be rescinded" and that State Farm was investigating these newly discovered facts subject to a reservation of rights. Barra Decl. ¶ 22; Supp. Barra Decl. Ex. A. Claimant McGee argued that no such notice was sent to him. See Def's Opp'n at 6:17-18.
State Farm brings this motion to affirm the stipulated judgment and settlement agreement entered into between State Farm and McDevitt. Claimants oppose the motion on the following grounds: (1) the evidence is insufficient to support rescission of the McDevitt insurance policy; (2) affirmation of the settlement agreement will result in manifest injustice; and (3) State Farm's delay in rescinding the policy is barred by the doctrine of laches.
III. DISCUSSION
A. Rescission
State Farm contended that McDevitt failed to disclose facts material to the risk and/or made intentional misrepresentations regarding the purchase price and condition of the boat, all of which entitled State Farm to rescission. State Farm further argued that the implied warranty of seaworthiness entitled it to rescission of the Policy. Claimants responded that the evidence is insufficient to support rescission and that the implied warranty of seaworthiness is inapplicable to the Policy at issue. Claimants also argued that because the Policy contained both liability and property coverages, misrepresentation as to the property coverage did not necessarily lead to rescission of the liability coverage.
State Farm initially argued that McDevitt also misrepresented the fact that the Boat had an automatic fire extinguishing system. State Farm later conceded that the Boat may have had an automatic fire extinguisher, but argued that the cumulative effect of the other admitted and well-established misrepresentations of facts are sufficient to rescind the Policy.
1. Misrepresentations
Under California law, failure to communicate that which a party knows and ought to communicate is concealment. Cal. Ins. Code § 330. "Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance." Cal. Ins. Code § 331. Additionally, a material misrepresentation on an insurance application is ground for rescission. See Kerr v. Metropolitan Life Ins. Co., 1995 WL 761241 (ND. Cal.) (citing Imperial Cas. Indemnity Co. v. Sogomonian, 198 Cal.App.3d 169, 179 (1988)); Ingram v. Old Line Ins. Co. of America, 1999 WL 430747 (N.D. Cal.) (citing Taylor v. Sentry Life Ins. Co., 729 F.2d 652, 654 (9th Cir. 1984)). Additionally, an insurer can rescind a contract where the insured makes any intentionally false representation regardless of materiality. Cal. Ins. Code § 1904.
California law also imposes upon an applicant seeking marine insurance an "uttermost good faith" duty to disclose material facts to the insurer. Specifically, an insured is under a duty to communicate "[a]ll the information which he possesses and which is material to the risk, except such as is exempt from such communication in the case of other insurance." Cal. Ins. Code § 1900. Where an insured fails to fulfill his obligation under this "uttermost good faith" duty to disclose, the insurer is entitled to rescind the contract. See Pacific Ins. Co. v. Kent, 120 F. Supp.2d 1205, 1210 (C.D. Cal. 2000) (citing Rallod Transp. Co. v. Continental Ins. Co., 727 F.2d 851, 853 (9th Cir. 1984)); Reliance Ins. Co. v. McGrath, 671 F. Supp. 669, 678 (N.D. Cal. 1987). Materiality is determined solely by the probable and reasonable effect which truthful answers would have had upon the insurer. See Cal. Ins. Code § 334. The fact that an insurer demands answers to specific questions in an application for insurance is in itself sufficient to establish materiality as a matter of law. See Thompson v. Occidental Ins. Co., 9 Cal.3d 904, 916 (1973).
Thus, under California law, the insurer is entitled to rescission if it can show either intentional misrepresentation of a fact, regardless of materiality, or nondisclosure of a fact material to the risk, regardless of intent. Further, the duty to disclose is especially great where, as here, the applicant seeks marine insurance.
a. Purchase price
The purchase price of a vessel is a material fact as a matter of law. See Pacific Ins. Co. v. Kent, 120 F. Supp. 1205, 1211 (C.D. Cal. 2000) (citing Certain Underwriters at Lloyd's v. Montford, 52 F.3d 219, 222 (9th Cir. 1995)). Here, State Farm argued that McDevitt misrepresented the purchase price of the Boat during the application process. McDevitt represented that the purchase price of the Boat was $19,500, when in fact McDevitt paid only $17,000. Ryan Decl. ¶ 3; Decl. of Denis Richardson in Supp. of Pl.'s Mot. Ex. A ("Richardson Decl."). During McDevitt's EUO on July 15 and 29, 1999, he admitted that he told State Farm and the credit union that the sale price, including sales tax, was $19,500, instead of$17,000. See Barra Decl. Ex. L (McDevitt's EUO testimony) at 205:17-206:19.
Claimants responded that State Farm knew the correct purchase price of the Boat during the application process. Claimants relied on the fact that McDevitt explained in his EUO that he borrowed $19,500 from the credit union, of which $1,500 was used to pay taxes and license fees, and $18,000 was paid to the seller of the Boat. Id. As evidence, Claimants referred to a document that shows that McDevitt issued a check for $18,000 for the purchase of the Boat. See Decl. of C.L. Mitchell in Supp. of Def.'s Opp'n to Pl.'s Mot. Ex. 3 ("Mitchell Decl."). According to Claimants, this document was in State Farm's possession during the application process.
State Farm responded that it did not receive that document at or shortly after McDevitt applied for the Policy. Supplemental Decl. of Geri Ryan in Supp. of Stipulation for J. Settlement Agreement ¶ 5 ("Supp. Ryan Decl."); Declaration of Steve Ward ¶ 3. Instead, State Farm argued that it did not receive the loan documents until March 1999, two years after the Policy was issued, when McDevitt's criminal defense attorney produced a package of documents to State Farm. Declaration of Carl Ilg ¶¶ 15-19 ("Ilg Decl."). Furthermore, State Farm demonstrated that the loan documents were not produced in the underwriting file disclosures, but as part of the claims file disclosures. In fact, the evidence shows that the loan documents, including the document referred to by Claimants, are bate stamped "CF" and not "UF." This evidence, coupled with the lack of evidence to the contrary, supports the fact that the documents were produced in the course of investigating the claim and not in connection with McDevitt's application for the Policy. See Supplemental Decl. of William Fenner in Supp. of Pl.'s Mot. ¶¶ 9, 10 ("Supp. Fenner Decl.").
In any event, even if this Court were to find that State Farm had the loan document during the application process, that document shows that McDevitt indicated the purchase price to be $18,000, instead of the correct purchase price of $17,000. Therefore, McDevitt again misrepresented the correct purchase price of the Boat.
Based on the evidence presented, McDevitt misrepresented the purchase price of the Boat and State Farm had no reason to know of this misrepresentation until McDevitt's EUO. Furthermore, State Farm specifically asked McDevitt the amount of the purchase price during the application process, rendering this fact material as a matter of law. See Murray Decl. Ex. A. This misrepresentation of the purchase price of the Boat is a material fact that entitled State Farm to rescind the Policy, regardless of McDevitt's intent.
b. Condition
State Farm further argued that McDevitt' s misrepresentations of the condition of the Boat and whether the required repairs were done or not supported its right to rescission. Approximately one week after McDevitt submitted his insurance application, State Farm required him to make ten repairs recommended in the survey report. Murray Decl. ¶¶ 3, 4. On April 2, 1997, McDevitt represented to State Farm that "all corrections per the surveyor have been rectified." Murray Decl. ¶ 6. Based on these representations, State Farm issued an insurance policy. Id. ¶ 7.
McDevitt admitted, however, under oath, that only one of the deficiencies identified in the survey had been corrected. McDevitt's declaration provides:
In March 1997, I brought the boat to Mr. Dillman Benton to perform general repair work. I did not show Mr. Benton the survey or its list of recommendations, nor did I request that he perform all of the work listed in the Survey. The only work Mr. Benton performed which satisfied any requirements of the Survey was to repair the outdrive raising and lowering rod. . . .
I did not agree or demand that Mr. Richardson was to perform the repair work recommended in the Survey as part of the sale of the Boat, nor to the best of my knowledge did Mr. Richardson in fact perform the repair work recommended in the Survey either before or after I purchased the Boat.
McDevitt Decl. ¶¶ 4, 8.
McDevitt's declaration is corroborated by the declarations of other individuals. For example, Denis Richardson, the Boat's previous owner, admitted to making some repairs to the Boat prior to the survey, but did not do any repairs to the Boat any time after the Boat was surveyed. See Barra Decl. Ex. M (McDevitt's EUO testimony) at 34:1-35:20; Richardson Decl. ¶ 5. Furthermore, Benton, the Boat's mechanic, declared under oath that the only work he performed which satisfied any of the recommendations was to fix the outdrive. Benton Decl. ¶¶ 4, 8. Benton further testified that McDevitt never provided him with a copy of the survey or asked him to correct any of the deficiencies listed in the survey. Id. at ¶¶ 5, 6.
Claimants argued that a summary, prepared by Paul Petrarca, Claim Team Manager for the Special Investigation Unit, shows that most of the survey's recommended repairs were completed by either Benton or Richardson, or that the reported defective items were functional when Benton was on the boat, after the sale to McDevitt. See Mitchell Decl. Ex. 7. While the summary indicates that some of the requested deficiencies may have been fixed or already functional, the weight of the evidence shows otherwise. Benton provided in his declaration, under oath, a list of repairs performed on the Boat, only one of which satisfies the recommended repairs for the Boat. Benton Decl. ¶ 4. Furthermore, Richardson stated that he did not do any repair work on the Boat after completion of the survey. Richardson Decl. ¶ 5. In any event, although the summary prepared by Petrarca shows that some of the deficiencies may have been repaired or no longer existed, State Farm required that all ten of the deficiencies be repaired before it would insure McDevitt's Boat.
McDevitt's misrepresentations regarding the condition of the Boat entitled State Farm to rescission of the insurance policy. Such misrepresentations, in light of their probable and reasonable influence on State Farm, are material. The evidence shows that State Farm relied on these representations when deciding to insure McDevitt's Boat and specifically determined that it would issue the Policy when the deficiencies indicated in the survey were first corrected. Had State Farm known the truth regarding the condition of the Boat, it would not have issued the Policy. See Murray Decl. ¶ 7.
2. Implied Warranty of Seaworthiness
State Farm also argued that it was entitled to rescission pursuant to California Insurance Code section 1920, which provides that "in every marine insurance upon a ship or involving transportation by ship, a warranty is implied that the ship is seaworthy. If the vessel is unseaworthy at the time the insurance attaches, the breach voids the policy." Cal. Ins. Code § 1920; Reliance Ins. Co. v. McGrath, 671 F. Supp. 669, 675-76 (N.D. Cal. 1987) (citing Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 983 n. 26 and 28 (5th Cir. 1969)).
Here, State Farm argued that McDevitt's failure to repair the requested deficiencies in the Boat rendered the Boat unseaworthy. In addition, when McDevitt took the Boat out on the San Francisco Bay on November 25, 1997, the motor stopped working. The United States Coast Guard towed the Boat back to the marina. See Barra Decl. ¶ 26. McDevitt did not take the Boat to a mechanic for repairs. See McDevitt Decl. ¶ 14. Therefore, State Farm argued, at the time the Policy was renewed in February 1998, the Boat was inoperable and unfit for its intended purpose. McDevitt Decl. ¶¶ 1:3, 14, 15.
Initially, Claimants argued that because the Policy is a protection and indemnity (PI) policy, the implied warranty of seaworthiness is inapplicable. While the implied warranty of seaworthiness does not apply to PI policies, Claimants admitted at the hearing that the Policy at issue is not a PI Policy. See Hanover Fire Ins. v. Merchants' Transp. Co., 15 F.2d 946, 947 (9th Cir. 1926). Instead, Claimants argued, citing to Hanover, supra, that the implied warranty of seaworthiness is inapplicable in legal liability policies. The court in Hanover addressed, however, whether the implied warranty of seaworthiness applies to a PI policy, not to a legal liability policy. In any case, Claimants conceded that the implied warranty of seaworthiness applies to hull coverage, a coverage which is included in the Policy at issue.
3. Distinct Coverages
Claimants further argued that State Farm cannot rescind the policy because misrepresentations and failures to disclose as to the property component of the Policy do not lead to rescission of the liability coverage., Decl. of C.L. Mitchell ("Mitchell Decl.") Ex. 4. Claimants rely on Coca-Cola Bottling Co. v. Columbia Cas., Ins. Co., 11 Cal.App.4th 1176, 1188-89 (1992), which held that misrepresentations made with respect to product liability coverage did not justify rescission of automobile coverage contained in the same policy. The court there reasoned that when a policy provides two or more distinct coverages and each such coverage is really a separate contract of insurance, misrepresentations as to one coverage will not necessarily support rescission of the others. In determining whether separate coverages constitute "separate contracts of insurance," the court may consider: (1) whether each risk was separately rated by the insurer in calculating the premium charged; (2) the existence of separate policy limits for each coverage; (3) whether the misrepresentation was material to one coverage and not another; and (4) the nature of the insured's business, including whether the insured is a conglomerate engaged in a myriad of activities, such that treating all coverages as a single contract could deprive it of insurance by forcing it to litigate the truthfulness of statements by each of its subsidiaries when any claim is made on the policy. See id.
Here, the two types of coverage were closely related and were routinely sold together by State Farm in single policies. Claimants presented no evidence that State Farm ever sold boatowners liability coverage only, separate from property coverage, and State Farm denied doing so at the hearing. Further, State Farm established that it would not have issued the Policy at all had it known, inter alia, about the failure to correct the deficiencies listed in the survey. By contrast, the Coca-Cola Bottling Co. case involved distinct coverages of unrelated risks tantamount to separate contracts of insurance that happened to be bundled together (probably because a large corporation can negotiate a specially tailored package of coverages, unlike individual owners of one or two boats): product liability coverage for risks such as exploding bottles made by Coca-Cola, and automobile coverage for risks such as car accidents involving its employees. Nor is the Coca-Cola Bottling Co. court's concern about the litigation nightmare that a multinational conglomerate would face if forced to litigate the truthfulness of statements by each subsidiary applicable here.
4. Negligent versus Intentional Conduct
Claimants further argued that State Farm limited its right to rescind to only intentional conduct, whereas McDevitt's declaration only admits negligence. Claimants argued that negligent conduct does not allow rescission of a liability policy. To the contrary, an insurer may rescind a contract of insurance for a material misrepresentation, even though the insured's misstatements were the result of negligence or, indeed, the product of innocence. Imperial Cas. Indem. Co. v. Sogomonian. et al., 198 Cal.App.3d 169, 182 n. 10 (1988) (citing Barrera v. State Farm Mut. Auto. Ins. Co., 71 Cal.2d 659, 666 n. 4 (1969)). Here, State Farm is entitled to rescind the policy based on negligence.
In any event, facts in the record (as opposed to McDevitt's self-serving characterization of them) evidence intentional misrepresentations. The evidence shows that McDevitt intentionally submitted a letter to State Farm providing that all the deficiencies identified in the survey had been repaired, even though such repairs were not done. See McDevitt Decl. Ex. 4. Additionally, McDevitt intentionally failed to notify State Farm that the Boat was inoperable following the November 1997 incident. Based on these facts, sufficient evidence in the record shows that McDevitt intentionally misrepresented facts to State Farm in his application for insurance.
B. Manifest Injustice
Claimants argued that even if State Farm had adequate grounds to rescind the contract, affirmation of the stipulated judgment and settlement agreement would result in manifest injustice. "It is of course fundamental that where the rights of others have intervened and circumstances have so far changed that rescission may not be decreed without injury to those parties and their rights, rescission will be denied." Beckwith v. Sheldon, 165 Cal. 319, 324 (1913); Angle v. United States Fid. Guar. Co., 201 Cal.App.2d 758, 763 (1962)).
Therefore, a district court may disregard a stipulation if to accept it would be "manifestly unjust or if the evidence contrary to the stipulation [is] substantial." PPX Enter., Inc. v. Audiofidelity, Inc., 746 F.2d 120, 123 (2d Cir. 1984) (citing Loftin and Woodward. Inc. v. United States, 577 F.2d 1206, 1232 (5th Cir. 1978)); see also Park v. Transamerica Ins. Co., 917 F. Supp. 731, 735 (D. Hi. 1996). In determining what constitutes manifest injustice, courts may consider: (1) the effect of the stipulation on the party seeking to withdraw the stipulation; (2) the effect on the other parties to the litigation; (3) the occurrence of intervening events since the parties agreed to the stipulation; and (4) whether evidence contrary to the evidence is substantial. See Waldorf v. Shuta, 142 F.3d 601, 617-18 (3d Cir. 1998). See Park v. Transamerica Ins. Co., 917 F. Supp. 731, 735 (D. Hi. 1996) (manifest injustice would result to the plaintiffs if the court were to fully enforce the stipulation because it was never their intention to waive their right to recover attorneys' fees and costs); Compania Transatlantica Espanola. S.A. v. Hartford Accident Indem. Co., 950 F.2d 105 (2d Cir. 1991) (the plaintiff would suffer "great harm" from the stipulation because it would lose its right to challenge the district court's adverse ruling where the amount in controversy was in excess of six million dollars). Furthermore, if an insurer desires to rescind a contract, it is required to act with reasonable promptness after discovery of grounds for rescission. See Massachusetts Bonding Ins. Co. v. Anderegg, 83 F.2d 622 (9th Cir. 1936).
Here, Claimants have not shown that rescission of the contract has resulted or will result in manifest injustice. Specifically, Claimants argued that if rescission is permitted, they will be left without a remedy as they will effectively lose their claim against McDevitt. Claimants asserted that McDevitt is judgment proof and will file for bankruptcy if any third party seeks to enforce a judgment against him. Claimants have not, however, produced any evidence in support of these allegations.
With respect to Claimant McGee, he argued that the delay in rescission has resulted in increase litigation expenses. In June of 1999, McGee sued McDevitt in the San Francisco Superior Court. Barra Decl. ¶ 15. McGee alleged that McDevitt negligently, intentionally and intentionally/negligently caused damage to his boat. Prior to initiating this complaint against McDevitt, however, McGee had sufficient notice that McDevitt's insurance policy was under investigation. In late July 1998, McDevitt was charged with felony arson which resulted in a plea bargain in March of 1999. This criminal investigation and charges should have put McGee on notice that McDevitt's insurance policy was being investigated. Furthermore, in February, March and April of 1999, State Farm informed McGee that it was investigating his claim pursuant to a reservation of rights. Barra Decl. Exs. E, G, I. These letters were sent well before McGee filed his complaint. Also, only two months after McGee filed his complaint, State Farm again notified McGee that "certain facts have been learned that have led State Farm to develop concerns whether McDevitt's Policy might be rescinded." Although McGee argued that he never received this document, the evidence shows that State Farm did send McGee this letter. See Supp. Barra Decl. Ex. A.
Furthermore, with respect to the Swansons, there is no evidence of manifest injustice. At oral argument, their counsel could not identify the prejudicial impact of rescission on his clients. Additionally, like McGee, State Farm informed the Swansons in February, March and April 1999 that it was investigating their claimed damages pursuant to a reservation of rights. Barra Decl. Exs. F, H, J. Further, in August 1999, State Farm informed the Swansons of the possibility of rescission. Barra Decl. Ex.O.
Therefore, the Court is not persuaded that Claimants will suffer manifest injustice if rescission of the Policy is permitted. At most, any possible delay in rescinding the Policy merely postponed State Farm's legal right to rescission.
C. Doctrine of Laches
Claimants argued that the doctrine of laches bars rescission. This doctrine bars an insurer s right to rescission if the insurer failed to act with reasonable promptness after discovery of the grounds for rescission and if such delay results in "substantial prejudice." Jaunich II, et al. v. National Union Fire Ins. Co., 647 F. Supp. 209, 215-16 (N.D. Cal. 1986).
The circumstances in each particular case govern whether delay in asserting a right gives rise to a defense of laches. See In re Consolidated Pretrial Proceedings in Air West Sec. Litig. v. Air West Inc., 436 F. Supp. 1281, 1290 (N.D. Cal. 1977) (citing Graham v. Atchison. T.S.F.Ry. Co., 176 F.2d 819, 827 (9th Cir. 1949)). "It is not possible to designate a definite period of time within which a party must give notice of rescission of a contract because of misrepresentation, fraud, etc., but the facts peculiar to each case are determinative thereof." Cole v. A.A. Calaway, 140 Cal.App.2d 340, 347 (1956) (citing Fabian v. Alphonzo E. Bell Corp., 55 Cal.App.2d 413, 415 (1942)). In Jaunich, 647 F. Supp. at 215-16, the court rejected the plaintiff's laches argument because the insurer rescinded only three months after it received all the information that it had requested relating to whether it had a right to rescind. See also Civil Serv. Employees Ins. Co. v. Blake, 245 Cal.App.2d 196, 200-02 (1966) (insurer entitled to a reasonable time period to investigate and to act upon information regarding its right to rescind an insurance policy).
Here, Claimants argued that State Farm's delay in seeking rescission for over three years after discovery of the purchase price and over one year after discovery of the purported misrepresentations regarding the Boat repairs is unreasonable and prejudicial. State Farm responded that it did not know of McDevitt' s misrepresentations regarding the purchase price of the Boat until it obtained his EUO in July 1999, and received copies of loan documents during the course of the investigation, two years after McDevitt applied for the policy. Ilg Decl. ¶¶ 13-19. State Farm further argued that its investigation of the coverage issue continued beyond October 1999. State Farm Team Manager, Paul Petrarca, testified that State Farm continued its efforts to locate and obtain a substantive interview with the prior owner of the Boat and pursued a number of other substantive investigative leads relevant to the resolution of the rescission issue after October 1999. Supp. Barra Decl. Ex. D. Therefore, according to State Farm, the investigation was not concluded until shortly before the declaratory relief action was filed on June 22, 2000. While Claimants point out that State Farm did not succeed in obtaining additional, significant information after October 1999, the evidence shows that State Farm was unaware of facts warranting rescission of the Policy until McDevitt's EUO and that State Farm continued to make efforts to investigate its right to rescission after October 1999.
Even if State Farm unreasonably delayed rescission, there is no evidence that Claimants were substantially prejudiced by the delay. California Civil Code section 1693 provides that delay will not preclude rescission unless the delay results in "substantial prejudice." Cal. Civ. Code § 1693; see also Air West, 436 F. Supp. at 1290 (nonrescinding party must assert prejudice caused by unreasonable delay); Jaunich II, 647 F. Supp. at 215-16 (holding that a delay in the return of a $30,000 premium did not constitute substantial prejudice).
Claimants have produced insufficient evidence to show "substantial prejudice." As previously discussed, Claimants argued, without evidence, that McDevitt is judgment proof and will file bankruptcy if third parties seek to enforce a judgment against him. The Court is not persuaded that these allegations, without more, show "substantial prejudice." Additionally, with respect to the Swansons, it is unclear what substantial prejudice will result from any delay in rescission of the Policy. The Swansons have not produced any evidence to support their general allegations that McDevitt is judgment proof, much less that McDevitt became judgment proof during the period that State Farm delayed seeking rescission so that the delay caused substantial prejudice. With respect to McGee, he argued that as a result of the delay in rescission, he has incurred greater attorneys' fees. As previously discussed, McGee knew or should have known well before he filed suit that McDevitt faced arson charges and that State Farm was asserting a reservation of rights. State Farm also informed McGee shortly after he filed his complaint that McDevitt's insurance policy might be rescinded. While it is unfortunate that McGee incurred additional litigation expenses, the Court is not persuaded that these expenses amount to "substantial prejudice." Because Claimants have failed to produce sufficient evidence to show "substantial prejudice," the doctrine of laches does not bar State Farm's right to rescission.
IV. CONCLUSION
Based on the aforementioned reasons, Plaintiff's Motion to Affirm the Stipulated Judgment and Settlement Agreement and to Dismiss Butch and Phyllis Swanson, Seamus McGee and Safeco Insurance Company is GRANTED.
Claimants' Motions to Strike the Declarations of Lisa Barra and Geri Ryan are DENIED. With respect to Geri Ryan, Claimants argued that as of November 23, 1998, Ryan had no recollection of the 26 McDevitt insurance application. Since that time, however, Ryan has reviewed the application and other materials and has refreshed her recollection. See Supp. Ryan Decl. ¶ 2. With respect to Lisa Barra, 27 Claimants argued that she does not have personal knowledge of the McDevitt Policy and was not produced as the person most knowledgeable with respect to the Policy. Barra need not, however, be the 28 person most knowledgeable to have personal knowledge and her declaration shows that she has personal knowledge of the McDevitt Policy in her role as Special Investigative Claim Specialist.