ATAIN SPECIALTY INS. CO. V. LAKE LINDERO HOA, No. 21-55319 (9th Cir. Feb. 7, 2022) [DISCLOSURE TO INSURANCE COMPANIES]

A representative applying for insurance on behalf of a homeowners association must disclose all requested information to the insurer under the “duty of disclosure.” Before entering into an insurance contract, the duty of disclosure requires the applicant to provide requested information to enable the insurance company to decide whether, and on what terms, the policy will be issued, including the amount of the insurance premium. In this case, the federal appellate court ruled that an insurance policy may be rescinded if an association fails to disclose a situation that could give rise to a claim or litigation at the time the application is completed. Atain’s insurance application required the applicant to disclose “any fact, circumstance or situation which may result in a claim.”  The Association did not respond to these questions even though it had an ongoing conflict with its property management company and received a written warning from a homeowner threatening to take legal action against the Association’s board of directors if it terminated its management contract. The Court ruled that the Association should have disclosed this information to Atain, during the application process, reasoning that if the Association terminated its management contract, this would present a risk that a claim would be filed against the LLHOA. The court further stated that “[i]t is irrelevant that these risks had not yet materialized; the question’s purpose was to enable Atain to assess the risks it was underwriting.”