An applicant agrees in the policy that every answer in the application is a warranty and a condition of the contract. Two years later the insurer discovers the applicant violated a material warranty. Under California Insurance Code Section 447:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Section 447 provides that the violation of a material warranty or other material provision of a policy, on the part of either party, entitles the other party to rescind. A warranty is a promise or statement that is made a part of the contract and must be literally true; because it is a condition, a material breach destroys the foundation of the bargain. The remedy is rescission — unwinding the contract as if it never existed — rather than a premium adjustment or continued coverage. This rule applies to either party, so the same right of rescission would protect an insured who was harmed by the insurer's violation of a material provision.
Why the other options are wrong
- B) Rescission, not a premium reduction, is the statutory remedy for violating a material warranty; the statute does not provide for adjusted premiums or continued coverage at reduced cost. The statute chooses rescission precisely because a material warranty breach undermines the foundation of the contract itself.
- C) Section 447 entitles the insurer to rescind the contract; merely refunding premiums while keeping coverage in force would not satisfy the statute's rescission remedy. A refund without unwinding the contract leaves the policy in force, which is not the remedy the statute provides for a material breach.
- D) The insurer need not pay a claim on a contract it is entitled to rescind for a material warranty violation, because rescission voids the contract as though it never existed.
Memory hook
Break a material warranty and the insurer can walk away — rescission is the remedy, not a discount.