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 the recent federal case, Atain Specialty Ins. Co. v. Lake Lindero HOA, No. 21-55319 (9^th Cir. Feb. 7, 2022), the federal appellate court ruled that an insurance policy may be rescinded if an association fails to disclose a situation that could give rise to a claim or litigation at the time the application is completed.

In Atain, the Lake Lindero Homeowners Association (“LLHOA”) and its management company appealed the federal district court’s grant of a motion for summary judgment in favor of the association’s insurance carrier, Atain Specialty Insurance Company (“Atain”). Atain filed its motion based on the contention that LLHOA did not reveal known facts on the insurance application and that those facts were material to Atain’s underwriting decision.

Atain’s application required the applicant to disclose “any fact, circumstance or situation which may result in a claim.” LLHOA did not respond to these questions even though a situation existed that was likely to give rise to a claim. The LLHOA had an ongoing conflict with its property management company. In fact, the LLHOA’s board had sent its property management company eight (8) letters alleging breach and threatening termination of their contract. In addition, the LLHOA had received a written warning from a resident member threatening to take legal action against the LLHOA’s board of directors if it terminated its management contract. The Court ruled that the LLHOA should have disclosed this information to Atain, during the application process, reasoning that if the LLHOA 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.”

A material fact is a piece of information that is vital to evaluating and interpreting a subject matter in legal documents. This means material facts are necessary, significant, or essential to an insurer when deciding whether to agree to provide insurance. Examples of material facts related to insurance policies can include facts that devalue property, known dangers to occupants or property, upcoming major repairs or projects, and/or facts that affect the salability of a property.

In Atain, a declaration filed by an Atain employee responsible for underwriting was used as the primary evidence regarding “materiality” of the known information. The declaration stated that Atain would not have issued the insurance policy had the LLHOA disclosed the possibility of a claim being filed against LLHOA by its management company. Since counsel for the LLHOA presented no evidence to contest the materiality declaration, the court concluded that Atain was entitled to rescind the policy and had no further duty to defend or indemnify the LLHOA in the underlying litigation.

The duty to disclose is directly related to an insurance company’s decision to agree to the contract of insurance. Based on the information provided by the insured, the insurance company may decide not to accept the contract, impose conditions, or adjust the amount of the premium. This case suggests that contractual disputes can be material information. As can be seen by this case, failure to disclose a material fact at the time of contract may have drastic consequences when a claim is made.