Oughta Know – Insurance Fails to Create New California Employment Disclosure Standard | Merlin Law Group

Whenever homeowners and business owners contact the Los Angeles office of Merlin Law Group about choosing a new insurance policy, I always remind them that the doctrine of of great faith they place a high fiduciary duty to tell the truth when filling out their new insurance application. This is especially important for potential insurers who have a history of claims. If you fail to disclose material information when asked directly, be prepared to swallow the insurance company’s Jagged Little Pill.

Failure to provide accurate information on your application is never excused: If the insurer leaves a profile or other information at risk, they run the risk of the carrier rejecting the claim based on false information. Most carriers will eliminate this process entirely. If carriers suspect that there are flaws in the process, they can hire outside counsel to conduct a lengthy and time-consuming Examination Under Oath to determine the basis of the representation on the application. Failure to follow this policy will violate the terms of this policy agreement and you will be subject to legal action.

A recent unpublished opinion from the Ninth Circuit Court of Appeals is discussed of great faith.1 An appeals court reversed a trial court’s decision in favor of Great Lakes Insurance against insured Tamara Lee Smith, holding that the You Oughta Know standard cannot be used to prepare an insurance claim in California.

The facts of the case are clear: Great Lakes Insurance denied Mrs. Smith’s claim after her boat struck rocks and sank in Chahue Bay, Mexico in December 2019. on her insurance claim because she did not disclose that the boat operator and her lover – John Jay Kerchelich – had been diagnosed with charged with violating California Water Code §13387(c) for wrongful breaching of the shoreline in an unrelated incident on Lake Elsinore.

Mrs. Smith did not disclose Mr. Kerchelich’s wrongdoings at first because she did not know. However, he was not forgiven by the Honorable André Birotte Jr., of the United States District Court for the Central District of California, who agreed with Great Lakes Insurance that Mrs. Smith made a show of things when she did not disclose her policy – even. it was undeniable he was unaware of Mr. Kerchelich’s convictions.

In reversing and restoring summary judgment, the appellate judges said that Great Lakes failed to show that Mrs. Smith knew of the wrongful conviction or should have known because of her past relationship. In other words, the appeals court disagreed with the facts to support the You Oughta Know standard:

Great Lakes relies on foreign case law to hold that a duty of good faith requires disclosure of information that the applicant should have known. You see Quintero v. Geico Marine Ins. Co.983 F.3d 1264, 1271 (11th Cir. 2020) (stating that of great faith requires the disclosure of ‘all material matters which ‘are within or should be within, the knowledge of one party, and of which the other party has no real or imaginary knowledge” ( The opinion of the company Steelmet, Inc. v. Caribe Towing Corp.747 F.2d 689, 695 (11th Cir. 1984), reh’g granted in part, denied in part, 779 F.2d 1485 (11th Cir. 1986))).

Ironically, it was Great Lakes Insurance that filed the case first – ab initio – to stop the entire process, but the appeals court rejected their arguments. California criminal law generally protects the “no-fault insured” even if they are a bystander and uninsured. Because there was no indication that Ms. Smith was aware of the decision or that she intentionally failed to disclose, the appeals court held that there was no evidence that Ms. Smith breached the duty of good faith – of great faith.

Although an unpublished opinion provides important information about how a carrier obtains information after a claim and takes action, it is not a perfect opinion for an insurer. Upon acquittal, the appeals court said:

And at this point there is no evidence proven by the district court whether Smith should have known about the information, or whether he failed to ask if Kerchelich was telling the truth. Without such an investigation or further development of the record, we cannot say that Smith breached the duty of good faith in completing the insurance policy.

When the case returns to the District Court, it may be Great Lakes Insurance arguing with Mrs. Smith “You learn” and is responsible for asking Kerchelich – the boat operator – about his criminal history and also making sure to explain what is under the doctrine of of great faith. The bottom line is that Great Lakes would probably have given him the information and disclosed this but at a very high cost.
1 Pictures of Great Lakes Ins. SE v. Smith, no. 21-56231, 2022 US App. LEXIS 23468 (9th Cir. Aug. 22, 2022).