Star Insurance Co. v. Sunwest Metals, Inc., 691 F. App'x 358

Sunwest operated a recycling facility and obtained two consecutive annual fire policies under Star’s Scrap Dealers Program; eligibility limited paper/plastics revenue to 15%.
Sunwest (through broker Thomas Dunlap Insurance Agency) represented that nearly all revenue was from metals; in fact ~66% of revenue came from paper processing.
Star issued policies and inspected the site multiple times between 2008 and 2012, receiving reports and viewing website content indicating substantial paper processing; Star repeatedly questioned operations but accepted nonresponsive assurances from Dunlap.
In April 2013 a catastrophic fire occurred; Sunwest filed a claim and Star rescinded the policy based on Dunlap’s misrepresentations rather than paying the claim.
Sunwest sued for breach of contract; after a five-day bench trial the district court awarded Sunwest nearly $978,000, finding Star had waived the right to rescind by failing to investigate information that distinctly implied misrepresentation.
Sunwest had previously settled with its broker, Dunlap, for $535,000; the district court determined ~$232,000 of that settlement remedied the insured loss and offset that amount against Star’s judgment to avoid double recovery.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Star waived right to rescind by ignoring information that distinctly implied misrepresentation	Sunwest: Star had information (inspections, website) that plainly contradicted applications and failed to investigate, so it waived rescission	Star: It reasonably relied on broker representations and made inquiries; no waiver	Court: Waiver—Star had information that distinctly implied falsity and failed in its duty to investigate, so waiver affirmed (review for clear error affirmed)
Whether rescission requires proof of intentional (vs. negligent) misrepresentation by broker	Sunwest: District court did not require intent; cross-appeals arguing intent should be required	Star: Intent not required for rescission when misrepresentation is material; insurer may rescind regardless of broker’s state of mind	Court: Did not decide because waiver resolved case; declined to reach whether intent is required
Whether district court properly offset Sunwest’s recovery by amount received from broker settlement to avoid double recovery	Sunwest: Challenged reduction; argued full judgment should stand	Star: Offset appropriate because settlement mitigated the contract loss and contract damages limited to actual loss	Court: Affirmed offset—equitable reduction appropriate; contract damages limited to actual loss, not collateral-source protected

Magnuson v. Video Yesteryear, 85 F.3d 1424 (9th Cir. 1996) (standard of review for bench trial findings)
Old Line Life Ins. Co. v. Superior Court, 229 Cal. App. 3d 1600 (Cal. Ct. App. 1991) (insurer may rely on insured but not ignore contradictory information)
Rutherford v. Prudential Ins. Co. of Am., 234 Cal. App. 2d 719 (Cal. Ct. App. 1965) (duty to make further inquiry when facts plainly indicate misstatements)
DuBeck v. Cal. Physicians’ Serv., 234 Cal. App. 4th 1254 (Cal. Ct. App. 2015) (duty to investigate information which reasonable diligence would reveal misrepresentations)
Plut v. Fireman’s Fund Ins. Co., 85 Cal. App. 4th 98 (Cal. Ct. App. 2000) (contract damages limited to actual loss; collateral source rule not extended to contract claims)