EVA BARRERA, Plaintiff, Cross-defendant and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant, Cross-complainant and Respondent.
S.F. No. 22313
In Bank. Supreme Court of California
July 8, 1969.
71 Cal. 2d 659 | 456 P.2d 674 | 79 Cal. Rptr. 106
Edward I. Pollock, Robert E. Cartwright, Theodore A. Horn, Robert G. Beloud, Leo M. O‘Connor and Leonard Sacks as Amici Curiae on Behalf of Plaintiff, Cross-defendant and Appellant.
Nagle, Yale & McDowall, Vernon V. Yale and Robert A. Seligson for Defendant, Cross-complainant and Respondent.
The trial court found that State Farm issued the automobile liability policy in reliance on a material misrepresentation, that rescission was therefore justified, and that State Farm acted promptly upon discovery of the misrepresentation. Accordingly, the court entered judgment for State Farm on both the complaint and the cross-complaint. Plaintiff moved for a new trial, urging that the public policy expressed in California‘s Financial Responsibility Law impelled a finding of laches by State Farm in its belated discovery of the
We conclude that an automobile liability insurer must undertake a reasonable investigation of the insured‘s insurability within a reasonable period of time from the acceptance of the application and the issuance of a policy. This duty directly inures to the benefit of third persons injured by the insured. Such an injured party, who has obtained an unsatisfied judgment against the insured, may properly proceed against the insurer; the insurer cannot then successfully defend upon the ground of its own failure reasonably to investigate the application. On retrial, therefore, plaintiff, upon showing that State Farm did not, within a reasonable time, reasonably investigate the insured‘s insurability, may recover from State Farm, within the policy limits, the amount of the judgment she obtained against the Alveses.3
The parties further stipulated that plaintiff did not consent to, or concur in, any rescission or attempted rescission between State Farm and the Alveses. They further agreed that on September 6, 1958, five months after the issuance of the original policy, State Farm paid to, or on behalf of, Mr. Alves a claim arising out of the comprehensive coverage provisions of the policy in effect at that time.
The record discloses the following facts as to the application for insurance and the misrepresentations. In April 1958 Mr. Alves purchased a Chevrolet from one Roberti, a used-car salesman. Roberti arranged with Pucci, State Farm‘s agent, that he come to the agency in order to obtain insurance for Alves‘s car. Both Alves, who was 24 years old at the time, and Pucci testified that Alves did not read the application, and that Pucci filled in the answers to the questions.
Question 18 on the application stated: “Has your license to drive or registration been suspended, revoked or refused, to the applicant or any member of his household in the last five years?” Contrary to the Department of Motor Vehicles (hereinafter “DMV“) report on Mr. Alves which evidenced one suspension and two probation orders within the five years preceding April 1958, a “No” answer appeared on the application in response to question 18.
Alves testified that Pucci did not call this question to his attention and, further, that he showed Pucci his driver‘s license, which bore a “Probation” stamp on it. Pucci testified that although he did not specifically recall asking this question, he always, as a matter of practice, made such an inquiry and a related one concerning prior cancellations of insurance. Pucci further testified that he did not see Alves‘s driver‘s license, and that he could not remember the manner in which he obtained the license number that he had included in the application. Considered as a whole, the evidence as to whether or not Alves misstated his past driving record to Pucci is conflicting: we must therefore accept the trial court‘s finding of misrepresentation.4
Maurice Hammer, an insurance broker for the previous two years, and prior thereto an agent for Allstate Insurance for three years, testified that the general custom and practice of the insurance industry was to obtain DMV reports in connection with applications, either as a basis for determining rates or insurability of the risk.
With respect to State Farm‘s policy on initial applications, Pucci testified that State Farm always issued a policy when he gave a binding receipt to the applicant. The binding receipt provided for insurance coverage for 30 days from the date of the receipt, even if the company subsequently refused to approve the risk. Pucci handed Alves a binding receipt on April 28, 1958.
Daniel Priest, an underwriting superintendent of State Farm, testifying as to State Farm‘s investigative policies, stated that State Farm orders DMV reports and makes other inspections “on a judgment basis.” In some cases State Farm does check on statements made by its applicants; but “in other cases the underwriting people just passed on the risk based on the statement on the application as submitted.” In response to the question whether State Farm customarily checks the driving record of an insured when a claim is presented against him, Priest stated: “Again, it depends upon the nature of the claim, the type of claim situation, circumstances involved, things of this nature. . . . We don‘t have any fixed custom or practice.” He further stated that once a claim has occurred, the claims, rather than the underwriting, department, determines whether the claim is sufficiently “significant” to warrant an investigation. Before any claim has
Although at the time of his application in April 1958 Alves, then being under 25 years of age, fell within the class of applicants who received the greatest number of spot checks, State Farm did not begin its investigation until February 4, 1960, more than two months after plaintiff was injured, and almost two years after the initial application. After discovering that Alves‘s file did not contain a DMV report, the underwriting department requested one. On February 12, 1960, it received a reply from the department; on March 2, 1960, it obtained the report. Prior to obtaining the report, and in response to an underwriter‘s question whether to cancel Alves‘s policy, the claims department on February 16 responded that it was in the process of developing evidence for rescission. On April 22, State Farm notified Alves of the rescission of his policy.
The evidence suggests that State Farm, in failing to investigate Alves‘s insurability and to obtain a DMV report, pursued a policy of saving minor costs on its part at the expense and sacrifice of the interests of its insured and those of the general public who were the potential victims of the insured‘s negligence. If, at the time of an initial or transfer application, the underwriter handling the risk relies on the application and fails to order a DMV report, the claims department thereafter determines whether a claim by or against an insured is sufficiently “significant” to warrant investigation. Here, State Farm must have considered Mr. Alves‘s September 6, 1958, claim under the comprehensive provisions of his policy “insignificant,” since State Farm apparently did not investigate but paid the claim. Not until plaintiff‘s attorneys notified State Farm of a $10,000 claim under the personal liability provision of the policy did State Farm attempt to check Alves‘s driving record.
State Farm‘s investigative practices may fail to conform to the standard of service which the public may reasonably expect of an insurance company and, more importantly here, may violate the public policy underlying California‘s Financial Responsibility Law. As we explain hereinafter in more
1. An automobile liability insurer incurs a duty reasonably to investigate an insured‘s insurability within a reasonable time after issuance of the policy.
a. The insurer‘s role as a public service entity
Because of the “quasi-public” nature of the insurance business and the relationship between the insurer and the insured (see fn. 5, supra), the rights and obligations of the insurer cannot be determined solely on the basis of rules pertaining to private contracts negotiated by individual parties of relatively equal bargaining strength. In the case of the standardized contract prepared by the economically powerful entity and the comparatively weak consumer we look to the reasonable expectation of the public and the type of service which the entity holds itself out as ready to offer.8
The reasonable expectation of both the public and the insured is that the insurer will duly perform its basic commitment: to provide insurance. (Glickman v. New York Life Ins. Co., supra, 16 Cal.2d at pp. 634-635.) “Insurance companies are engaged in the business of running risks for pay; . . .” Guardian Life Ins. Co. v. Weiser (1941 S.Ct. Spec. Term) 51 N.Y.S.2d 771, 773; cf. Casey v. Proctor (1963) 59 Cal.2d 97, 111 (“[I]f the releaser is bound by the literal terms of the release, it has been recognized that he is left to suffer personal injuries without compensation, while the releasee, who usually is an insurer, has received a windfall in avoiding liability for a risk it has been paid to assume.“)
With respect to an insurance policy voidable under the Insurance Code, if an automobile liability insurer can perpetually postpone the investigation of insurability and concurrently retain its right to rescind until the injured person secures a judgment against the insured and sues the carrier, then the insurer can accept compensation without running any risk whatsoever. Such a rule would permit an automobile liability insurer to continue to pocket premiums and take no steps at all to probe the verity of the application for the issued policy unless and until the financial interest of the insurer so dictated. Furthermore, under such a rule, the carrier would be permitted to deal with the insured as though he were insured, and thus to lead him to believe that he was in fact insured.
b. The public policy underlying the financial responsibility law
A rule which would permit an automobile liability insurer indefinitely to postpone determination of the validity of a liability policy and to retain its right to rescind the policy in the absence of the filing of a suit against it by a judgment creditor of the insured, defeats not only the public service obligations of the insurer but also the basic policy of the Financial Responsibility Law.9 That law aims “to make
Thus we have uniformly held that “the entire automobile financial responsibility law must be liberally construed to foster its main objective of giving ‘monetary protection to that ever changing and tragically large group of persons who while lawfully using the highways themselves suffer grave injury through the negligent use of those highways by others.‘” (Interinsurance Exchange v. Ohio Cas. Ins. Co. (1962) 58 Cal.2d 142, 153, quoting from Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 434.) As we concluded in Interinsurance Exchange, supra, “The pattern is clearly discernible: a desire on the part of the judiciary and the Legislature to not only prevent the astronomical accident toll in this state, but also to provide compensation for those injured through no fault of their own.” (Id. at p. 154.)10
A rule permitting an automobile liability insurer indefinitely to postpone its investigation of insurability until such time as it is financially opportune to do so directly thwarts a chief purpose of the Financial Responsibility Law: to “provide compensation for those injured through no fault of their
The public policy expressed in the Financial Responsibility and related laws requires that we construe statutes applicable to automobile liability insurance policies, as well as contractual provisions in those policies, in light of its purpose to protect those who may be injured by the use of automobiles. (See fn. 10, supra.) We therefore cannot accept a construction of the statute governing rescission of insurance policies, insofar as it applies to automobile liability insurers, which would serve only the financial interest of the insurer and directly thwart that public policy.
State Farm‘s alleged practice of postponing its investigation of insurability until after the assertion of a “significant” claim produces the dangerous condition that owners of cars will be driving on the streets and highways in the erroneous belief that they are insured and that the public generally will utilize these streets and highways with the frustrated expectation that insurance companies would conduct their business in such a way as to fulfill, not thwart, the basic purposes of the Financial Responsibility Law. This latter expectation can only be fulfilled, however, by recognition of the duty of the automobile liability insurer to undertake within a reasonable time from issuance of the policy a rea-
c. The insurer‘s analogous extra-contractual duty to act promptly on applications
California has developed a line of decisions imposing a duty upon all insurers to act promptly upon an application for insurance.11 The rationale underlying the extra-contractual imposition of this duty parallels the philosophy underlying the Financial Responsibility Law and related statutory and judicial rules governing automobile liability insurance.
The rule that an insurer must act promptly finds its source in the quasi-public nature of the insurance business and the reasonable expectation of the applicant and the general public. “Since insurance companies are held to a broader legal responsibility than are parties to purely private contracts, having solicited and obtained an application for insurance and having received payment of a premium, they are bound either to furnish indemnity or decline to do so within a reasonable time.” (12 Appleman, Insurance Law and Practice, supra, § 7226, at p. 330; see also Funk, The Duty of an Insurer to Act Promptly on Applications, supra, 75 U.Pa.L.Rev. 207, 222, 224.)
The following analysis of the insurer‘s duty to act promptly upon an application applies directly to the insurer‘s analogous duty to conduct with due diligence a reasonable investigation after issuance of the policy of insurability: “Before one can hold himself out as competent to transact the business of insurance he must have fully complied with the statutes of the state relating to insurance. . . . By the soliciting, making and receiving of the application, the parties had entered into some kind of a consensual relationship. . . .
“Under such circumstances, having in view the nature of the risk against which the insure [d] seeks protection, is there not a duty upon the insurer to act upon the application within a reasonable time? Can the insurer, having pre-empted the field, retain control of the situation and the applicant‘s funds indefinitely? Does not the very nature of the transaction impose upon the insurer a duty to act?” (Kukuska v. Home Mut. Hail-Tornado Ins. Co., supra, 235 N.W. 403, 405.) (Italics added.)
Similarly, the rationale below applies as much to the insurer‘s obligation to investigate insurability after issuance of a policy as to its duty to act promptly on applications: “It strikes us as manifestly unfair to hold a stipulation in an application for insurance that the company is not bound until the application is received and approved, as warranting an insurance company to delay consummating a contract of insurance for an unreasonable length of time, and then in the event of loss repudiate it. It is in just such situations as this that the insured is allowed, in the event of loss, to recover damage for negligence based upon unreasonable delay. . . . Any other rule would place it in the power of an insurance company to take the chances of a loss, and, if none occurred, retain the premium; but if one does occur, repudiate the contract and compel the assured to bear the loss.” (Security Ins. Co. v. Cameron (1922) 85 Okla. 171 [205 P. 151, 159-160, 27 A.L.R. 444]; cf. Guardian Life Ins. Co. v. Weiser, supra, 51 N.Y.S.2d 771, 773.)
Our conclusion that an automobile liability insurer incurs the duty to conduct a reasonable investigation of insurability within a reasonable period of time after issuance of the policy, paralleling the line of decisions that hold that an insurer has a duty to act promptly on applications, “recognize [s] facts to be what they are. They do not attempt to force the facts to fit a ready-made legal mold. They recognize the status and relationship of the parties, as they are, and measure the obligations of the parties accordingly.” (Bekken v. Equitable Life Assur. Soc., supra, 293 N.W. 200, 210; Stark v. Pioneer Cas. Co., supra, 139 Cal.App. 577, 580; Duffy v. Bankers’ Life Ass‘n. of Des Moines, supra, 139 NW. 1087, 1089.)
2. The automobile liability insurer‘s duty to investigate insurability after issuance of the policy inures directly to the benefit of third persons injured by the insured.
The requirement that the carrier act promptly to determine insurability after issuance of an automobile liability insurance policy inures primarily to the benefit of those members of the public who suffer injury from negligent motorists and seek recovery against the responsible tortfeasors.12 The duty arises
The proposition that a party to a contract may owe a duty of care to a third person not in privity with either party to the contract is not new. (See Prosser, The Law of Torts (3d ed. 1964) pp. 658-661.) Nor can we doubt that a third person not in privity of contract with the defendant may recover for the defendant‘s breach of a duty arising out of a contract with a second party when the only risk of harm created by that breach of duty affected an intangible interest. (Biakanja v. Irving (1958) 49 Cal.2d 647, 649; Walnut Creek Aggregates Co. v. Testing Engineers, Inc. (1967) 248 Cal.App.2d 690, 696; Glanzer v. Shepard (1922) 233 N.Y. 236 [135 N.E. 275, 23 A.L.R. 1425].) As we said in Merrill v. Buck (1962) 58 Cal.2d 552, 561-562: “Privity of contract is not necessary to establish the
In Biakanja v. Irving, supra, 49 Cal.2d 647, 650, we held that a notary public who negligently failed to direct proper attestation of a will became liable in tort to an intended beneficiary damaged because of the invalidity of the instrument. In analyzing the bases for this duty, we said, “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant‘s conduct and the injury suffered, the moral blame attached to the defendant‘s conduct, and the policy of preventing future harm.”
In Lucas v. Hamm (1961) 56 Cal.2d 583, we extended the Biakanja rationale to the attorney-client relationship and held that an attorney who negligently drafted a will could be held liable to a person named in the will who suffered deprivation of benefits as a result of the negligence.
More recently, in Connor v. Great Western Sav. & Loan Assn. (1968) 69 Cal.2d 850, we held that the Biakanja criteria applied in the context of residential tract development; we concluded that a lending institution which financed and “shared in the control” of the tract development, and which “cooperated” with the developer in that undertaking, incurred liability in tort to the buyers of improperly built houses. We said that the lending institution owed a duty to the purchasers “to exercise reasonable care to prevent the construction and sale of seriously defective homes.” (69 Cal.2d at p. 867.)
Similar considerations in the present case impel the holding that the automobile liability insurer incurs a direct duty to those members of the public, situated as the plaintiff, who stand to benefit from the validity of a contract of insurance which protects them against the risk of their own injury or death. Public policy requires the recognition of this duty; without its imposition a basic purpose of the Financial Responsibility Law would be significantly thwarted and persons
3. If the automobile liability insurer breaches a duty owing directly to the class of persons of which the plaintiff is a member, plaintiff does not “stand in the shoes of” the insured
State Farm contends that the “rule” that an injured person “stands in the shoes of” the insured bars the injured person‘s recovery against the insurer when the insured procured the policy through misrepresentation. It argues that the Alveses could not compel it to pay them if they had satisfied the judgment obtained by plaintiff, and that therefore plaintiff lacks any basis upon which to sue it on the policy.14
State Farm‘s contention overlooks the fact that the automobile liability insurer‘s duty to conduct a reasonable investigation of insurability with due diligence inures directly to the benefit of persons such as the plaintiff who may be injured by the insured‘s use of his automobile. Upon the imposition of analogous duties in other contexts, we have held that the real beneficiary of such a duty cannot lose his remedy merely because the party whose relationship with the defendant gave rise to the duty would be barred from recovery.
In Heyer v. Flaig (1969) 70 Cal.2d 223, we considered a case in which the intended beneficiaries of a will sought to recover losses incurred because the defendant-attorney breached a duty owed them when he negligently failed to fulfill the testamentary directions of his client. We recognized such a duty in Lucas v. Hamm, supra, 56 Cal.2d 583, and noted that the duty ran directly in favor of the intended testamentary beneficiaries. In Heyer, the defendant invoked the rule that a third party is subject to the same statute of limitations as the promisee to the contract which created the rights of the beneficiary (Bogart v. George K. Porter Co. (1924) 193 Cal. 197 [223 P. 959, 31 A.L.R. 1045]), and argued that since the testatrix would have been barred by the relevant statute of limitations if she
Likewise, in the instant case, to allow the defendant to raise the defense of the insured‘s misrepresentation to an action by a person injured by the insured‘s automobile would frustrate the purpose of the imposition of a duty upon the insurer to undertake a reasonable investigation of insurability within a reasonable time from the acceptance of the application and issuance of the policy. The purpose of the imposition of such a duty is to reduce the number of motorists on our highways who are, in fact, financially irresponsible; the goal is to protect the motoring public generally against the inability to recover compensation for death or injuries caused by automobile accidents. Prompt notice to the insured of the revocation of his policy of insurance will most certainly impel him to seek other means of compliance with the potential requirements of the Financial Responsibility Law. The Assigned Risk Plan (see p. 672, supra) provides a guarantee that such means will be available.
If the insurer does undertake a reasonable investigation of insurability, it retains the statutory right granted in
The defendant argues further, however, that Mrs. Alves‘s negligence while driving was the superseding cause of the plaintiff‘s injury, and that such conduct should insulate it from responsibility. Under the circumstances, Mrs. Alves‘s negligence cannot be a superseding cause, since “the risk that it might occur was the primary hazard that gave rise to [State Farm‘s] duty.” (Connor v. Great Western Sav. & Loan Assn., supra, 69 Cal.2d 850, 869.) The defendants in the Connor case urged the same defense, based upon the builder‘s negligence in constructing the defective homes. We cited with approval language from an earlier case which held: “If the realizable likelihood that a third person may act in a particular manner is the hazard or one of the hazards which makes the actor negligent, such an act whether innocent, negligent, intentionally tortious or criminal does not prevent the actor from being liable for harm caused thereby.” (Richardson v. Ham (1955) 44 Cal.2d 772, 777.)
In the present case, the basic reason for the imposition of a duty upon the insurer to conduct a reasonable investigation of insurability is the known hazard that innocent members of the public will suffer serious injury and death as a result of automobile accidents. The “likelihood” that the Alveses could become responsible for such an accident was “realizable” by State Farm; indeed, such a hazard is the very risk against which insurance is directed. The purpose of the imposition of
Finally, we point out that this court has rejected a mechanical application of the over-generalization that the rights of the injured person cannot rise above those of the insured. In Shapiro v. Republic Indem. Co. (1959) 52 Cal.2d 437, the insurer urged that “an injured person stands in the shoes of the insured and has no greater rights against the insurer than the insured would have had he paid the judgment against him and then sued the insurer” (52 Cal.2d at p. 439). We nevertheless held that the plaintiffs, on suffering their injury, “had an interest that could not be altered or conditioned by independent action of the insurer and the insured. [Citation.] Nor can these rights be conclusively determined against the injured persons in an action to which they were not made parties.” (Id. at p. 440.) We concluded that a declaratory judgment reforming the policy obtained by the insurer after an accident in which plaintiffs suffered injury, could not defeat the plaintiffs’ right of recovery against the insurer upon obtaining judgment against the insured. We granted relief even though, if the insured had paid the judgment and then sued the insurer, the insured could not have recovered under the policy.
The Shapiro decision demonstrates that rights of innocent third persons injured by the insured cannot be defeated merely because the insured would not be entitled to indemnity from the insurer if he had satisfied the judgment against him. Moreover, the decision implicitly rejects the mechanical rule that the injured person “stands in the shoes of” the insured when application of that proposition defeats a more primary policy underlying the injured person‘s right of recovery.
Failure of the automobile liability insurer reasonably to investigate the insurability of the insured within a reasonable time after issuance of the policy, as described above, results in the loss of the carrier‘s right to rescind, as opposed to its right to cancel, the policy. Thus, if, in such a case, the insurer has not timely rescinded an automobile liability policy prior to an accident in which the insured negligently injures a third person, the policy necessarily remains in effect at least through the time of the accident; the insurer cannot thereafter rescind, but only cancel the policy. After the injured person has obtained a judgment against the insured, therefore, he may compel the insurer to pay the judgment to the extent of the monetary limits set forth in the Financial Responsibility Law. (
That the automobile liability insurer that fails to make such an investigation loses its right to rescind does not, however, necessarily mean that it forfeits all remedies against the insured for his misrepresentations. The insurer may still prosecute a cause of action against the insured for damages for wrongful misrepresentation, after satisfying the injured person‘s claim, or, in an action brought by the insured, after he has satisfied a judgment against him by the injured person, defend on the ground of misrepresentations in the application. (Cf., e.g., De Campos v. State Comp. Ins. Fund (1954) 122 Cal.App.2d 519, 528-529). This recognition of the right of the insurer to rely on the insured‘s misrepresentations either as a basis for a damages suit against the insured or as a defense in an action by the insured does not conflict with the purpose of the Financial Responsibility Law, the assurance of a solvent defendant for those innocently injured by the use of automobiles.
5. The question whether State Farm negligently breached a duty owed to plaintiff in the present action is a question of fact to be determined on remand
Whether or not the automobile liability insurer has breached its duty to the public to make a reasonable investigation within a reasonable time after the issuance of the policy ordinarily constitutes a question for the trier of fact. (Cf. Bekken v. Equitable Life Assur. Soc., supra, 293 N.W. 200,
Factors to be taken into account by the trial court in assessing the reasonableness of State Farm‘s course of conduct in failing to investigate Alves‘s driving record are, inter alia: the cost of obtaining the information from the Department of Motor Vehicles, the availability of this information from the department or elsewhere (e.g., Alves claimed that his license suspensions appeared on the back of his driver‘s license), and the general administrative burden of making such an investigation.17 These factors must be weighed against the importance of the protection of innocent members of the public against the consequences of automobile owners driving with voidable liability policies.
The judgment on plaintiff Barrera‘s complaint and defendant State Farm‘s cross-complaint is reversed. The cause is remanded for proceedings consistent with this opinion.
Traynor, C. J., Peters, J., Mosk, J., Burke, J., and Sullivan, J., concurred.
McCOMB, J.—I dissent. I would affirm the judgment.
Notes
“Now, there may be a question of law which the upper court might reverse me on as to the duty of the insurance company, . . .” (Italics added.)
Plaintiff‘s contention regarding section 651 runs counter to the statutory scheme for termination of insurance contracts and blurs the clear statutory distinction between “rescission” (retroactive termination) and “cancellation” (prospective termination) of insurance policies. Section 651 provides: “Notwithstanding any other provision of this code, no cancellation by an insurer of an auto liability insurance policy shall be effective prior to the mailing or delivery to the named insured at the address shown in the policy, of a written notice of the cancellation stat-
The Legislature added section 651 in 1957. (Stats. 1957, ch. 723, § 1, p. 1931.) In 1957, the Insurance Code did not contain a separate chapter on “Cancellation” (present ch. 10). Section 651 was incorporated into the “Rescission” chapter (ch. 9). The Legislature did not insert the section in the “Cancellation” chapter when that chapter was added by 1965 Statutes, chapter 1716, section 1, page 3850. The Insurance Code specifically provides, however, that “Division, part, chapter, article, and section headings contained herein shall not be deemed to govern, limit, modify or in any manner affect the scope, meaning, or intent of the provisions of any division, part, chapter, article or section hereof.” (§ 6.)
The statutory scheme reflects a deliberate distinction between “rescission” and “cancellation.” Sections 331, 338, and 359, which prescribe the grounds for rescission, all involve false statements or material omissions in the procurement of the policy. Section 660 (Stats. 1965, ch. 1716, § 1, p. 3850), on the other hand, provided: “The commissioner, by regulation, shall prescribe the grounds upon which an insurer may cancel a policy of automobile insurance. No insurer shall cancel a policy of automobile insurance except upon such ground or grounds as have been prescribed by the commissioner.” (Repealed, Stats. 1968, ch. 137, p. 352, § 1, effective Jan. 1, 1969.)
Unless we say that automobile liability insurance policies cannot be rescinded at all and that section 660 completely abrogated the rescission section for automobile liability insurance, we must hold that section 651, which specifically refers to “cancellation,” does not control the procedure for “rescission” of automobile liability insurance. Instead, the general section governing rescission of insurance policies, section 650, applies. Section 650 provides: “Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this part such right may be exercised at any time previous to the commencement of an action on the contract.” The issue, then, turns on the validity of plaintiff‘s contention that the public policy of this state requires that an automobile liability insurer reasonably investigate within a reasonable time after issuance of the policy or otherwise be estopped to rescind the policy, at least in an action by an injured person who has obtained judgment from the insured.
Indeed, the trial court in the present case found only that Alves materially misrepresented facts within his knowledge; there was no finding of scienter, that Alves fraudulently misrepresented the facts. Thus, under the present interpretation of the Insurance Code, an insurer may rescind the contract of insurance ab initio for a material misrepresentation—even though the insured‘s misstatements were the result of negligence, or, indeed, the product of innocence.
“The purpose and nature of [life] insurance [contracts], and the duties which the insurer assumes under such contracts, and the manner in which such contracts are negotiated, impress such contracts and the relationship of the parties, even during the negotiations, with characteristics unlike those incident to contracts and negotiations for contracts in ordinary commercial transactions.” (Bekken v. Equitable Life Assur. Soc. (1940) 70 N.D. 122 [293 N.W. 200, 210-212, 128 A.L.R. 1150]; see also Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 270, 280; Steven v. Fidelity & Cas. Co. (1962) 58 Cal.2d 862, 882-883; Glickman v. New York Life Ins. Co. (1940) 16 Cal.2d 626, 633-635; Stark v. Pioneer Cas. Co. (1934) 139 Cal.App. 577, 580; Duffy v. Bankers’ Life Ass‘n. of Des Moines (1913) 160 Iowa 19 [139 N.W. 1087, 1089-1090, 46 L.R.A. N.S. 25]; Republic Nat. Life Ins. Co. v. Chilcoat (Okla. 1961) 368 P.2d 821, 824; Dyer v. Missouri State Life Ins. Co. (1925) 132 Wash. 378 [232 P. 346, 347-348]; cf. German Alliance Ins. Co. v. Kansas (1914) 233 U.S. 389, 411-415; see generally, 12 Appleman, Insurance Law and Practice (1943) § 7226, at pp. 326-327, 330; Funk, The Duty of an Insurer to Act Promptly on Applications (1927) 75 U.Pa.L.Rev. 207, 215, 222-223; Kessler, Contracts of Adhesion—Some Thoughts about Freedom of Contract (1943) 43 Colum.L.Rev. 629, 631-632, 637, 641-642; Comment, Responsibility of Insurer for Delay in Acting on Application (1930) 40 Yale L.J. 121, 127.)
Similarly, the court in Kukuska v. Home Mut. Hail-Tornado Ins. Co. (1931) 204 Wis. 166 [235 N.W. 403], in discussing an insurer‘s duty to act promptly on an application (see accompanying fn. 10, infra), explained: “If the insurer is under such a duty and fails to perform the duty within a reasonable time and, as a consequence, the applicant sustains damage, it is not vastly important that the legal relationship be placed in a particular category. If we say it is contractual, that is, there is an implied agreement under the circumstances on the part of the insurer to act within a reasonable time, or, having a duty to act, the insurer negligently fails in the performance of that duty, or that the duty springs out of a consensual relationship, and is therefore in the nature of a quasi contractual liability, is not vitally important.” (Id. at p. 405.) (Italics added.)
“The statute [