Can an Insurer Rescind a California Policy Over a Fact It Never Asked About?

Two people form an LLC to buy a jet. One of them, unknown to the other, pays for his share with roughly two million dollars stolen from a client. The company insures the aircraft, the insurer never asks where the purchase money came from, and about two years later the federal government seizes the plane. A Santa Barbara County jury awards the company more than $21.5 million against the insurer, including $15,000,000 in punitive damages. On October 1, 2026, the Court of Appeal reversed the entire judgment.

The question the case answers is one most policyholders have never considered: can an insurance company rescind a policy in California over a fact it never asked about? The answer is yes. And the way the court got there should worry anyone who owns a business with someone else, because the owner who lost was the one who did nothing wrong.

An insurance company can rescind a policy in California for silence, not only for lies

Most people think of rescission as the penalty for a false answer on an application. California's Insurance Code is broader than that. Section 330 defines concealment as "Neglect to communicate that which a party knows, and ought to communicate." Section 331 supplies the consequence in one sentence: "Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance." And section 332 states the duty itself. Each party to an insurance contract must communicate to the other, in good faith, "all facts within his knowledge which are or which he believes to be material to the contract" and which the other has no means of ascertaining.

Nothing in those sections is limited to the questions printed on the form. False statements are handled separately, in section 359, which allows rescission when a representation is false in a material point. Concealment is its own ground. The California Supreme Court said decades ago, in a life insurance case, Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, that material concealment is a ground for rescission and that "an actual intent to deceive need not be shown."

What happened in Passport 420 v. Starr Indemnity

The case is Passport 420, LLC v. Starr Indemnity & Liability Co. (Oct. 1, 2026, B343113) ___ Cal.App.5th ___, decided by the Second Appellate District, Division Six. In 2016, attorney Michael Avenatti suggested to a client, William Parrish, that the two of them buy a jet together. Avenatti drafted the operating agreement for a two member LLC, Passport 420. Parrish, through his own company, put up 52.7 percent of the purchase price. Avenatti's law firm put up the rest. The operating agreement made Avenatti the manager, with "full and complete authority, power and discretion to manage and control the affairs of the Company."

It was undisputed on appeal that Avenatti embezzled approximately two million dollars from another client and used it to pay his share. It was equally undisputed that Parrish had no actual knowledge of the crime and took no part in it.

Passport's pilot filled out the insurance application. It asked about the aircraft, the pilots, maintenance, and any liens or loans. It did not ask where the purchase money came from, and Starr's underwriting manual did not list the source of funds as a risk factor. Starr's investigation of the two owners consisted of a Google search. Starr issued the policy effective January 26, 2017, including a "War Risk" endorsement that covered physical loss of the aircraft caused by seizure under the order of any government.

By 2018 the owners' relationship had broken down. Avenatti stopped paying the company's bills, and in August 2018 Parrish notified him that he was taking over as manager. Parrish later signed the renewal application himself. On April 10, 2019, the Treasury Department seized the jet, the same day Avenatti was indicted for wire and bank fraud. Passport made a claim for $3,990,000. Starr reserved its rights, Passport sued, and after Avenatti's conviction Starr denied the claim and purported to rescind the policy for concealment.

The jury sided with Passport: $3,990,000 on the policy, $1,048,331.51 in prejudgment interest, $1,417,068.27 in attorney fees, $125,971.01 in costs, and $15,000,000 in punitive damages. The trial court had refused to grant judgment for Starr on rescission, reasoning that an insurer that never asks about the source of funds has essentially said, in the trial court's words, "We don't care where the money came from."

Why it did not matter that the insurer never asked

The Court of Appeal held that the trial court misread the Insurance Code. In the opinion's own words, when an applicant fails to disclose a material fact, the insurer may rescind when it learns the truth, "even if the carrier never asked the applicant about that fact."

The reasoning turns on who carries the burden of speaking up. Section 332 puts an affirmative duty on the applicant. Because the duty runs that direction, the insurer generally has no duty to go looking. The court described two exceptions, drawing on Colony Ins. Co. v. Crusader Ins. Co. (2010) 188 Cal.App.4th 743: the insurer must inquire when a material fact is distinctly implied by other facts that were revealed, or when the insurer actually knows that something in the application is untrue. Neither applied. In a footnote the court observed that there were no red flags, and that it took federal and state authorities years to uncover the crimes.

That shifts the whole inquiry. As the court put it, "The question is whether its underwriting decision would have been different had Passport disclosed the true facts." What the application form asked, and how careful the underwriting was, are beside the point.

Materiality is measured by what the insurer would have done with the truth

Section 334 says materiality is determined "solely by the probable and reasonable influence of the facts upon the party to whom the communication is due." The court applied the test stated in Mitchell v. United National Ins. Co. (2005) 127 Cal.App.4th 457: "whether the information would have caused the underwriter to reject the application, charge a higher premium, or amend the policy terms, had the underwriter known the true facts."

On these facts the court treated the answer as a matter of law rather than a jury question. A policy that insures against government seizure is plainly affected by the fact that the property was bought with stolen money. The opinion says so directly: "As a matter of law, no reasonable insurer would insure property against government seizure if it knew the property was acquired with embezzled funds."

The court also repeated a rule that surprises policyholders. The insurer does not have to show that the concealed fact caused the loss. Here the connection happened to be direct, since the embezzlement is what led to the seizure, but the rule does not depend on that.

The harder holding: one owner's secret became the company's knowledge

Parrish did not conceal anything. He did not know. So how did the company "conceal" the embezzlement?

Through agency law. Civil Code section 2332 provides that "both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other." An LLC knows what its manager knows. Avenatti was the manager when the stolen funds went into the purchase and when the company obtained the policy. His knowledge was Passport's knowledge, which meant Passport, the named insured, was sitting on a material fact it never disclosed.

This is the part of the opinion that matters most to people who share ownership of a company. The sentence in the operating agreement handing one person full authority over the company's affairs is routine. Here it is the reason the company was charged with knowing what that person knew. An LLC protects its owners from the company's debts, a subject we cover in our article on piercing the corporate veil. It does not protect the company from its own manager's knowledge.

Why the rogue agent exception did not save the innocent owner

California recognizes an exception. When an agent turns against the principal, the law stops pretending the agent reported his own misconduct. The court discussed two examples. In Stueve Bros. Farms, LLC v. Berger Kahn (2013) 222 Cal.App.4th 303, as the court described it, a lawyer used an estate plan he had created to steal from his clients, and his knowledge of the theft was not imputed to the law firm he later joined. In People v. Park (1978) 87 Cal.App.3d 550, an agent who steered investors into a development while taking a finder's fee from the promoter did not pass his knowledge of the risks to those investors.

The court drew the line this way. In both of those cases the agent acted against the principal and the principal got nothing out of it. Avenatti's use of the stolen money, by contrast, helped Passport, at least at first, because it let the company complete the purchase. In the court's words, "He used embezzled funds for Passport's unknowing benefit." An agent who acts for the company while holding a personal adverse interest is still the company's agent for purposes of what the company knows.

The court also cited the Restatement Third of Agency, section 5.04, under which notice is imputed even from an adverse agent "when necessary to protect the rights of a third party who dealt with the principal in good faith." Starr was that third party. The court was candid about the result. It called Parrish a victim. It called Passport a victim. It called Starr a victim too, and between an innocent owner and an innocent insurer, the loss stayed with the side that chose the manager.

What the decision leaves open

Several limits are worth knowing before treating this case as a blank check for insurers.

• Waiver still exists. Section 336 provides that the right to information may be waived by the terms of the insurance or "by neglect to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated." The court also quoted earlier authority, Old Line Life Ins. Co. v. Superior Court (1991) 229 Cal.App.3d 1600, for the point that an insurer's right to disclosure "may be waived by its own failure to follow up obvious leads." An insurer that ignores a warning sign in the file is in a different position than Starr was.
• Section 333 was not discussed. That statute lists matters a party need not volunteer except in answer to an inquiry, including those which the other party, "in the exercise of ordinary care," ought to know. The opinion does not mention it. How it fits with this holding in a case where the concealed fact was more discoverable is a question for another day.
• The fact was extreme. Stolen purchase money under a policy that covers government seizure is about as material as a fact can be. A court may be slower to decide materiality as a matter of law when the undisclosed fact is something an underwriter might reasonably have shrugged at.
• Most of the appeal went undecided. Because rescission disposed of everything, the court did not reach Starr's other arguments, including a policy exclusion for illegal acts, Insurance Code section 533, the bad faith finding, the attorney fee award, or the punitive damages.
• The opinion is new. It was filed October 1, 2026, and could still be modified or reviewed.

What business partners should do now

Treat the application as a floor. The form tells you what the insurer thought to ask. It does not define what you must disclose. If a fact would make a reasonable underwriter hesitate, raise it with your broker before the policy is bound, and get the disclosure in writing.

Know where your partner's money comes from. An operating agreement can require each member to represent that contributed funds are lawfully obtained and unencumbered, and to indemnify the company if that turns out to be false. That will not stop a rescission, but it gives the innocent owner a direct contract claim instead of an argument.

Think twice about a sole manager with unlimited authority. The broader the manager's authority, the more of the manager's knowledge the company owns. Shared management, approval rights over major transactions, and real access to the books all reduce the chance that one person's secret becomes the company's problem. Owners who are being shut out of information have remedies, discussed in our articles on inspection rights and on what to do when a business partner locks you out.

Use a change in control as a checkpoint. Parrish took over as manager and signed a renewal without, as far as the opinion shows, any reason to suspect the purchase money. The court did not rest its decision on the renewal. Still, the moment one owner pushes another out for breach of fiduciary duty is the moment to review what the company has told its insurers and whether anything needs to be corrected.

Ask your broker about protection for innocent insureds. Some commercial policies contain provisions limiting when one insured's knowledge or conduct can be held against another. The opinion does not address whether any such term would have changed the outcome, but it is a fair question to ask before a loss rather than after.

If your insurer is threatening to rescind

Do not assume the insurer is right because it says the word concealment. Rescission requires a fact that was actually known to the insured, or to someone whose knowledge is legally the insured's, and that was material when the policy was issued. Each of those is contestable. Pin down exactly which fact the insurer relies on, who knew it and when, and what was in the insurer's own file at the time. Evidence that the insurer had the information, or had facts pointing straight at it and did not follow up, goes to waiver under section 336.

If the rescission fails, the insurer's handling of the claim is measured by the implied covenant of good faith and fair dealing, which is how the jury in this case reached a punitive damages award before the Court of Appeal took the judgment away. And if the rescission holds because of what another owner hid, the innocent owner's claim is usually against that owner.

Talk to a Los Angeles business litigation attorney

The Darvish Firm's Los Angeles business litigation attorneys represent business owners in partnership and ownership disputes, including cases where one owner's misconduct has cost the company its coverage, its assets, or both. If your company's insurer is denying or rescinding coverage, or you have learned something troubling about a business partner, call (310) 677-3512 or request a consultation.

This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Every case depends on its facts. Consult an attorney about your specific situation.