## Facts

- Anthony Alves obtained an automobile liability policy from State Farm after a used-car dealer arranged insurance through a State Farm agent.
- The agent completed the application; Alves did not read it.
- The application stated that Alves’s driver’s license had not been suspended or revoked within the prior five years, but Alves’s license had in fact been suspended and subject to probation orders during that period.
- State Farm issued a 30-day binder and then a policy without checking Alves’s driving record, although an inexpensive DMV check would have disclosed the adverse record.
- While the policy was in force, Sandra Alves negligently struck Eva Barrera, a pedestrian, causing injury.
- Barrera obtained a tort judgment against Anthony and Sandra Alves.
- After Barrera asserted her claim, State Farm investigated, discovered the prior suspension, and attempted to rescind the policy and return premiums based on material misrepresentation.
- Barrera sued State Farm to compel payment under the policy; State Farm sought a declaration that the policy was void from inception.

## Issues

1. Whether an automobile liability insurer that fails to reasonably investigate an applicant’s insurability within a reasonable time may rescind for material misrepresentation after an accident, as against an innocent injured third party.
2. Whether public policy reflected in California’s Financial Responsibility Law bars post-loss rescission in these circumstances, notwithstanding the insured’s material misstatement.

## Decision

- The California Supreme Court reversed the judgment for State Farm.
- The court held that an automobile liability insurer must conduct a reasonable investigation of insurability within a reasonable time after issuing the policy.
- The court held that this duty runs directly to the benefit of members of the public injured by the insured.
- Because State Farm did not timely investigate and sought rescission only after the accident, it was barred from asserting rescission against Barrera.
- State Farm was required to satisfy Barrera’s judgment up to the policy limits.

## Legal Principles

- Automobile liability insurers must undertake a reasonable investigation of insurability within a reasonable time after accepting the application and issuing a policy.
- The duty to investigate is enforceable by, and intended to protect, innocent third parties injured by the insured.
- An insurer that could have discovered disqualifying facts through a reasonably timely investigation cannot avoid liability to an innocent third party through post-loss rescission based on those facts.
- In evaluating timeliness, the relevant delay includes the insurer’s failure to discover readily ascertainable insurability facts, not merely the speed of rescission after belated discovery.
- Public policy favoring compensation of accident victims places the risk of an insurer’s decision not to promptly verify insurability on the insurer rather than on injured members of the public.

## Conclusion

The court limited an auto liability insurer’s rescission rights against innocent third-party victims by requiring prompt, reasonable investigation of insurability and barring post-accident rescission when the insurer’s own delay caused the late discovery of grounds for rescission.


Barrera v. State Farm Mut. Auto. Ins. Co., 71 Cal. 2d 659 (Cal. 1969)