Case Title: Douglass v. Nationwide Mut. Ins. Co.

Citation: 

Docket Number: 

State: arkansas

Court: Arkansas Supreme Court

Date: 1996-01-16T00:00:00Z

Document:
Lee DOUGLASS, In His Capacity as Commissioner
of the Arkansas Insurance Department, and
Arkansas Insurance Department v. NATIONWIDE
MUTUAL INSURANCE COMPANY and State Farm
General Insurance Company

95-233                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
               Opinion delivered January 16, 1996


1.   Administrative law & procedure -- declaratory orders under
     Administrative Procedure Act have same status in adjudication
     as agency orders. -- Declaratory orders are contemplated under
     the Administrative Procedure Act and have the same status as
     agency orders in cases of adjudication.

2.   Administrative law & procedure -- no distinction seen between
     judicial review of agency rule and judicial review of
     declaratory order. -- The Administrative Procedure Act
     provides for petitions for declaratory judgment in circuit
     court concerning the validity of agency rules that threaten to
     injure the petitioner; where the instant case concerned review
     of a declaratory order by the agency rather than a rule, the
     supreme court saw, with respect to the issue of ripeness and
     the threat of injury, no legitimate distinction between
     judicial review of an agency rule and judicial review of a
     declaratory order by the agency.

3.   Administrative law & procedure -- issue fit subject for review
     and petition for declaratory relief where rule or declaratory
     order has direct effect on business operations of insurance
     company -- Commissioner's order ripe for determination and
     subject to review. -- Where a rule or declaratory order has a
     direct effect on the day-to-day business operations of an
     insurance company and places that company in a dilemma
     regarding the full range of its property and casualty
     insurance, the issue is a fit subject for judicial review and
     a petition for declaratory relief.

4.   Contracts -- rescission at law. -- In Arkansas, rescission of
     a contract at law is accomplished by the rescinding party's
     tendering the benefits received to the contracting party, and
     the courts have nothing to do with the repudiated transaction.

5.   Contracts -- rescission on grounds of fraud or deceit -- must
     be done as soon as rescinding party discovers truth. -- One
     who desires to rescind a contract on grounds of fraud or
     deceit must do so as soon as that person discovers the truth;
     the rescinding party must announce his purpose at once and act
     with reasonable diligence so that the parties may be restored
     to their original position as nearly as possible.

6.   Contracts -- rescission on grounds of fraud or deceit -- may
     be accomplished by prompt restoration of benefits to
     contracting party and by clear statement that rescission is
     intended. -- Rescission of a contract at law occasioned by
     fraud may be accomplished without court action but instead by
     a prompt restoration of benefits to the contracting party and
     by a clear statement that rescission of the agreement is what
     is intended; the contracting party then has the option of
     suing for breach of contract; the supreme court held that the
     circuit court was correct in applying these general contract
     principles to the matter at hand.

7.   Insurance -- rescission on grounds of fraud or deceit -- right
     of insurer to rescind coverages is unavailable where third-
     party claims are at issue. -- The right of an insurance
     company to rescind coverages based on fraud by the insured
     without consent of the insured or a declaratory judgment is
     unavailable when third-party claims are at issue.

8.   Insurance -- cancellation statutes -- sixty-day period for
     cancellation not applied under circumstances. -- Where neither
     Ark. Code Ann.  23-89-303(e)(2) (Supp. 1993) nor any other
     statute limited the right of an insurer to rescind to a
     particular time frame, the supreme court declined to apply the
     sixty-day period specified in the cancellation statutes as a
     limitations period for rescission based on fraud without
     clearer direction from the General Assembly.

9.   Appeal & error -- circuit court's policy justifications did
     not present grounds for reversal. -- Where the circuit court
     declared that it was "expeditious, cost-effective, and fair"
     to permit unilateral rescission, the supreme court held that
     the lower court's policy justifications for its decision did
     not present grounds for reversal.


     Appeal from Pulaski Circuit Court; John Plegge, Judge;
affirmed.
     Jeanette Denham, for appellants.
     Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., by: 
Robert M. Eubanks III, Stuart P. Miller, and J. Lee Covington II,
for appellees.

     Robert L. Brown, Justice.Associate Justice Robert L. Brown
January 16, 1996






LEE DOUGLASS, IN HIS CAPACITY
AS COMMISSIONER OF THE ARKANSAS
INSURANCE DEPARTMENT, AND
ARKANSAS INSURANCE DEPARTMENT,
                   APPELLANTS,

V.

NATIONWIDE MUTUAL INSURANCE
COMPANY AND STATE FARM GENERAL
INSURANCE COMPANY,
                    APPELLEES,

95-233




APPEAL FROM THE PULASKI COUNTY
CIRCUIT COURT,
NO. 94-2593,
HON. JOHN PLEGGE, JUDGE,




AFFIRMED.






     This appeal by Lee Douglass, Commissioner of the Arkansas
Insurance Department, and the Arkansas Insurance Department itself
(collectively referred to as Department), focuses on whether an
insurance company may unilaterally rescind coverage based on fraud
or material misrepresentations by the insured after a loss has
occurred, when no third-party claims are involved.  According to a
Memorandum of Decision and Declaratory Order by the Department,
rescission by an insurance company may only transpire when the
company (1) seeks declaratory relief from a court of competent
jurisdiction, or (2) obtains consent from the insured and any
affected third parties.  The circuit court reversed the order of
the Department.  On appeal, we affirm the circuit court's order.
     The relevant facts are found in a complaint filed jointly by
appellees Nationwide Mutual Insurance Company and State Farm
General Insurance Company against appellant Department.  On April
26, 1993, State Farm issued a binder of coverage for renter's
insurance to Donna J. Carter and Michael Beirne based on
representations submitted in their application for insurance.  On
May 12, 1993, a claim for theft loss was presented for payment
under the policy.  During State Farm's investigation into the
claim, it discovered that Carter and Beirne had experienced a theft
loss three days prior to submitting their application for
insurance.  In the application, they had reported that no losses
had been experienced in the past three years.  State Farm alleged
that it would not have issued the policy, if the truth had been
known.  Apparently, State Farm rescinded the policy and returned
paid premiums to the insureds on or about July 20, 1993, but it is
not altogether clear precisely when this occurred.  Also on July
20, 1993, Donna Carter filed her complaint with the Arkansas
Insurance Department.
     On the same day that Carter filed her complaint, the Insurance
Commissioner issued the following Memorandum of Decision and
Declaratory Order:
     The Arkansas Insurance Department ("Department") has in
     the past several months received numerous consumer
     complaints regarding property and casualty insurance
     carriers unilaterally voiding insurance contracts ab
     initio for alleged material misrepresentation.  The
     Department has received a request for declaratory order
     to articulate its position on this matter.  As this
     raises an issue of great public importance, this order is
     being issued.
          In Ferrell v. Columbia Mutual Insurance Casualty
     Company, 306 Ark. 533,