Opinion ID: 950936
Heading Depth: 2
Heading Rank: 1

Heading: Rhode Island Mutual Rescission Law

Text: Rescission is . . . [an] abrogation or undoing of [a contract] from the beginning. It seeks to create a situation the same as if no contract ever had existed. Dooley v. Stillson, 128 A. 217, 218 (R.I. 1925). In Klanian, the Rhode Island Supreme Court stated that [m]utual rescission rests upon intention; it depends both upon the acts of the parties and the intention with which those acts are done. 26 A.2d at 613. While the question of intention to rescind is ordinarily a question for the jury, . . . it may become a question for the court where the facts are admitted or clearly established. Id. Here, the facts surrounding the cashing of the premium refund check were undisputed, with the only difference among the parties being the appropriate inferences to draw from those facts. 4 Wilmington also argues, in the alternative, that any rescission was based on a mutual mistake of fact that renders the agreement voidable. This argument appears to be premised on the unsupported theory that Pruco itself was mistaken as to the alleged falsity of the statements in the rescission letter. Besides being unrelated to record evidence and making little sense, this argument would fail for the same reasons explained below as to Wilmington's assertion that Pruco deliberately made misrepresentations in the rescission letter. -12- As in Klanian, the insurance company here sent a letter to the policyholder clearly stating its intent to rescind the policy and including a check tendering the premiums paid, with interest. See id. at 609-10. As in Klanian, the recipient here cashed the check. See id. at 610. The Klanian court stated that these facts raised a reasonable inference of mutual rescission. Id. at 613. The difference between Klanian and this case is that, in the former, the policyholder was illiterate and did not understand the contents of the letter or the notation on the tendered check. Id. at 610. When he learned what the letter said, he immediately dictated a response letter to the insurer stating that he had not intended to agree to rescission and offering to return the refunded premiums. Id. Days later, his counsel sent the insurer a check in the amount of the premiums. Id. Under these circumstances, the court determined that there was a jury question as to the policyholder's intent to rescind. Id. at 613. Wilmington argues that Klanian stands for the proposition that, if a party has an unexpressed, subjective intent not to rescind, then that intent can defeat a claim of mutual rescission. This is not an accurate reading. Indeed, the Klanian court stated that, were it not for Klanian's prompt letter and attempt to return the refund, there would have been merit in the [insurer]'s contention that there was nothing to go to the jury and that [the insurer] was entitled to a direction of a verdict as a matter of -13- law. Id.; see also Reccko v. Criss Cadillac Co., 551 A.2d 20, 2122 (R.I. 1988) (finding jury issue on intent to rescind where plaintiff had sent letter to defendant stating that she was making an offer in mitigation of damages that should not be interpreted as a[] . . . rescission). The Klanian court also specifically distinguished Klanian's situation from those in other cases holding that a mutual rescission had occurred based on the tender and cashing of a refund check, on the grounds that the other cases had involved policyholders who waited a significant amount of time before cashing the check and thereafter offered no evidence to overcome the inference of an intent to rescind. See 26 A.2d at 612-13 (citing Kincaid v. N.Y. Life Ins. Co., 66 F.2d 268 (5th Cir. 1933); Warren v. N.Y. Life Ins. Co., 58 P.2d 1175 (N.M. 1936); Peterson v. N.Y. Life Ins. Co., 240 N.W. 659 (Minn. 1932)). Klanian never suggests that a party's unexpressed intentions, evidenced by nothing more than that party's bare, post hoc assertions, can overcome the inference of mutual rescission. Cf. Newport Plaza Assocs. v. Durfee Attleboro Bank (In re Newport Plaza Assocs.), 985 F.2d 640, 643-44, 646 (1st Cir. 1993) (noting that, under Rhode Island law, [c]ontracts ordinarily depend on objective indicia of consent, not on a party's subjective expectations). Here, of course, Wilmington did not take any actions either before or after it cashed Pruco's refund check to indicate -14- that it did not intend to agree to rescission.5 Wilmington does not point to any record evidence showing that it ever expressed any dissent to Coventry or to Pruco. Nor does it present any evidence to support a finding that Coventry had any intent other than to agree to rescission when it instructed Wilmington to cash the check. Cf. Dooley, 128 A. at 218 (An implied rescission is as effective as an express one.). To this day, Wilmington has never attempted to return the premiums to Pruco. These facts are undisputed, and Wilmington's bare assertions are not enough to overcome the reasonable inference that a mutual rescission took place. The out-of-state cases cited by the district court support this result, and none of them are in conflict with Rhode Island law. In fact, the case at which Wilmington aims the brunt of its attack -- Avemco Insurance Co. v. Northern Colorado Air Charter, Inc., 38 P.3d 555 (Colo. 2002) -- cites Klanian for the very proposition that in order to overcome the inference of rescission, the insured must offer evidence, beyond a subjective intent not to rescind, to rebut the acts of the insurer and the 5 That Wilmington was taking instructions from Coventry does not change the situation. It is undisputed that Wilmington had agreed to act at Coventry's direction for all matters relating to the policy for as long as the premium finance loan was outstanding. The fact that Coventry directed Wilmington to act in a manner that Wilmington now claims was against its preferences has no effect on the rescission analysis. -15- insured. Id. at 563. Wilmington's argument that the district court ignored Rhode Island law is without merit. B. Relevance of Pruco's Alleged Misrepresentations Wilmington next argues that, even if cashing the refund check raises an inference of an agreement to rescind, there were genuine issues of material fact that should have precluded the conclusion, at the summary judgment stage, that such an agreement was valid. Specifically, Wilmington argues that there were material factual disputes as to whether Pruco made misrepresentations in its rescission letter concerning what Pruco knew about Paul's medical condition and the extent to which Pruco had relied on the statements in Paul's application. Wilmington suggests that Pruco made these misrepresentations in order to fraudulently induce rescission; if so, Wilmington says, the agreement to rescind is voidable. As the district court correctly concluded, regardless of whether the statements in the letter were accurate as to Pruco's knowledge of Paul's medical condition, the undisputed facts reveal that Coventry did not rely on these statements in reaching its decision to consent to rescission. Coventry is a sophisticated entity that had the advice of in-house counsel on this matter. The decisionmaking process involved Coventry's CEO. Coventry had possession of Paul's medical records and had performed its own underwriting, so it had no need to rely on Pruco's characterization -16- of the records; indeed, Coventry's representative explicitly testified that it did not assume the truth of Pruco's statements. Coventry contacted Passananti for additional information6 and considered its options for approximately three weeks. Based on all of its information and advice, Coventry decided to instruct Wilmington to cash the check, and Wilmington was obligated to follow that direction. Under these circumstances, any dispute about the truth of Pruco's statements in the letter cannot be considered material to the outcome of this case. No reasonable jury could have concluded that Coventry relied, let alone justifiably relied, on Pruco's statements in reaching its decision to instruct Wilmington to cash the check. Nor is the issue of Pruco's reliance on the statements in Paul's application material to the outcome here. Wilmington's argument goes to Pruco's cause of action for unilateral rescission, 6 We reject the argument, advanced by both Wilmington and Jay, that Passananti was acting as an agent of Pruco (and thus, presumably, that he should be treated as part of the alleged fraud). The record is clear that Passananti had contractual relationships with both Pruco and Coventry but was an employee of neither. Further, Passananti's non-exclusive contract with Pruco only granted him the authority to solicit, procure and submit applications for Policies, along with limited related duties; he was specifically barred from, inter alia, mak[ing] representations as an agent of [Pruco] in any manner or for any purpose except as specifically authorized by the contract. Neither Wilmington nor Jay points to any record evidence showing that Passananti made any statements to Coventry at Pruco's direction or request, or that any statements Passananti made were specifically authorized by his Pruco contract. -17- which included an allegation that Pruco had relied on the truth of the statements in the application when deciding whether to issue the policy. Pruco's cause of action for mutual rescission did not contain, nor was it required to contain, such an allegation. The district court resolved the case on the mutual rescission count, as do we. Wilmington attempts to argue -- although not very clearly -- that Pruco could not have obtained a mutual rescission if it was not entitled to a unilateral rescission. But in Klanian, the Rhode Island Supreme Court noted that the question of whether a party to a contract has a valid right to rescind is relevant only in the case of a unilateral rescission claimed as of right by the rescinding party, not in a case of mutual rescission. 26 A.2d at 613. The court expressly rejected the argument that there could not have been a mutual rescission because the terms of the policy would have prevented unilateral rescission (specifically, because the contestable period had expired). See id. This reasoning alone supports the district court's decision, without needing to address the merits of Wilmington's factual allegations. Even if the facts here are disputed, they are not material. Once Coventry and Wilmington took the steps to effect a mutual rescission, Pruco's independent right to rescind ceased to be legally relevant. -18- C. Bad Faith Jay argues that there were genuine issues of material fact for trial regarding whether Pruco's offer to rescind was made in bad faith, and that if Pruco did act in bad faith, it would have been equitably barred from obtaining the remedy of rescission. He asserts that the district court erred in finding these arguments irrelevant to the rescission analysis. We agree with the district court. First, many of Jay's arguments nominally based on bad faith are functionally identical to Wilmington's arguments concerning whether Pruco had a right to unilateral rescission. Regardless of the label Jay places on these arguments, the result is the same. As we have explained, the uncontested evidence shows that Coventry did not rely on the statements in the rescission letter when it considered whether to agree to rescission. Thus, even if Jay were correct that there was a genuine factual dispute as to whether Pruco acted in bad faith by making the statements in the letter -- and we express no opinion on that point -- the dispute would not be material. The same goes for Jay's allegations that Pruco acted in bad faith by asserting that it had a right to unilateral rescission. Whether or not Pruco believed in good faith that it had such a right, the question is not material where mutual rescission occurred as a matter of law. -19- Second, Jay offers no Rhode Island law supporting his theory that an insurer acts in bad faith, and that any agreedupon mutual rescission is therefore void, if the insurer offers to rescind an insurance contract when the insurer (allegedly) could not have obtained unilateral rescission. The only authority Jay cites for this proposition is a Minnesota case, based on Minnesota precedent, which has never been cited by a Rhode Island court. See Kilty v. Mut. of Omaha Ins. Co., 178 N.W.2d 734 (Minn. 1970). And in any event, the case is distinguishable. In Kilty, the Minnesota court noted that there was no evidence of misrepresentation in connection with the insured's application, which raised a factual question as to whether the insurer had procur[ed] consent to the rescission by fraud or bad faith. Id. at 736. Here, by contrast, Paul undisputedly misrepresented his medical history in his application, and Coventry's agreement to the mutual rescission was not induced by any of the allegedly bad-faith statements in the rescission letter.7 Even if the Rhode Island courts were to require an insurer to have a good-faith basis for believing that it 7 Moreover, the insurance company in Kilty did not seek a declaration of rescission before the insured had made a claim for benefits. See 178 N.W.2d at 736. Here, Pruco began investigating the possibility of rescission not when a claim was made on the policy, but when it received information suggesting that the policy was designed to be sold on the open market. As Pruco's counsel explained at oral argument, life insurance policies are more valuable on the market when the insured has health problems, because that means the buyer will likely recoup its investment sooner. -20- could obtain a unilateral rescission in order to make an offer for mutual rescission (and we do not assume they would), no reasonable jury could have concluded in this case that Pruco lacked even an arguable basis for seeking rescission of the policy. Paul admittedly made misrepresentations about his being diagnosed with and treated for a degenerative brain disease, and the medical records that Pruco received omitted any documentation of this fact. Jay's reliance on general principles of equity is unavailing under these circumstances. The implied covenant of good faith and fair dealing and the clean hands doctrine simply are not relevant here. Where it was Paul who originally misrepresented his medical history in order to obtain a $15 million life insurance policy, Jay cannot be heard to complain that Pruco came to court with unclean hands.8 Finally, Jay argues that there is a genuine dispute of material fact concerning whether Pruco acted in bad faith because it did not attach Paul's application to the original policy, and thus would not have been entitled to rescind based on any statement in the application. There are at least three problems with this 8 Jay's argument based on Rhode Island statutory law is also misplaced. As Jay himself admits, the statute he relies on, R.I. Gen. Laws § 27-4-10, does not apply to claims for rescission made by the insurer while the insured is alive. See Prudential Ins. Co. of Am. v. Tanenbaum, 167 A. 147, 149-50 (R.I. 1933). Paul was still alive when Pruco filed the instant suit. The fact that Pruco sought rescission while Paul was alive, rather than after his death, certainly is not evidence of bad faith. -21- argument. First, Jay admitted in his answer to Pruco's second amended complaint that the application was attached to the policy.9 A party's assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the proceeding. Schott Motorcycle Supply, Inc. v. Am. Honda Motor Co., 976 F.2d 58, 61 (1st Cir. 1992) (quoting Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 528 (2d Cir. 1985)) (internal quotation marks omitted). Second, Jay states that Coventry is in possession of the original policy, so Coventry would have had an opportunity during its three-week investigation to find out whether the application was attached to the policy and to decide what, if any, weight to give that fact in reaching its decision to agree to rescission. Third, as explained above, Klanian forecloses the argument that, in order for a mutual rescission to be effective, a policy must by its terms authorize a unilateral rescission. See 26 A.2d at 613. Thus, even if the first two problems were not present, Jay's argument would be legally irrelevant.