Opinion ID: 2405719
Heading Depth: 1
Heading Rank: 2

Heading: Unilateral Rescission

Text: The essential point in this appeal is whether State Farm and Nationwide could unilaterally rescind their policies after a loss when no third parties were affected and when the insureds materially misrepresented the facts in their applications for insurance. The circuit court, initially, made it perfectly clear at the hearing that no third-party claims were involved in this matter: THE COURT: Number one, so that we all are playing on the same level field, we are only talking about first party claims here, we are not talking about third party claims. Everybody agrees to that? MS. DENHAM (ATTORNEY FOR DEPARTMENT): Yes, sir. The Department argues, however, that either consent of the insured or judicial action is necessary before unilateral rescission for fraud may occur. We disagree, in the absence of innocent third parties. In Ferrell v. Columbia Mutual Cas. Ins. Co., 306 Ark. 533, 816 S.W.2d 593 (1991), this court addressed whether the statute setting out the method for prospectively cancelling an automobile insurance policy had abrogated an insurance company's common law right to rescind an automobile policy ab initio. Ferrell, 306 Ark. at 534-535, 816 S.W.2d at 594. In that case, Ferrell had made numerous misrepresentations to his insurance agent when filling out the application for his family's auto insurance policy, including the failure to list his family's traffic violations and accidents. After coverage was bound, Ferrell's daughter ran a stop sign and was hit by another car. She immediately notified her insurance agent. A week later, the insurance company rejected the binder due to the driving records of the Ferrell children. On February 18, 1988, the insurance company, without knowledge of the wreck, refunded the entire premium and notified Ferrell that it was rescinding the policy ab initio. This court observed in Ferrell that all courts that have considered the question as it relates to third-party claimants have held that insurers cannot unilaterally rescind their contracts on grounds of fraud or misrepresentation. But we went on to say that because no third-party claimants were involved in the case and the case involved only the insured's property, there was no public policy reason to hold that an insurer's common law right to rescind for fraud was abrogated. During the session of the General Assembly that followed the Ferrell decision, the Ferrell reasoning was adopted in Act 457 of 1993, now codified at Ark.Code Ann. § 23-89-303(e) (Supp.1993), which relates to automobile liability coverage: (e)(1) However, an insurer shall not be able to rescind bodily injury or property damage liability coverage under an insurance policy for fraud or misrepresentation with respect to any injury to a third party when suffered as a result of the insured's negligent operation of a motor vehicle. (2) Nothing in this subsection is intended to negate an insurer's right to rescind other coverages in the insurance policy purchased by the insured. The cases cited by the Department in support of its argument that unilateral rescission may not transpire stand for the proposition that a contract may be rescinded by mutual agreement. See Standard Abstract & Title Co. v. Rector-Phillips-Morse, Inc., 282 Ark. 138, 666 S.W.2d 696 (1984); Wheatley v. Drennen, 209 Ark. 211, 189 S.W.2d 926 (1945); Duty v. Keith, 191 Ark. 575, 87 S.W.2d 15 (1935). However, none of the cases adduced stands for the proposition that mutual consent or court action is required for a rescission at law based on fraud. In the insurance treatise, Couch on Insurance, the author recognizes the right of the insurance carrier to rescind or repudiate a contract based on the insured's fraud: There tends to be some confusion in the cases because of the use of the term rescission without distinguishing between a judicially sought rescission and a unilateral rescission or repudiation. When the insurer asserts that it is not liable on the contract because it rescinds the contract because of insured's fraud, the insurer is repudiating the contract, and unless justified in so doing is guilty of breach of its contract. 17 Couch on Insurance 2d § 67:314, p. 743 (1983). 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. See Savers Federal Savings & Loan Ass'n v. First Federal Savings & Loan Ass'n, 298 Ark. 472, 768 S.W.2d 536 (1989), quoting with approval Dan B. Dobbs, Pressing Problems for the Plaintiff's Lawyer in Rescission: Election of Remedies and Restoration of Consideration, 26 Ark.L.Rev. 322 (1972). But one who desires to rescind a contract on grounds of fraud or deceit must do so as soon as that person discovers the truth. See Herrick v. Robinson, 267 Ark. 576, 595 S.W.2d 637 (1980), reh'g denied, 267 Ark. 592, 595 S.W.2d 647 (1980). We stated in Herrick that 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. Id. Hence, rescission of a contract at law occasioned by fraud may be accomplished without court action but by a prompt restoration of benefits to the contracting party and by a clear statement that rescission of the agreement is what is intended. Maumelle Co. v. Eskola, 315 Ark. 25, 865 S.W.2d 272 (1993); Herrick v. Robinson, supra . The contracting party then has the option of suing for breach of contract. The circuit court applied these general contract principles to the matter at hand, and we hold that it was correct in doing so. While we uphold the right of an insurance company to rescind coverages based on fraud by the insured without consent of the insured or a declaratory judgment, we underscore the point that this right is unavailable when third-party claims are at issue. Other jurisdictions have likewise referred to these public policy considerations. See, e.g., Klopp v. Keystone Ins. Companies, 528 Pa. 1, 595 A.2d 1 (1991) (concurring opinions); United Security Ins. Co. v. Commissioner of Insurance, 133 Mich.App. 38, 348 N.W.2d 34 (1984). In Klopp , a husband and wife, as insureds, sought to prevent an insurance carrier from unilaterally rescinding an automobile policy due to material misrepresentations in the application concerning past accidents. The trial court denied the carrier the right to rescind, but the Pennsylvania Supreme Court reversed. The Court referred to a Pennsylvania statute which limited a carrier's ability to cancel coverage 60 days after issuance of the policy but concluded that the legislature did not intend to abrogate the carrier's rescission rights within that same 60-day period. Two concurring opinions emphasized the necessity for protecting the rights of innocent third parties and noted that third-party claims were not at issue in that case. In United Security Ins. Co. v. Commissioner of Insurance, supra , the Michigan Commissioner of Insurance prevented an insurance carrier from rescinding an automobile policy based on intentional misrepresentations in the application by the insured. The trial court reversed the Commissioner's order, and the Court of Appeals affirmed, holding that common law rescission for fraud was still a right retained by insurers. The Court took pains, however, to assure that rescission was not appropriate when thirdparty claims were involved: We emphasize that the person making the claim under the insurance policy here is the insured who made the intentional material misrepresentations; this is not a case in which the claimants are innocent third parties. United, 348 N.W.2d at 36. In the case before us, the circuit court made clear by its questioning to counsel that third-party claims were not at issue. We, accordingly, read the circuit court's order of reversal as being solely limited to matters where third-party rights are not impacted. There is, next, the issue of whether unilateral rescission for fraud may occur after the 60-day period from issuance of the insurance policy set out in the cancellation statutes for automobile insurance. See Ark. Code Ann. §§ 23-89-303, 23-89-304 (Repl. 1992 & Supp.1993). The Department is correct that Ferrell v. Columbia Mut. Cas. Ins. Co., supra , concerned a rescission made within 60 days and that these statutes apply only to automobile liability insurance. Nonetheless, § 23-89-303(e)(2) does not limit the right to rescind to a particular time frame; nor does any other statute. As a result, we decline to apply the 60-day period specified in the cancellation statutes as a limitations period for rescission based on fraud without clearer direction from the General Assembly. The Department also disagrees with the circuit court's policy rationale for reversing the Commissioner's order. The language used by the court was that it was expeditious, cost-effective, and fair to permit unilateral rescission. The court's policy justifications for deciding as it did do not represent grounds for reversal. Affirmed. JESSON, C.J., not participating.