Opinion ID: 1844233
Heading Depth: 1
Heading Rank: 1

Heading: The Fraud in the Factum Claim Against Merit Life

Text: Mrs. Ashby has a fourth-grade education and can read only simple words. Mr. Ashby, who is now deceased, was illiterate. Mrs. Ashby stated that she and Mr. Ashby asked Michael Anderson, the agent for American General Finance and Merit Life, to explain to them the various documents associated with the loan before they agreed to the transaction. The trial court found that Mrs. Ashby had established a fraud in the factum defense because Anderson had described the freestanding arbitration agreement that he presented to Mr. Ashby as a contract of insurance and not as an arbitration agreement. The issue presented is whether, as a matter of law, an illiterate person who signs an agreement to purchase credit-life insurance in which an arbitration clause is a material term can maintain an action against the insurance company for fraud in the factum (and avoid performance under the arbitration clause) when the agent who explained the material terms of the insurance agreement to the illiterate person described the portion of the insurance agreement containing an arbitration clause simply as insurance papers and not as a binding arbitration agreement. Fraud in the factum occurs when `a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has a reasonable opportunity to know of the character or essential terms of the proposed contract....' Harold Allen's Mobile Home Factory Outlet, Inc. v. Early, 776 So.2d 777, 783 n. 6 (Ala.2000)(quoting Restatement (Second) of Contracts § 163 & cmt. a (1981)). [13] A determination of whether a term is [an] essential [term] must be done with respect to the contract and the particular circumstances in each case. Conner v. Lavaca Hospital Dist., 267 F.3d 426, 434 (5th Cir. 2001). Generally, [t]he essential terms of an insurance contract are the rate of premium, the duration of the policy, the nature of the risk, a description of the property or person or interest to be insured and its location, and the amount of the insurance. Gulf Gate Mgmt. Corp. v. St. Paul Surplus Lines Ins. Co., 646 So.2d 654, 658 (Ala.1994). An insurance agent ordinarily would not commit fraud in the factum if the agent explained or read an insurance contract to an illiterate person and omitted a discussion of an arbitration agreement, because such an agreement is not an essential element in an insurance contract. [14] However, Mrs. Ashby alleges that in this case Anderson characterized the arbitration agreement as insurance papers. If Anderson engaged in such an active mischaracterization of the arbitration agreement, that conduct is compelling evidence that Merit Life considered the arbitration agreement an essential element in the insurance contract; therefore, Merit Life may be estopped to deny that the arbitration agreement is an essential element and would have been required to disclose the agreement to the Ashbys. There is other evidence indicating that Merit Life considered the arbitration agreement an essential element. In determining whether a term is an essential element of a contract, we look at whether a party's rejection of the term[ ] could have affected the negotiation of other terms ... `[A]n essential promise denotes one that the parties reasonably regarded, at the time of contract, as a vitally important part of the bargain....' Conner, 267 F.3d at 433 (citations omitted). Merit Life stated in its brief to this Court that Anderson, its agent, presented to Mr. Ashby, along with the insurance application, a separate agreement containing the bold and capitalized words `arbitration of claims and waiver of jury trial.'  Merit Life required Mr. Ashby not only to sign the insurance application but also to sign the arbitration agreement. By these actionsidentifying the arbitration agreement with bold capitalized letters, presenting the arbitration agreement as a separate document, requiring that Mr. Ashby sign the arbitration agreement as well as the insurance applicationMerit Life indicated that the arbitration clause was an essential element in its insurance contract with the Ashbys. Thus, Merit Life considered the agreement to arbitrate disputes an essential element in the credit-life insurance agreement and created for itself a duty to disclose and to explain the arbitration clause when Mr. Ashby asked Anderson to read and explain the loan and insurance documents. I concur with the holding of the per curiam opinion that Mrs. Ashby may maintain, as a matter of law, a fraud in the factum claim against Merit Life.