On June 28, the U.S. Court of Appeals for the First Circuit found that a mutual rescission of a life insurance policy had occurred where a company, which had been granted the policyholder’s power of attorney, cashed a premium refund check.
Paul L’Archevesque bought a life insurance policy from Pruco Life Insurance Co. and set up two trusts: one to take out a premium finance loan and another that ultimately would take control of the life insurance policy. Jay L’Archevesque was the sole trustee of one trust. Jay and Wilmington Trust Co. were co-trustees of the other. Together, Paul and Jay gave power of attorney to Coventry, a premium financing company, for purposes of the life insurance policy.
In obtaining the policy, Paul submitted a number of medical records to Pruco that indicated he suffered from dizziness and depression. However, the records did not include a letter that contained a doctor’s diagnosis that Paul likely had mild Alzheimer’s disease and was taking medication for it. Pruco issued a $15 million policy on Paul’s life.
Subsequently, Coventry contacted Pruco to inform it that Paul intended to sell his life insurance policy. Suspicious, Pruco requested Paul’s updated medical records, which revealed information regarding Paul’s mild Alzheimer’s disease.
Upon the discovery that there had been material misrepresentations in the policy application about the insured’s health, Pruco sought rescission of the policy. It mailed to Wilmington a check for the policy premiums paid along with a letter indicating that the payment signified rescission of the policy. Wilmington sent the letter and check to Coventry, requesting further instructions. Based on the advice of its in-house counsel, Coventry instructed Wilmington to cash the check, and Wilmington did so. Coventry, Wilmington and Jay never informed Pruco that the trust did not agree to the rescission and never attempted to send the funds back to Pruco.
On cross-motions for summary judgment, the district court found that there had been a mutual rescission and granted Pruco’s claim for summary judgment.
On appeal, Wilmington argued that the district court misinterpreted Rhode Island law. The First Circuit examined Rhode Island law, focusing heavily on a Rhode Island Supreme Court case, Dooley v. Stillson, 128 A. 217 (R.I. 1925). In that case, the policyholder received a rescission letter and a check for the premiums paid. The policyholder, who was illiterate, did not understand the letter and cashed the check. Upon learning the meaning of the letter, he immediately sought to repay the funds to the insurer. Thus, there was a jury question as to the policyholder’s intent to rescind.
In Pruco Life Insurance Co. v. Wilmington Trust Co., the court found there was no evidence that there was any intent other than to agree to the rescission. Prior to litigation no one expressed any concern about Pruco’s desire to rescind the policy. Further, the check was cashed after Coventry examined the issue for a number of weeks, and no attempt was made to return the funds. Thus, there had been a mutual rescission.
Wilmington also argued there were genuine issues of material fact as to whether Pruco had made material misrepresentations in the rescission letter. The First Circuit dismissed this argument, finding that even if there had been material representations in Pruco’s rescission letter, there was no evidence that Coventry had relied on those statements in deciding to consent to rescission. Therefore, any dispute as to the veracity of Pruco’s statements was irrelevant.
Separately, Jay argued that Pruco had acted in bad faith and should be equitably barred from obtaining a rescission. As with Wilmington’s arguments about Pruco’s misrepresentations, the court determined that any alleged bad faith was not material to Coventry’s decision.
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