PHL Variable Ins. Co. v. P. Bowie 2008 Irrevocable Trust(1st Cir. (R.I.) May 13, 2013)
The First Circuit recently held that an insurer may retain life insurance premiums following a policy rescission to offset the loss it has suffered. The ruling is notable because courts typically require an insurer to refund an insured’s policy premium where a rescission is effected.
In PHL, an insurance broker submitted an application for life insurance for Peter Bowie. Bowie’s application represented that he was a self-employed real estate investor with a net worth of $7.5 million and an earned income of $250,000 per year. In a revised application, the broker listed a trust as the owner and sole beneficiary of the life insurance policy. The application also answered “no” to questions about whether premiums for the policy would be borrowed from any individual or entity other than the owner of the policy. In consideration of the application and a premium of $192,000, PHL issued a $5 million life insurance policy on Bowie’s life.
Two years after issuing the policy, PHL attempted to contact Bowie, the trust, and the insurance broker regarding the information in the insurance application. It received no response. In the interim, its own investigation indicated that the information had been falsified. Namely, PHL learned that Bowie was not a wealthy real estate investor, but rather a retired city employee, used car salesman, and blackjack dealer. In addition, PHL discovered that Bowie could not afford to pay the policy premium on his own. Instead, another entity, Imperial Finance, LLC, lent money to Bowie to pay for the policy premium and then took a security interest in the policy.
Given the results of its investigation, PHL filed a complaint in the U.S. District Court for Rhode Island to rescind the policy. PHL also sought to retain the premium paid by the trust as an “offset” against the damages it had suffered in connection with the policy, including the costs of “underwriting and issuance of the [p]olicy, payment of commissions and fees in connection with the issuance of the [p]olicy, administration and servicing of the [p]olicy, investigation of the misrepresentations and concealments [alleged in the complaint], and commencement of [the instant] action to enforce its rights.” After the parties filed motions for summary judgment, the district court issued a declaration rescinding the policy and held that PHL was entitled to retain the insurance premium, which amounted to $192,000.
On appeal, the First Circuit affirmed the district court’s ruling and found that a “court sitting in equity under Rhode Island law has the power to make whole a party who seeks rescission of a contract procured by fraud.” The First Circuit further noted that basic principles of equity provide that contract rescission “seeks to create a situation the same as if no contract ever existed … an endeavor that may include allowing a party to recover costs it would not have incurred but for the formation of the contract.” Because PHL paid a hefty commission to the insurance broker that it would not have paid but for the misrepresentations that led it to issue the policy, it was reasonable for the district court to conclude that the costs alleged in PHL’s complaint justified awarding it the entire premium, particularly in light of the trust’s fraud.