Typically, an insurance company that rescinds a policy must return the premium to policyholder. Indeed, a number of courts have found that insurers waived the rights to rescission when premium was not returned.
Recently, however, a federal court in Rhode Island held that no premium return was owed where the insured’s false representations caused damage to the insurer that could not be satisfied simply by rescission.
In PHL Variable Ins. Co. v. P. Bowie 2008 Irrevocable Trust, an insurance broker submitted an application from Peter Bowie to PHL for a life insurance policy on Bowie’s life. 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, and he applied for a policy with $5 million limits policy. A letter from Bowie’s lawyer accompanying the application stated the policy would be placed into a trust.
It was later revealed that Bowie was not a wealthy investor, but a retired city employee, used car dealer, and blackjack dealer. In order to pay the premium, Bowie’s broker and attorney secured a deal with a financing company in exchange for a security interest in the policy.
This plan was directly contrary to the multiple representations in the application documents that Bowie himself would pay the premiums and that there was no plan for any third party to obtain an interest in the Policy.
When PHI discovered it was the victim of this elaborate fraud, it filed a declaratory judgment action, seeking rescission. It 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, issuance, investigation of the fraud, and the like. It also stated it stood ready and willing to return the premium, which it tendered to the court. In fact, during discovery, the defendants agreed to rescind the policy, but demanded the premium be returned.
Briefly, both the lower and appellate court found that there was compelling evidence that the defendants committed fraud in applying for coverage. Recognizing that rescission is an equitable remedy, the court found that insurer could keep the premium because, for among other reasons, the defendants had unclean hands.
It will be interesting to see whether other jurisdictions also adopt the same reasoning. But it seems like in cases of clear fraud, an insurer ought to consider seeking the same relief granted here. If you would like more information, please write to Mike Bono.