A Policy Rescinded Never Existed

Liberty Mutual Personal Insurance Company (“Liberty Mutual”) moves for summary judgment on its counterclaim for unjust enrichment and return of funds paid on a policy that was, after the payments were made, declared rescinded from its inception. In Tanesha Taybron v. Liberty Mutual Personal Insurance Company, No. 20-10925, United States District Court, E.D. Michigan, Southern Division (May 19, 2022) the USDC resolved claims by the Plaintiff that she need not return payments made by Liberty to her before the policy was effectively rescinded.

LAW AND ANALYSIS

The parties do not dispute the existence of an express contract: the insurance policy issued by Liberty Mutual. When there is no dispute regarding the existence of an express contract covering the subject matter at issue, courts regularly dismiss unjust enrichment claims as a matter of law. Liberty Mutual may not recover on an unjust enrichment theory.

This does not end the inquiry, however, as the relief Liberty Mutual seeks – restitution – is inherent in the equitable remedy of rescission.

“Rescission is the common, shorthand name for a composite remedy (more fully, ‘rescission and restitution’) that combines the avoidance of a transaction and the mutual restoration of performance thereunder.” [Restatement (Third) Of Restitution And Unjust Enrichment § 54 cmt. a (2011)].

Liberty Mutual was entitled to rescind the insurance policy based upon Taybron’s material misrepresentation in her application. An insurance policy procured by fraud may be declared void ab initio at the option of the insurer. Rescission abrogates a contract and restores the parties to the relative positions that they would have occupied if the contract had never been made. To rescind a contract is not merely to terminate it, but to undo it from the beginning, and the effect of rescission is not merely to release the parties from further obligation to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made.

Rescission Involves a Restoration of the Status Quo.

In this case, the status quo has been partially restored, in that Liberty Mutual returned the premium paid by Taybron for the policy. Unlike cancellation of a policy, which permits the insurer to keep that portion of the premiums corresponding to the period of coverage preceding cancellation, rescission requires a full refund of the premiums paid.

In order to restore the status quo, as if the contract had never been made, so too must Taybron return the amounts paid to her or on her behalf under the policy. An insurer entitled to rescind an insurance policy because of fraud is not obligated to pay benefits under that policy. Requiring Liberty Mutual to return the premium without considering the benefits already paid restores Taybron to her precontract position, but not Liberty Mutual.

An insurer who has an “arguable duty to pay” under a policy is protecting its own interests and not acting as a volunteer and Liberty had the arguable duty until the court affirmed its claim for rescission. Assuming that Liberty Mutual knew the basis for rescission early in its investigation of the claim, it nonetheless had a strong incentive for paying Taybron’s claim promptly and sorting out its liability later.

Taybron obtained benefits as a result of a misrepresentation in her insurance application. In this regard, she is primarily responsible for her own unjust enrichment.

The measure of unjust enrichment or restitution may be calculated in different ways, depending on the circumstances. In this case, Taybron received a direct money payment and Liberty Mutual paid housing costs on her behalf. Enrichment from a money payment is measured by the amount of the payment or the resulting increase in the defendant’s net assets, whichever is less. Enrichment from the receipt of nonreturnable benefits may be measured in various ways, including the value to the defendant, the market value, or the cost to the claimant of conferring the benefit.

In light of the circumstances, which involve rescission and a return to the status quo, the cost to Liberty Mutual of conferring the benefits is the appropriate measure of value. Restoring the parties to the status quo, as if no contract had been made, must involve restitution of the amount Liberty Mutual paid under the policy, rather than calculation of the subjective benefit experienced by Taybron. Enrichment from benefits wrongfully obtained is not discounted to reflect some lesser value actually realized in advancing the purposes of the defendant.

Liberty Mutual paid $21,921.05 to or on behalf Taybron under a policy that was properly rescinded. Restitution in that amount to Liberty Mutual returns the parties to the status quo and avoids the retention of a benefit that was wrongfully obtained.

Liberty Mutual’s motion for summary judgment was granted in part.

Liberty Mutual determined, after a claim was presented, that it appeared its insured had lied on the application for insurance about material facts that entitled Liberty Mutual to rescind. While obtaining a judgment confirming rescission Liberty Mutual protected itself by paying the claim under a reservation of rights. It rightfully required return of the money paid since the policy – by law – never existed and the court agreed it was entitled to restitution.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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