Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Julie Goldman

Date Promulgated: October 9, 1980

Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F.Supp. 623 (D. Neb. 1980)

Court:  United States District Court for the District of Nebraska

Issue Decided:  Under Nebraska law, must the plaintiff prove scienter or an “intent to deceive” when seeking rescission based on misrepresentation?

Can the reinsured be held responsible for misrepresentations made by its
reinsurance intermediary?

Did the reinsurers prove their claim for rescission based on misrepresentation, i.e. were the reinsured’s representations false, were they made with knowledge of their falsity, did the reinsurers rely on them and were the reinsurers injured as a result of their reliance on these false representations?

Did the reinsurers prove their claim for rescission based on the
reinsured’s failure to perform under the reinsurance agreement?

Did the reinsurers ratify or waive their rights to challenge the reinsured’s
misrepresentations by filing their claim for rescission almost three years
after sending notices of termination?

How is the remedy of rescission employed?

Key Holdings
Under Nebraska law, in order to maintain an action for rescission, a plaintiff must show proof of scienter, but it need not be shown in terms of an “intent to deceive.” Instead, the element of scienter is satisfied “by proving that the person who made the representation knew it was false or made it as a positive statement without knowledge as to its truth or falsity.” To prove a claim for rescission based on false misrepresentations, a plaintiff “‘must allege and prove what representations were made; that they were false and so known to be by the party charged with making them or else were made without knowledge as a positive statement of known fact; that the party seeking relief believed the representations to be true; and that he relied and acted upon them and was injured thereby’” (internal citations omitted).

The court found that the reinsurance intermediary acted as an agent for the reinsured, and that the reinsured could thus be held responsible for representations made by Guy Carpenter.

The court found that the reinsurers were entitled to rescission based on false representations made by the reinsured. The reinsured knew that these representations were false when they were made. The reinsurers believed that these representations were true and they were material to the decision to participate in the reinsurance agreements, and were relied upon. As a result of the reinsurers’ reliance on these false representations, they were “exposed to a much greater volume of loss than they anticipated.” The reinsured also submitted false premium figures to the reinsurers with the knowledge that they were false. The court also found that the reinsured had failed to perform under the contracts, thus also entitling the reinsurers to rescission.

The court rejected the reinsured’s argument that the reinsurers had waived any claim for rescission. The court held that a claim for rescission based on fraud must be made promptly “upon discovery of the facts,” but “the case law also makes clear that the ‘knowledge’ necessary to give rise to the right must be full knowledge” (internal citations omitted). The court found that the reinsurers were “doing all they could to ascertain facts in order to make an intelligent decision” and the reinsured’s failure to maintain accurate records was one of the reasons that this process took so long. The reinsured did not show that it suffered damages as a result of the delay. Accordingly, the court held that the reinsurers had not waived their claim for rescission, nor ratified the contract.

Finding that attempting to determine the “dollar amount of damage done to the plaintiffs as a result of [the reinsured’s] actions would be next to impossible,” the court ordered that the contracts be rescinded from inception. Since the objective of rescission is to “place the parties as nearly as possible in the position they were in prior to the execution of the contract,” the court ordered that the reinsurers return to the reinsured all premiums which they received in excess of losses which they had previously paid. The court further released the reinsurers from any further liability under the contracts.

Key Takeaways
Under Nebraska law, proof of scienter requires proof of knowledge, not an intent to deceive. A reinsurer may be held liable for representations made by its reinsurance intermediary. Under Nebraska law, a claim for rescission is not barred by ratification or waiver if the party seeking rescission did not have full knowledge when it allegedly ratified the contract at issue. The objective of rescission is to place the parties in the position that they occupied prior to the inception of the contract; from a reinsurance perspective, where a reinsurer obtains rescission, that would involve netting premiums against losses.