John Hancock Prop. & Cas. Ins. Co. v. Universale Reins. Co.
Issue Discussed: Rescission and Reformation
Submitted by Michele Jacobson, Michael Fernandez
Date Promulgated: March 4, 1993
John Hancock Prop. & Cas. Ins. Co. v. Universale Reins. Co., 147 F.R.D. 40 (S.D.N.Y. 1993)
Court: United States District Court for the Southern District of New York
Issue Decided: Whether a retrocessionaire’s failure to comply with significant obligations under its reinsurance agreement supported rescission?
From 1982-1987, the retrocedent purchased retrocession coverage from the retrocessionaire through several Proportional Casualty Retrocession Agreements. When a dispute arose between the retrocedent and the retrocessionaire concerning two contracts which required the retrocessionaire, inter alia, to provide a letter of credit sufficient to secure losses and IBNR, as well as to pay for covered losses, the retrocedent commenced the instant action seeking, inter alia, rescission and restitution of premiums paid in connection with those agreements. The retrocedent subsequently moved for summary judgment on its claims. In opposition, the retrocessionaire maintained that it did not intend to enter into either agreement and that any communications respecting those agreements were merely evidence of negotiations. The retrocessionaire also interposed several additional affirmative defenses, including estoppel, statute of limitations/laches and its own claim for rescission based upon the alleged falsity of the premium projections. The District Court largely rejected the retrocessionaire’s arguments and defenses, but permitted the retrocessionaire to take additional discovery with respect to whether the premium projections were known to be incorrect, holding that while statements concerning projections are generally not actionable, they may be actionable where they were known to be false when made. The District Court held that, indeed, the parties had entered into valid reinsurance contracts by pointing to communications between the parties and their intermediaries, a telex by the retrocessionaire to the intermediary confirming its share percentage for both treaty years and the retrocessionaire’s acceptance of nearly three million dollars in premiums over a two year period. Holding that rescission is available where a breach of contract is so “material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties making the contract,” the District Court next found that the retrocessionaire’s failure to provide a letter of credit in an amount to secure losses and IBNR and to pay losses under the treaties struck at the root of the treaties such that rescission and restitution would be justified. Thus, the retrocedent was entitled to a return of its premiums less losses already paid under the treaties. The District Court further rejected the retrocessionaire’s affirmative defense of estoppel on the ground that it was a well-known industry practice that not all retrocessionaires were required to post letters of credit (the other reinsurers were Lloyd’s syndicates) as well as the retrocessionaire’s statute of limitations/laches defense on the grounds that there were no facts alleged in support of that defense.
Statements concerning future projections typically do not support a claim for misrepresentation/rescission unless the statements were made with the knowledge that they were incorrect. Rescission may be appropriate where a party’s breach of contract is so material that it strikes at the root of the contract.