In PHL Variable Insurance Company v. The P. Bowie 2008 Irrevocable Trust (May 13, 2013), the United States Court of Appeals for the First Circuit issued an order holding that a life insurer may retain premium in a case involving a stranger originated life insurance transaction.
The case, decided under Rhode Island law, is an appeal from the District Court’s grant of summary judgment allowing PHL Variable Insurance Company (“PHL”) to rescind a life insurance policy while retaining premium as damages to cover PHL’s costs in connection with underwriting, administration and servicing a policy when there were misrepresentations in the insurance application, among other things. Specifically, the policy application indicated that the insured, Peter Bowie, was a high net worth individual, who would pay policy premiums from his own account. However, in reality, Bowie could not afford to pay premiums, and the intent was to premium finance the policy with a non-recourse loan, with the underlying policy being assigned to the lender as collateral. The opinion indicates that the financing terms were such that the loan “could not be paid back,” meaning that policy ownership would transfer to the lender. According to the opinion, the “plan to pay the premium had originated with [the insured’s] brokers…who began negotiating with [the premium finance company]…even before filling out” the application. Furthermore, 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.”
The District Court issued a memorandum and order on September 5, 2012, granting recession of the policy, and finding that the P. Bowie 2008 Irrevocable Trust (the “Trust”) in its role in the premium finance plan had engaged in fraudulent conduct, and, while PHL had not pleaded an independent fraud case, such conduct was relevant to determining the appropriate remedy which, in this case, was rescission coupled with allowing PHL to retain premiums paid to offset its expenses in connection with the policy. The Trust appealed, arguing that summary judgment was inappropriate as the existence of fraud should be determined at trial, and that rescission must be coupled with a return of premium. The First Circuit rejected these arguments, noting, with respect to the fraud, that the issue was irrelevant because the Trust agreed to the rescission, and, with respect to permitting premium retention, there was support in case law for allowing such damages in the interest of equity, particularly since the Trust had “unclean hands.”
The May 13 order is available here.