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A repealed policy has never existed



Liberty Mutual Personal Insurance Company (“Liberty Mutual”) seeks a summary judgment on its counterclaim for unfair enrichment and repayment of funds paid on an insurance which, after the payments were made, was declared revoked from its inception. IN Tanesha Taybron v. Liberty Mutual Personal Insurance Company, Nr. 20-10925, United States District Court, ED Michigan, Southern Division (May 19, 2022), USDC resolved a claim by the plaintiff that she does not have to repay payments that Liberty made to her before the insurance was practically terminated.

LAW AND ANALYSIS

The parties do not dispute the existence of an express agreement: the insurance issued by Liberty Mutual. When there is no dispute regarding the existence of an express agreement covering the subject matter, courts regularly reject unwarranted profit claims by law. Liberty Mutual may not be recovering from an unfair enrichment theory.

However, this does not end the investigation, as the relief that Liberty Mutual seeks – restorative – is inherent in the just remedy for rising.

“Rescision is the common, abbreviated name for a composite remedy (more complete, ‘termination and restitution’) that combines the avoidance of a transaction and the mutual restoration of performance under it.” [Restatement (Third) Of Restitution And Unjust Enrichment § 54 cmt. a (2011)].

Liberty Mutual was entitled to cancel the insurance due to Taybron’s material misstatement in her application. An insurance policy taken out through fraud can be declared invalid ab initio at the choice of the insurer. Termination terminates an agreement and restores the parties to the relative positions they would have held if the agreement had never been entered into. Termination of an agreement is not only to terminate it, but to cancel it from the outset, and the effect of the termination is not only to release the parties from further obligations towards each other with respect to the subject matter of the agreement, but to cancel contracts and restore the parties to the relative positions they would have held if no such agreement had ever been concluded.

Termination means a restoration of the status quo.

In this case, the status quo has been partially restored by Liberty Mutual returning the premium paid by Taybron for the insurance. Unlike the termination of an insurance policy, which allows the insurer to retain the part of the premiums that corresponds to the insurance period before the termination, cancellation requires full repayment of the premiums paid.

In order to restore the status quo, as if the agreement had never been made, Taybron must also repay the amounts paid to her or on her behalf under the insurance. An insurer that has the right to terminate an insurance policy due to fraud is not obliged to pay benefits under that insurance. Demanding that Liberty Mutual repay the premium without taking into account the benefits already paid will restore Taybron to its pre-contract position, but not Liberty Mutual.

An insurer that has an “alleged obligation to pay” under an insurance policy protects its own interests and does not act as a volunteer and Liberty had the alleged obligation until the court upheld its claim for revocation. Provided that Liberty Mutual knew the basis for the rise early in its investigation of the claim, it nevertheless had a strong incentive to pay Taybron’s claim immediately and settle its liability later.

Taybron received benefits as a result of an incorrect presentation in her insurance application. In this respect, she is primarily responsible for her own unjust enrichment.

The measure of unauthorized enrichment or restitution can be calculated in different ways depending on the circumstances. In this case, Taybron received a direct cash payment and Liberty Mutual paid housing costs on her behalf. Enrichment from a monetary payment is measured by the amount of the payment or the resulting increase in the defendant’s net assets, whichever is lower. Enrichment from the receipt of non-refundable benefits can be measured in various ways, including the value of the defendant, the market value or the cost of the applicant to grant the benefit.

Given the circumstances, which involve termination and return to the status quo, the cost of Liberty Mutual to award the benefits is the appropriate measure of value. Restoring the parties to the status quo, as if no agreement had been made, must involve repayment of the amount paid by Liberty Mutual under the insurance, rather than calculation of the subjective benefit experienced by Taybron. Enrichment from wrongly received benefits is not discounted to reflect any lesser value actually realized to further the defendant’s purposes.

Liberty Mutual paid $ 21,921.05 to or on behalf of Taybron under a policy that was properly repealed. Repayment of that amount to Liberty Mutual restores the parties to the status quo and avoids retaining a wrongly received benefit.

Liberty Mutual’s claim for summary judgment was partially granted.

Liberty Mutual established, after a claim had been made, that it appeared that its insured had lied in the application for insurance of material facts which justified Liberty Mutual’s termination. At the same time as Liberty Mutual received a judgment confirming revocation, Liberty Mutual protected itself by paying the claim under a reservation of rights. It rightly demanded a refund of the money paid because the policy – by law – never existed and the court agreed that it was entitled to a refund.


(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his internship to the position of 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 a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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