Opinion
March 6, 1908.
Van Schaick Brice, for the appellant.
George E. Morgan, for the respondent.
On the 19th of June, 1906, the plaintiff applied for and obtained from the defendant a policy of life insurance for $20,000, and he then paid an annual premium of $1,397.27, and by the terms of the policy agreed to pay a similar amount on the nineteenth of June in each succeeding year until he had made in all fifteen payments and at the expiration of fifteen years from the date of the contract, or sooner in the case of death, the defendant agreed to pay the plaintiff, if living, or to his executors, administrators or assigns, if dead, the sum of $20,000.
Thereafter, and on or about the 12th of June, 1907, defendant canceled said policy and gave the plaintiff notice of that fact, and that it would not be liable thereunder and would not perform the same. Thereupon he brought this action in equity to procure a judgment restoring said policy and declaring it an existing contract and liability of the defendant, and to compel it to issue a receipt showing the payment of the premium due on the 19th of June, 1907, which the plaintiff tendered to the defendant and which it refused to accept.
The defendant, as a separate answer, alleged that as a consideration of issuing the policy the plaintiff signed certain written statements which were made a part of it and which statements the plaintiff warranted were true, and among other things, he stated that he had never made an application for life insurance on which a policy was not issued or issued upon a different plan from the one applied for, whereas he had in fact previous to making such statements, frequently applied for and been refused insurance in other companies, and that "as soon as defendant was informed of this, and before the first anniversary of the policy, the defendant duly notified the plaintiff that it elected to cancel said policy of insurance and said policy was thereupon duly cancelled." The plaintiff demurred to this defense upon the ground that it is insufficient in law upon the face thereof. The demurrer was sustained and defendant appeals.
The answer was held bad upon the ground, as appears from the opinion of the learned justice at Special Term, that "there is no allegation that the defendant has returned, or offered to return, the premiums paid by the plaintiff;" in other words, that the general rule applies as to the rescission of contracts. There is no doubt about the general rule, which is that in order to rescind a contract, the one seeking to do so must place or offer to place the other party in the same position, so far as he has parted with value, in which he was prior to its execution. This rule has for its origin the equitable principle that one who seeks to free himself from a contract can do so only by returning all benefits derived therefrom. ( Cox v. Stokes, 156 N.Y. 491; Outcault v. Bonheur, 120 App. Div. 168.) Where restoration has not been made prior to the commencement of the action, then willingness and ability to restore must be alleged and such allegation complied with at the trial. ( Gould v. Cayuga County Nat. Bank, 99 N.Y. 333; Nelson v. Hatch, 56 App. Div. 149.) This rule, however, is not of universal application. ( Kley v. Healy, 127 N.Y. 555.) Where a party seeks to rescind on the ground of fraud, he has an election of remedies. He "can rescind by tendering or restoring what he has received, and then commence his action. He may keep what he has received and sue to recover damages for the fraud; or he may commence an action in equity to rescind and for equitable relief, offering in his complaint to restore, in case he is not entitled to retain, what he has received." ( Gould v. Cayuga County Nat. Bank, 86 N.Y. 75, 84.) The same rule applies where, by way of defense, a rescission is sought. ( City of Ironwood v. Wickes, 93 App. Div. 164.) If the party seeking to rescind has incurred expense or otherwise sustained damage by reason of the fraud, then equity will not compel him to pay back all he has received, but only such part as remains after deducting his loss. This is equitable to both parties. The party perpetrating the fraud ought to be compelled to pay whatever damage the other party has sustained by reason of such fraud. But if this rule be applied I do not think the answer demurred to sets forth a defense, inasmuch as facts are not stated from which it can be seen or even inferred that the defendant has incurred any expense or sustained any loss by reason of the plaintiff's alleged fraud. There is no offer to return the premium paid, or any part of it. The judgment asked is simply that the complaint be dismissed, with costs. The defendant should have indicated in its answer, by an appropriate offer to that effect, a willingness to restore, if it be determined that it is not entitled to retain, what it has received ( Delano v. Rice, 23 App. Div. 327), or else the relief demanded should provide for an award in plaintiff's favor if it be determined that the defendant is not equitably entitled to keep what the plaintiff has paid to it. ( Allerton v. Allerton, 50 N.Y. 670; Harris v. Equitable Life Assurance Society, 64 id. 196; Pritz v. Jones, 117 App. Div. 643.)
The allegation that defendant "duly cancelled" the policy does not make the answer good. This is a conclusion of law and not the statement of a fact.
The interlocutory judgment appealed from, therefore, should be affirmed, with leave to the defendant to serve an amended answer on payment of the costs in this court and in the court below.
PATTERSON, P.J., LAUGHLIN and SCOTT, JJ., concurred; HOUGHTON, J., dissented.
I do not think defendant pleads a rescission of contract.
It is a breach of warranty only that is pleaded.
Defendant sets forth that prior to the time the second premium fell due, acceptance of which would have made the policy incontestible, it learned that plaintiff, contrary to his warranty, had applied for other insurance and been rejected, whereupon it notified the plaintiff it would have no further dealings on the contract with him. There are no express allegations of fraud nor any prayer for rescission, and nothing from which these can be implied except that the warranty alleged chances to be one which was broken the moment the policy was issued. If the policy had been issued on a warranty that the insured would not travel outside the United States a plea of cancellation because the insured had gone beyond its borders would be perfectly good and there could not well be any suggestion of rescission. So, too, if the insured had died and an action had been brought by the beneficiaries under the policy, the present answer would have been perfectly good without any plea of tender back of the premium paid.
It is true the plaintiff has brought the defendant into equity, but that does not prevent defendant from pleading a breach of warranty or setting up any legal defense it may have. It can stand on its legal rights if it has any. Termination of a continuing contract for breach of warranty which makes it void, is quite different from coming into court and asking to be relieved from a contract because fraud induced its execution. The defendant does not ask to be relieved. It simply alleges it terminated the policy because of its discovery of a breach of warranty which made it void and stands on its legal right so to do, and I see no reason for saying it must plead tender of the premium which the plaintiff paid.
I think the demurrer was improperly sustained and vote to reverse the interlocutory judgment.
Judgment affirmed, with costs, with leave to defendant to amend on payment with cost.