AVEMCO INS. v. NORTHERN COLO. AIR CHARTER

• Decision Date: 14 January 2002
• Docket Number: No. 00SC985.,00SC985.
• Citation: 38 P.3d 555
• Parties: AVEMCO INSURANCE COMPANY, Petitioner, v. NORTHERN COLORADO AIR CHARTER, INC., Respondent.
• Court: Colorado Supreme Court

38 P.3d 555

AVEMCO INSURANCE COMPANY, Petitioner, v. NORTHERN COLORADO AIR CHARTER, INC., Respondent.

No. 00SC985.

Supreme Court of Colorado, En Banc.

January 14, 2002.

Tienken & Hill, L.L.P., James C. Tienken, Alan G. Hill, Louisville, CO, Attorneys for Petitioner.

Fonfara Law Offices, Joseph P. Fonfara, Fort Collins, CO, Attorneys for Respondent.

Justice MARTINEZ delivered the opinion of the Court.

In May 1998, petitioner Avemco Insurance Company ("Avemco") filed this action against respondent Northern Colorado Air Charter, Inc. ("NCAC") seeking a declaratory judgment that Avemco was not required to provide benefits under an aircraft insurance policy issued by Avemco to NCAC in late 1997. Avemco subsequently amended its complaint to assert that a mutual rescission had occurred. Avemco then moved for summary judgment on all claims, including the claim of mutual rescission. The trial court granted summary judgment in Avemco's favor on the issue of mutual rescission. The trial court held that, under Equitable Life Insurance Co. of Iowa v. Verploeg, 123 Colo. 246, 227 P.2d 333 (1951), Avemco's actions of mailing NCAC a letter expressly rescinding the insurance contract, then subsequently mailing NCAC a check refunding the premiums, coupled with NCAC's endorsement and negotiation of that check, accomplished a mutual rescission of the insurance contract. The court of appeals reversed, holding that Verploeg was not dispositive on the question of mutual rescission. Avemco Ins. Co. v. N. Colo. Air Charter, 25 P.3d 1238 (Colo.App. 2000).

We granted certiorari to determine (1) whether the court of appeals erred in reversing the trial court's entry of summary judgment for Avemco on the issue of mutual rescission when it found that NCAC's acceptance, endorsement, negotiation, and retention of the premium refund check and proceeds transmitted by Avemco for the stated purpose of rescinding the insurance policy between the parties did not give rise, as a matter of law, to a mutual rescission of the policy; and (2) whether NCAC is entitled to assert facts on remand before the trial court demonstrating that coverage exists under the insurance policy between the parties. We conclude that NCAC voluntarily negotiated the premium refund check knowing that the purpose of the check was to accomplish a mutual rescission of the insurance policy. Based on such voluntary and informed action, which amounted to an objective manifestation of assent to rescission, the rescission intended by Avemco was realized because there was a meeting of the minds. We further find that NCAC failed to offer any competent evidence to rebut the strong presumption that its cashing of the premium refund check accomplished mutual rescission. Accordingly, we conclude that the trial court properly granted summary judgment in Avemco's favor on the issue of mutual rescission and thus reverse the judgment of the court of appeals.

I.

In late October 1997, Avemco issued a commercial airline insurance policy to NCAC. In early 1998, after an NCAC aircraft was struck by lightning, sustaining extensive damage, NCAC filed a claim with Avemco. While investigating the claim, Avemco discovered what it believed was a material misrepresentation in NCAC's original application for insurance.¹ On April 13, 1998, Avemco sent a letter to NCAC that stated, in pertinent part, "[o]ur investigation into this matter has been completed and coverage is being denied due to a material misrepresentation in your signed application for insurance. . . . As a result of this misrepresentation, Avemco Insurance Company is rescinding your current 1997/1998 policy from inception and will be refunding premium paid in the amount of $10,381.81 under separate cover." On May 12, 1998, Avemco tendered the premium refund check to NCAC. On May 14, 1998, Avemco initiated this declaratory judgment action, seeking a declaration that it was not required to provide benefits to NCAC under the insurance contract based on the alleged material misrepresentation.² On June 14, 1998, NCAC filed its answer and counterclaims, which included a claim of breach of the insurance contract. On July 13, 1998, NCAC endorsed and negotiated the premium refund check.

The parties filed cross-motions for summary judgment. As relevant here, Avemco contended that it was entitled to summary judgment on the issue of rescission, arguing that there was no issue of material fact that precluded the trial court from finding as a matter of law that a mutual rescission had been accomplished. Specifically, Avemco argued that its letter expressly rescinding the insurance contract, coupled with the tender of the premium refund check, amounted to an offer to rescind that was accepted by NCAC when NCAC endorsed and negotiated the check.

The trial court agreed with Avemco and granted summary judgment in its favor, ruling that the insurance contract was rescinded and void from its inception. The trial court found that our decision in Equitable Life Insurance Co. of Iowa v. Verploeg, 123 Colo. 246, 227 P.2d 333 (1951), was controlling. Accordingly, the trial court held that, although NCAC maintained that Avemco's assertion of misrepresentation was erroneous and Avemco thus had no right to rescind, such protestations, even in the form of NCAC's counterclaims, did not diminish the effect of NCAC's knowing and voluntary action of negotiating the premium refund check, which resulted in a mutual rescission.

The court of appeals reversed. It concluded that Verploeg does not stand for the proposition that the mere cashing of a premium refund check always effects a mutual rescission as a matter of law. The court of appeals reasoned that because NCAC asserted counterclaims, including a claim for breach of contract, and because NCAC continued to deny that Avemco had a right to rescind, there was evidence that there was no meeting of the minds regarding mutual rescission. The court of appeals stated: "Under the circumstances here, we conclude that there remain genuine issues of material fact as to whether the parties intended a mutual rescission and also whether NCAC made material misrepresentations in its policy application. Thus, summary judgment should not have been entered." Avemco Ins. Co., 25 P.3d at 1241. In a dissenting opinion, Judge Jones stated that, based on his view, Verploeg was dispositive, compelling the trial court's conclusion that mutual rescission had occurred as a matter of law.

II.

This case requires us to revisit our decision in Verploeg, as well as to consider the principles of mutual rescission articulated by other courts, in order to articulate a more definite rule regarding the effect of an insured knowingly and voluntarily cashing a premium refund check when an insurer tenders that check with the express intent of rescinding the policy.

A.

Mutual rescission of an insurance contract is predicated on mutual consent and is therefore accomplished when there is a meeting of the minds between the insurer and the insured. Verploeg, 123 Colo. at 252, 227 P.2d at 336; 2 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 31:59 (1995). Mutual rescission renders the insurance contract void ab initio. Peterson v. N.Y. Life Ins. Co., 185 Minn. 208, 240 N.W. 659, 659-60 (1932). Mutual rescission may be manifested by conduct; no written agreement is necessary. 2 Couch, supra, § 31:55. When an insurer mails a letter to an insured stating its intent to rescind and tenders a check to the insured representing a refund of the premiums, and the insured understands the intent to rescind when cashing the check, a meeting of the minds is deemed to have occurred. Peterson, 240 N.W. at 660; 2 Couch, supra, § 31:55.

An insured's professed lack of intent to forgo his or her claim after having cashed the check is immaterial to the issue of rescission; it is the knowing, voluntary, and informed action of cashing the check that effects a meeting of the minds and the resulting mutual rescission. Peterson, 240 N.W. at 660. In other words, the relevant inquiry regarding whether rescission has occurred is whether there has been a meeting of the minds. Lundy v. Lititz Mut. Ins. Co., 232 S.C. 1, 100 S.E.2d 544, 547 (1957); Henry Campbell Black, Black on Rescission § 525 (1929). Such meeting of the minds is evidenced by "acts, conduct and words, taken in connection with the attendant circumstances," and is not evidenced by any subjective, unexpressed intent by either party. Lundy, 100 S.E.2d at 547; Black, supra, § 528 (stating that rescission may result when parties act in a way that "clearly indicates their mutual understanding that the contract is abrogated or terminated, or from the acquiescence of one party in its explicit repudiation by the other").

Because such meeting of the minds is evidenced through words or conduct, the subjective intent of either party is not dispositive of the issue of meeting of the minds. In fact, "[a]s in any contract, the subjective intent of the parties to a contract of rescission is immaterial. A mutual rescission is effected, if at all, on the basis of the parties' objective manifestations of assent." Wippman v. Rowe, 24 Ariz.App. 522, 540 P.2d 141, 144 (1975) (citing In re Estate of Lyman, 7 Wash.App. 945, 503 P.2d 1127 (1972), adopted, 82 Wash.2d 693, 512 P.2d 1093 (1973)); see also Peterson, 240 N.W. at 660 (holding that "when [the insured] cashed the [premium refund] check transmitted for that purpose [of rescission] stated in the letter, the minds of the parties met and the rescission became complete," notwithstanding the insured's statement that he did not intend such rescission); Hayford v. Century Ins. Co., 106 N.H. 242, 209 A.2d 716 (1965) ("The intent of the parties is to be judged by objective or external standards, rather than by their unmanifested state of mind."); Modern Builders, Inc. v. Manke, 27 Wash.App. 86, 615 P.2d 1332, 1337 (1980) ("uncommunicated, subjective intent by one party" is...