Wednesday, July 30, 2008
Jean M. Simes (Simes) died of cancer less than four months after purchasing an annuity that provided for monthly benefit payments as long as she lived. The administrators of her estate (the Estate), sought to rescind the annuity based on a mistake of fact, namely, that Simes was unaware at the time of the contract that she was terminally ill. The trial court granted summary judgment in favor of the issuing company, defendant United of Omaha Life Insurance Company (United). A California appellate court affirm because the Estate failed to establish an essential element for rescission based on mistake of fact -- that is, the Estate failed to establish that Simes did not bear the risk of the mistake.
This strikes me as a great teaching case for mistake of fact, especially because it extensively cites Donovan v. RRL Corp., 26 Cal.4th 261, 278 (2001), which I use to discuss unilateral mistake of fact.
It was undisputed that Simes submitted a signed annuity application to United’s agent on October 2, 2001, and paid a single premium of $321,131. United then issued a policy for a single premium immediate annuity, effective the date of Simes’s application. On January 25, 2002, after receiving three benefit payments, Simes was diagnosed with ovarian cancer. She died less than a week later on January 30, 2002.
The Estate filed suit against United to, among other things, rescind the annuity based on mistake of fact. The trial court granted summary judgment in favor of United, concluding that Simes’s undetected cancer did not constitute a mistake of fact rendering enforcement unconscionable. The trial court noted that purchasers of annuities assume the risk of dying before recouping their investments and concluded it was reasonably foreseeable that Simes would die before the benefit payments matched her premium. Under these circumstances, the trial court held that it was reasonable to allocate to Simes the risk of a mistake regarding her health and life expectancy.
The Estate appealed. The appellate court reviewed the grant of summary judgment de novo, and affirmed the trial court. The appellate court reasoned:
While there was no California case squarely on point, the court noted that the decision was consistent with the bulk of persuasive authority from other jurisdictions.
The facts on which the Estate relied below purport to show the following: (1) Simes did not know at the time of her application and during the statutory rescission period that she had terminal ovarian cancer that would result in her death four months later; (2) Simes’s illness affected her ability to make decisions; and (3) Simes did not receive a copy of the annuity policy until mid-November 2001. The sole issue argued by the Estate on appeal is whether these facts provide a legal basis for rescission of the life annuity contract based on a mistake of fact. We hold, as a matter of law, that they do not, for the following reasons.
California law permits rescission of a contract when a party’s consent is given by mistake. (Civ. Code, § 1689, subd. (b)(1); Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 278 (Donovan).) On this basis, the Estate asserts a right to rescind the annuity policy, alleging that Simes would not have entered the contract but for a mistake of fact, specifically, the terminal illness she did not know she had. A mistake of fact may consist of a “[b]elief in the present existence of a thing material to the contract, which does not exist.” (Civ. Code, § 1577.) The alleged mistake therefore may be characterized as Simes’s erroneous belief at the time of the contract that she was in good health and had a reasonable life expectancy.
A mistake of this nature does not support a claim for rescission. The Estate asserts a unilateral mistake and offers no evidence that United had reason to know of or caused the mistake. Accordingly, to prevail at trial, the Estate would have been required to prove the following: (1) Simes was mistaken regarding a basic assumption upon which she made the contract; (2) the mistake materially affected the agreed exchange of performances in a way that was adverse to Simes; (3) Simes did not bear the risk of the mistake; and (4) the effect of the mistake was such that enforcement of the contract would be unconscionable. (See Donovan, supra, 26 Cal.4th at p. 278.) The facts on which the Estate relies demonstrate that it cannot establish the third of these elements.
We conclude, based on the nature of the contract and the alleged mistake, that Simes bore the risk of the mistake, as a matter of law. A contracting party bears the risk of a mistake when the agreement so provides or when the party is aware of having only limited knowledge of the facts relating to the mistake but treats this limited knowledge as sufficient. (Donovan, supra, 26 Cal.4th at p. 283, citing Rest.2d Contracts, § 154.) Additionally, the court may allocate the risk to a party because it is reasonable under the circumstances to do so. (Donovan, at p. 283.) The contract in this case does not expressly assign the risk of the alleged mistake. Nonetheless, parties who contract for “life contingent” benefits necessarily do so based on limited knowledge of the very facts about which Simes was mistaken. We cannot fix the length of our lives or even the state of our health with certainty, and the parties knew that their expectations in this regard were at best an educated guess. Indeed, life annuity contracts are read “in the light of the knowledge of all mankind, that death may come tomorrow.” (Rishel v. Pacific Mut. Life Ins. Co. of California (10th Cir. 1935) 78 F.2d 881, 883 (Rishel).)
The allocation of this risk to Simes is reasonable because such risks are an inherent part of life annuity contracts, which reflect, at their essence, a longevity wager measured by average life expectancy. (See Rest.2d Contracts, § 154, illus. 3 [reasonable allocation of risk that annuitant has incurable disease and will live no more than a year]; see also Stockett v. Penn Mut. Life Ins. Co. (1954) 82 R.I. 172 [106 A.2d 741, 744] [contract not based on life expectancy of particular annuitant, but on “the average life expectancy of a specified group within which the individual may reasonably be included”].) Annuitants who survive the average life expectancy receive benefits beyond the premium; those who die earlier do not recoup their investments. Both risks are contemplated by the parties and, indeed, are an integral part of their bargain. (See Guthrie v. Times-Mirror Co. (1975) 51 Cal.App.3d 879, 885 [“Where parties are aware at the time the contract is entered into that a doubt exists in regard to a certain matter and contract on that assumption, the risk of the existence of the doubtful matter is assumed as an element of the bargain”].)
Grenall v. United of Omaha Life Insurance Company, 08 S.O.S. 4461, (California Court of Appeal, 1st Appellate Dept., July 25, 2008).
[Meredith R. Miller]