PHL Variable Insurance v. Sheldon Hathaway Family Trust, The et al

Filing 195

MEMORANDUM DECISION and ORDER denying 128 Motion for Summary Judgment; granting 131 Motion for Summary Judgment. Signed by Judge Robert J. Shelby on 12/02/2013. (tls)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION

PHL VARIABLE INSURANCE
COMPANY,
Plaintiff,

MEMORANDUM DECISION
AND ORDER

vs.

THE SHELDON HATHAWAY FAMILY
INSURANCE TRUST, by and through its
trustee, DAVID HATHAWAY,

Case No. 2:10-cv-67

Defendant,
WINDSOR SECURITIES, LLC,

Judge Robert J. Shelby

Intervenor-Defendant.

Sheldon Hathaway took out a life insurance policy from Plaintiff PHL Variable Insurance
Company and passed ownership of the policy to Defendants The Sheldon Hathaway Family
Insurance Trust (the “Trust”) and Trustee David Hathaway. PHL Variable has filed suit to
rescind this policy due to misrepresentations contained in the policy application. PHL Variable
now moves the court for summary judgment on its claims against the Defendants and against
Intervenor-Defendant Windsor Securities, LLC, a company that paid the premiums on Mr.
Hathaway’s policy. Windsor Securities has filed a cross motion for summary judgment. The
court finds that there are no genuine issues of disputed fact and that the false statements in the
policy application were material misrepresentations upon which PHL Variable relied. As a
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result, the court GRANTS PHL Variable’s Motion for Summary Judgement (Dkt. 131) and
DENIES Windsor Securities’ Cross Motion for Summary Judgment (Dkt. 128).
FACTUAL BACKGROUND
Sheldon Hathaway is a previous employee of Newmont Gold Company, U.S. Steel, and
Bechtel Corporation, where he worked as a heavy equipment operator and a welder and
performed other industrial tasks. He is now retired and lives on fifteen acres of rural property in
Payson, Utah, where he owns a residence and a non-commercial farm. His residence is valued at
approximately $380,000. His ten acres of non-commercial farmland were valued at $530,000 in
2008, but decreased in value to $340,000 in 2012. Besides his residence and farmland, Mr.
Hathaway owns only minor assets, including farm equipment, an older Jeep, and a Ford truck.
He receives an income of about $30,000 per year from Social Security payments and company
pensions.
Mr. Hathaway became involved in a stranger-originated life insurance (STOLI) scheme,
in which a third-party investor obtains a life insurance policy for someone even though the third
party has no interest in the continued life of the insured. Mr. Hathaway’s involvement in this
scheme began when his neighbor, Jay Sullivan, showed him a promotional brochure outlining
life insurance policies financed through an outside investor that supposedly carried no liability
for the insured. Mr. Sullivan promised Mr. Hathaway that the life insurance policy would cost
him nothing and that he would receive a payment of $300,000 after two years when the policy
was sold.
The application required disclosure of Mr. Hathaway’s net worth. Mr. Sullivan
performed these calculations and initially estimated Mr. Hathaway’s net worth at $4,000,000.
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Mr. Hathaway testified that he questioned Mr. Sullivan’s calculations, but Mr. Sullivan assured
him that his property was worth more than Mr. Hathaway thought. On the final signed
application, Mr. Sullivan listed Mr. Hathaway’s net worth as $6,250,000 and his other income as
$484,500. In addition, the application contained representations that premium financing would
not be used to pay policy premiums, and that neither Mr. Hathaway nor the Trust had any intent
to transfer any interest in the policy to a disinterested third party. Mr. Hathaway signed the
application, although Windsor Securities asserts that Mr. Hathaway is illiterate and that he signed
a blank application form before it contained any of this information.
A series of insurance brokers and insurance agents acting as intermediaries then
transferred the application to PHL Variable. Brock Diediker, an insurance intermediary working
with Mr. Sullivan, passed the application to Gabriel Giordano, a licensed insurance producer, and
his company, PRG Financial Resources, Inc. (PRG). Mr. Giordano submitted the application to
PHL Variable. Mr. Giordano also submitted a “Producer’s Report” on December 10, 2007, in
which he stated that he had met Mr. Hathaway. Mr. Giordano affirmed the information in the
policy application regarding Mr. Hathaway’s net worth, the lack of any prohibited financing
methods, and the lack of Mr. Hathaway’s intent to transfer his rights or interests in the policy. In
reality, neither Mr. Diediker nor Mr. Giordano ever met Mr. Hathaway. The parties do not
dispute this sequence of events, but Windsor Securities contends that Mr. Giordano was PHL
Variable’s agent because PHL Variable had a brokerage contract with him.
PHL Variable also sought confirmation of Mr. Hathaway’s net worth from Infolink, a
third-party verification service it routinely employed. Infolink submitted an “Inspection Report”
on December 5, 2007, in which Infolink stated that the calculations contained in the policy

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application appeared to be accurate based on a conversation with Mr. Hathaway. PHL Variable
later learned that Infolink, like Mr. Diediker and Mr. Giordano, never contacted Mr. Hathaway or
otherwise confirmed the calculations of Mr. Hathaway’s assets and net worth.
Mr. Hathaway’s son, David Hathaway, is the trustee of the Trust. Mr. Sullivan and the
other intermediaries worked with David Hathaway to transfer money through various accounts in
order to credit the Trust’s bank account with sufficient funds to pay the $200,000 initial policy
premium. The ultimate source of these funds was the San Diego law firm of Sadr & Barrera,
APLC, which is active in the secondary insurance market. On March 7, 2008, the day before the
initial premium was due, Sadr & Barrera transferred $200,000 into the Trust’s bank account.
These funds remained in the Trust’s account for approximately one day before they were paid to
PHL Variable. David Hathaway witnessed Mr. Sullivan perform these transfers telephonically
during a bank visit.
PHL Variable issued the life insurance policy to Mr. Hathaway on January 31, 2008. The
policy provided a death benefit of $4,000,000. When the policy issued, PHL Variable paid a
sales commission to Mr. Giordano. PHL Variable had an Independent Producer Contract with
Mr. Giordano, under which Mr. Giordano received sales commissions in connection with any
PHL Variable product that Mr. Giordano sold. PHL Variable also paid a sales commission on
Mr. Hathaway’s policy to the broker on the policy, Crump Life Insurance Services, Inc. (Crump).
Crump was a general broker that PHL Variable hired to sell its insurance products. Crump had a
Top Producer Agreement with Mr. Giordano, under which Mr. Giordano received a portion of
Crump’s sales commission if Mr. Giordano’s company, PRG, generated a certain level of sales
for which Crump served as broker.

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After Mr. Giordano received his sales commission, he paid a portion of the commission
to Mr. Diediker and to New Concepts Financial Corporation, a company affiliated with Mr.
Sullivan. Through PRG, Mr. Giordano also paid Windsor Securities $40,000. Finally, Windsor
Securities made a payment of $200,000 to Sadr & Barrera. PHL Variable contends that this
payment was made to refund the money that Sadr & Barrera provided to finance Mr. Hathaway’s
initial policy premium. Windsor Securities maintains that it believed the $200,000 payment was
a reimbursement to the Trust and that it had no knowledge of Sadr & Barrera’s involvement.
On December 18, 2008, the Utah Department of Insurance sent a letter to PHL Variable
requesting information about Mr. Giordano. Alerted to the Department’s investigation of Mr.
Giordano, PHL Variable undertook its own internal investigation of five policies connected with
Mr. Giordano, including Mr. Hathaway’s policy. PHL Variable first attempted to confirm the
information contained in the policies. When such confirmation was not forthcoming, PHL
Variable engaged in legal action to rescind the policies. PHL Variable filed suit against the Trust
on January 28, 2010. On April 13, 2011, the court granted Windsor Securities’ motion to
intervene.
ANALYSIS
I.

Standard of Review
The court grants summary judgment when “there is no genuine dispute as to any material

fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The court
“view[s] the evidence and make[s] all reasonable inferences in the light most favorable to the
nonmoving party.” N. Natural Gas Co. v. Nash Oil & Gas, Inc., 526 F.3d 626, 629 (10th Cir.
2008).

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II.

Rescission of the Policy
PHL Variable moves to rescind the insurance policy on the grounds that the policy is part

of a STOLI scheme. The Utah Legislature has defined STOLI as “an act, practice, or
arrangement to initiate a policy for the benefit of a third party investor or other person who has
no insurable interest in the insured resulting in the requirements of [Utah’s insurable interest
statute] not being met.” Utah Code Ann. § 31A-36-102(18). Under Utah law, an insurance
contract may be rescinded due to a misrepresentation if “(a) the insurer relies on [the
misrepresentation] and it is either material or is made with intent to deceive; or (b) the fact
misrepresented or falsely warranted contributes to the loss.” Utah Code Ann. § 31A-21-105(2).
“In order to invalidate a policy because of a misrepresentation by the insured, an insurer need
prove applicable only one of the above provisions.” Derbidge v. Mut. Protective Ins. Co., 963
P.2d 788, 790 (Utah Ct. App. 1998) (citations omitted).
The court first addresses the question of whether the Defendants made misrepresentations
to PHL Variable because, “while the insurer must show only one of these three provisions has
been met, under each alternative a threshold requirement is that the applicant have made a
misrepresentation.” Id. at 791.
A.

Misrepresentation

Under Utah law, a misrepresentation is “something more than an innocent misstatement.”
Derbidge, 963 P.2d at 795. “Although the outright intent to deceive is no longer required in all
cases, requiring that an applicant have at least some knowledge or awareness of her misstatement
is consistent with principles of insurance law enunciated after Utah enacted statutory standards
for misrepresentation.” Id. at 794. Under this standard, a misrepresentation requires an act that

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may fall short of intentional deception, but consists of more than mistake or negligence.
The Tenth Circuit discussed this standard in ClearOne Communications, Inc. v. National
Union Fire Insurance Co. of Pittsburgh, 494 F.3d 1238 (10th Cir. 2007).1 The Tenth Circuit
interpreted the Derbidge standard as requiring “some level of bad faith before a misstatement
may serve as a basis of rescission,” id. at 1244 n. 3, and acknowledged that “Utah courts would
apply a standard of recklessness to the insured’s state of mind under the statute.” Id. at 1247.
Generally “[a] misstatement is not innocent under Derbidge if the applicant knew or should have
known about its falsity.” Id. For a misrepresentation to be an improper basis for rescission, “the
insured must have no idea that the misstatements were inaccurate.” Id.
Here, it is undisputed that Mr. Hathaway’s life insurance policy application contained
inaccurate calculations of his net worth and assets. PHL Variable also contends that the
application contained misleading guarantees regarding Mr. Hathaway’s intention to assign rights
under the policy and the financing methods used to fund the policy. Even taking the facts in the
light most favorable to the Defendants, these inaccuracies constitute misrepresentations. See id.
at 1244 (“[F]alse financials constitute[] a misstatement for purposes of rescission.”). Mr.
Hathaway did not have an annual income of $484,500 and he was unable to afford the initial
$200,000 policy premium.
Windsor Securities does not dispute these facts. Instead, it argues that Mr. Hathaway is
illiterate and that therefore neither he nor the Trust can be said to have knowingly made the
misrepresentations. The court is not persuaded by this argument. Under Utah law “an insured is

1

Windsor Securities argues against application of ClearOne on the grounds that the case
is from the Tenth Circuit, not a Utah court. The Tenth Circuit’s interpretation of Utah law is
nevertheless binding on this court.
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under a duty to read his application before signing it, and will be considered bound by a
knowledge of the contents of his signed application.” Theros v. Metropolitan Life Ins. Co., 407
P.2d 685, 688 (Utah 1965). And even if Mr. Hathaway was unable to read the completed
application, no reasonable jury could find that Mr. Hathaway was unaware of the
misrepresentations in his application. Mr. Hathaway knew, or at least strongly suspected, that the
four million dollar asset figure that Mr. Sullivan quoted to him was an overestimate. At his
deposition, Mr. Hathaway admitted that he questioned the inflated estimate. (S. Hathaway Dep.
46:7-10, Dkt. 133-1 (“Q: Did you tell him, I’m not worth $4 million? A: That’s what I asked. I
says, Jay, what are you talking about?”).) Mr. Hathaway also admitted that he did not believe the
figure. (Id. at 26:15-19.)
Given these facts, the court finds that the Defendants have presented no evidence that
creates a genuine dispute about whether the Trust knew or should have known about the clear
misrepresentations contained in Mr. Hathaway’s insurance application.
B.

Reliance on a Material Misrepresentation

The court next addresses whether these misrepresentations were material and whether
PHL Variable relied upon them in issuing the policy. “[A] material fact is one that would
naturally influence the insurer’s judgment in making the contract, in estimating the degree and
character of the risk, or in fixing the rate of insurance.” ClearOne, 494 F.3d at 1250 (citation
omitted) (internal quotation marks omitted). “[W]hen an insurer specifically asks information in
regard to a certain matter, the presumption is that the matter is material.” ClearOne Commc’ns,
Inc. v. Lumbermens Mut. Cas. Co., 2005 WL 2716297, *13 (D. Utah Oct. 21, 2005), aff’d in part
sub nom. ClearOne Commc’ns, Inc., 494 F.3d 1238.

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There is no dispute that PHL Variable requested information about Mr. Hathaway’s net
worth, assets, and sources of financing on the life insurance policy application form. As such,
this information is presumed to be material. The Defendants have not presented any evidence to
rebut this presumption. PHL Variable would not have insured Mr. Hathaway for $4,000,000 had
it known the true extent of his assets. As PHL Variable points out, inflated asset and net worth
figures distort the pricing policies of insurance companies and prevent them from accurately
fixing the rate of insurance. Inflated asset and net worth figures also create the false impression
of a legitimate estate need for a highly-priced life insurance policy. This false information led
PHL Variable to issue a policy that had no correlation with Mr. Hathaway’s actual insurance
needs.
Windsor Securities argues that only facts affecting the risk of mortality are material to life
insurance policies. Windsor Securities cites as support for this contention the case of Berger v.
Minnesota Mutual Life Insurance Co. of St. Paul, in which an insured failed to disclose a diabetic
condition. 723 P.2d 388, 391-92 (Utah 1988). Similarly, Windsor Securities argues that the
court should apply the reasoning set forth in Farrington v. Granite State Fire Insurance Co., a
case involving failure to disclose the vacancy of a building in an application for fire insurance.
In Farrington, the court found that the fact that the building was vacant was not material because
it was unclear whether vacancy made it more or less likely that the building would have a fire.
232 P.2d 754, 758 (Utah 1951). But the Utah Supreme Court’s rationale in these cases is broader
than Windsor Securities suggests. In Berger, the court held: “The materiality of a fact
misrepresented or withheld is determined by the probable and reasonable effect that a truthful
disclosure would have had upon the insurer in determining the advantages of the proposed

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contract.” Id. at 391. Here, the advantages of the proposed life insurance contract do not depend
solely on the risk of mortality because the amount of insurance needed also depends on the
finances of the insured. PHL Variable is not concerned that it was misled as to the risks
associated with Mr. Hathaway’s life expectancy. Rather, PHL Variable wishes to rescind the
contract because the policy insures against a number of losses that Mr. Hathaway cannot suffer
given his current financial situation, such as estate settlement costs and inheritance taxes.
Information about Mr. Hathaway’s financial state is clearly material to the question of how much
insurance Mr. Hathaway needs.
For these reasons, the court finds that there is no genuine dispute that PHL Variable relied
on material misrepresentations about Mr. Hathaway’s finances when it issued Mr. Hathaway’s
life insurance policy. As a result, the court does not reach the question of whether these
misrepresentations were made with an intent to deceive. Regardless of the Defendants’ intent,
PHL Variable is entitled to have the policy rescinded.
III.

Affirmative Defenses
Windsor Securities asserts that PHL Variable is barred from rescinding the insurance

policy for a number of reasons. The court examines each of these affirmative defense and finds
that none of them provides a reason why the policy should not be rescinded.
A.

Waiver Based on Agency

Windsor Securities first argues that PHL Variable waived its right to rescind the contract
because it had knowledge of the misrepresentations for over thirteen months before it decided to

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bring suit.2 Windsor Securities’ argument rests on the assumption that Crump, the broker on Mr.
Hathaway’s policy, and Mr. Giordano, the producer on Mr. Hathaway’s policy, were agents of
PHL Variable and that their knowledge can therefore be imputed to PHL Variable.
“To be an agent, a person must be authorized by another to act on his behalf and subject
to his control.” Gildea v. Guardian Title Co. of Utah, 970 P.2d 1265, 1269 (Utah 1998)
(quotations and citations omitted). “The question of whether an insurance agent is the agent of
the insurer or the insured is a question of fact.” Vina v. Jefferson Ins. Co. of N.Y., 761 P.2d 581,
585 (Utah Ct.App. 1988). But even taking the facts in the light most favorable to Windsor
Securities, there is no genuine dispute that Crump and Mr. Giordano were not PHL Variable’s
agents.
Utah courts draw a distinction between insurance agents and insurance brokers. An
insurance agent is typically “a person expressly or impliedly authorized to represent [the insurer]
in dealing with third persons . . . [and] is commissioned and employed by an insurance company
to solicit and write insurance by and in the name of the company.” Id. at 585. An insurance
broker, by contrast, is “ordinarily the agent of the insured as to matters connected with the
procurement of the insurance.” Id. An independent agent who solicits insurance for an insured
and places that insurance with an insurance company is, “if anyone’s agent, the agent of the
insured and not of the insurance company.” Id.
Here, Crump and Mr. Giordano were at most insurance brokers for PHL Variable. The
relationship between PHL Variable and Crump was governed by a Brokerage General Agent

2

Windsor Securities also argues that PHL Variable waived its right to rescind the contract
based on its knowledge and conduct during the thirteen-month period from December 2008 to
January 2010. The court discusses this argument below.
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agreement, while the relationship between PHL Variable and Mr. Giordano was governed by an
Independent Producer Contract. These agreements contain provisions about the use of company
property, indebtedness and indemnification, and refund of premiums, but they do not establish an
agency relationship between PHL Variable and either Crump or Mr. Giordano.
It is undisputed that Crump and Mr. Giordano could not unilaterally bind PHL Variable into
issuing an insurance policy to Mr. Hathaway before Mr. Hathaway first submitted an application
to PHL Variable. Without this ability, Crump and Mr. Giordano could not be agents of PHL
Variable. See id. at 586 (citing with approval a Louisiana case holding that an insurance
salesperson was not the agent of the insurer where the salesperson could only quote premiums
and could not bind insurer prior to the insurance company’s approval).
Moreover, it is undisputed that Mr. Giordano (through Crump) submitted Mr. Hathaway’s
insurance application to multiple insurance carriers. If the court adopted Windsor Securities’ line
of reasoning, Crump and Mr. Giordano would be agents of all of these companies. Given these
facts, the contractual relationships between Crump and PHL Variable and between Mr. Giordano
and PHL Variable did not create an agency relationship. As a result, any knowledge of the
misrepresentations in Mr. Hathaway’s policy application possessed by either Crump or Mr.
Giordano cannot be imputed to PHL Variable.
B.

Waiver Based on Course of Conduct

Windsor Securities also contends that PHL Variable waived its right to rescind due to its
own conduct and knowledge. Under Utah law, “an insurer may forfeit the right to rescind a
contract if it intentionally relinquishes that right or if its course of conduct demonstrates that it
intended to relinquish that right.” Continental Ins. Co. v. Kingston, 114 P.3d 1158, 1161 (Utah

12

Ct. App. 2005). Windsor Securities does not argue that PHL Variable expressly relinquished its
right to rescind the life insurance policy, but instead asserts that PHL Variable’s conduct is
evidence of an intent to relinquish.
Windsor Securities contends that four of PHL Variable’s actions demonstrate its intention
to relinquish its right to rescind. First, Windsor Securities points out that PHL Variable sent Mr.
Hathaway a letter on May 5, 2009, seeking verification of the financial information contained in
Mr. Hathaway’s application. But this letter merely demonstrates that PHL Variable was
investigating possible misrepresentations in Mr. Hathaway’s application. There is no reason why
PHL Variable should have moved to rescind Mr. Hathaway’s policy immediately upon learning
in December 2008 that the Utah Department of Insurance was investigating Mr. Giordano.
Instead, PHL Variable reasonably sent Mr. Hathaway a letter asking for confirmation of his
information and advising him that the company would seek rescission if he did not provide
evidence that his policy application was truthful.
Second, Windsor Securities notes that PHL Variable did not initially challenge Windsor
Securities’ request for a collateral assignment in July 2009, but instead sent the Trustee a letter
asking for a signature to process the assignment request. Windsor Securities’ argument is not
persuasive. PHL Variable’s stock response requesting a signature to process an assignment
request does not constitute a distinct recognition that Mr. Hathaway’s policy was in force,
especially when PHL Variable ultimately rejected Windsor Securities’ request on the grounds
that the request was made during an ongoing investigation into possible misrepresentations in the
policy application.
Third, Windsor Securities argues that PHL Variable waived its rights to rescind because it

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accepted a $20,000 payment under the life insurance policy two months after filing this lawsuit.
But it is undisputed that PHL Variable’s title department reviewed the $20,000 deposit3 and,
determining that it related to a life insurance policy that was the subject of active litigation,
immediately sent a refund to Windsor Securities. The fact that Windsor Securities did not
deposit PHL Variable’s check does not demonstrate that PHL Variable had an intent to relinquish
its right to rescind.
Finally, Windsor Securities alleges that, after PHL Variable accepted the initial $200,000
premium payment, PHL Variable continued to make monthly deductions from the account that
held this payment past December 2008. But it is undisputed that Windsor Securities was not
required to pay the entire first year premium amount up front. Additionally, PHL Variable made
clear that it would automatically deduct funds from any overpayment to cover the costs of
keeping Mr. Hathaway’s policy in force. The fact that PHL Variable continued to perform in
accordance with the insurance contract while it was investigating possible misrepresentations
does not constitute an intentional relinquishment of PHL Variable’s right to rescission.
Even though PHL’s actions do not demonstrate an intent to relinquish its rights, Windsor
Securities alleges that PHL Variable nevertheless waived its rights because it had knowledge of
misrepresentations in Mr. Hathaway’s policy application by December 2008. Windsor Securities
points to PHL Variable’s investigation, which it commenced after receiving a letter from the
Utah Department of Insurance concerning Mr. Giordano. PHL Variable’s answers to

3

Windsor Securities’ $20,000 payment was deposited by Boston Financial after the
payment was received in PHL Variable’s Boston office. As required by standard operating
procedures, Boston Financial then forwarded an image of the check to PHL Variable, where it
was reviewed by PHL Variable’s title department.
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interrogatories indicate that this investigation resulted in a report to PHL Variable’s law
department in December 2008. The report contained information on five insurance policies that
Mr. Giordano handled, including Mr. Hathaway’s application. But while it is clear that PHL
Variable had become suspicious of the statements in Mr. Hathaway’s application by December
2008, there is no reason that PHL Variable should have immediately moved to rescind Mr.
Hathaway’s policy before ascertaining that the policy application contained misrepresentations.
On the contrary, PHL Variable’s actions were reasonable. After sending Mr. Hathaway an
inquiry on May 5, 2009, and failing to obtain any response, PHL timely commenced this lawsuit
before the standard two-year contestability period expired.
Accordingly, the court finds that PHL Variable did not waive its right to rescind the
policy.
C.

Spoliation of Evidence

Windsor Securities alleges that PHL Variable caused the loss of key evidence in this case
because it did not file the lawsuit in December 2008. The court notes that Windsor Securities
presents no compelling evidence of spoliation. But the court need not consider the merits of this
defense because Windsor Securities fails to provide any authority discussing a legal rule or
equitable consideration that would make this loss of evidence, even if placed beyond dispute,
legally relevant as an affirmative defense.
D.

Policy Void Ab Initio

Windsor Securities contends that, under Utah law, a contract induced by fraud is not void
but only voidable, with the injured party retaining the right to affirm it or treat it as valid. Frailey
v. McGarry, 211 P.2d 840, 845 (Utah 1949); see also U.S. v. Johnson, 584 F.3d 995, 1003 (10th

15

Cir. 2009) (“While under Utah law a contract induced by fraud [or] false representations . . . is
not void at its inception, it is, nevertheless, voidable.” (citations and internal quotation marks
omitted)). Windsor Securities argues that PHL Variable is therefore not entitled to a declaration
that the life insurance policy is void ab initio. The court declines to address this argument. Even
if the policy is merely voidable, PHL Variable has chosen to exercise its right to void the
contract. PHL Variable is entitled to rescission of the policy regardless of whether the policy was
void from its inception or has simply become void. This distinction does not affect the outcome
of the case.
E.

Lack of Insurable Interest

Finally, Windsor Securities asserts that an insurance policy is not void for lack of
insurable interest under Utah law. As a result, Windsor Securities argues that the court must
dismiss PHL Variable’s second cause of action, in which PHL contends that Mr. Hathaway’s
policy should be rescinded because the policy lacks an insurable interest. But PHL Variable did
not move for summary judgment on this claim. In any event, this alternative ground for relief is
moot because the court holds that summary judgment is proper under PHL Variable’s first cause
of action for rescission. As a result, the court need not determine whether Mr. Hathaway’s policy
is void for lack of an insurable interest.
IV.

Equitable Adjustment of Premiums
Having held that PHL Variable is entitled to rescind Mr. Hathaway’s policy, the court

now addresses whether it is equitable to allow PHL Variable to keep the premiums that Windsor
Securities has already paid on the policy. PHL Variable seeks retention of these payments to
cover its damages related to issuing the policy, paying brokers, and incurring attorneys’ fees and

16

costs. The court agrees that PHL Variable is entitled to keep the premium payments.
In general, rescission of a contract should return the parties to the position they were in
before they entered into the contract. In life insurance cases, this doctrine generally allows an
insured to recover the premiums they have paid. See Anderson v. Doms, 75 P.3d 925, 928 (Utah
Ct. App. 2003). But rescission is an equitable doctrine, and the court has discretion to depart
from the general rule when equity so requires:
[While the] goal of rescission is to restore the status quo that existed prior to the
parties’ agreement . . . [t]he status quo rule is not a technical rule, but rather it is
equitable, and requires practicality in adjusting the rights of the parties. How this
is to be accomplished, or indeed whether it can, is a matter which is within the
discretion of the trial court under the facts as found to exist by the trier of fact.
Dugan v. Jones, 724 P.2d 955, 957 (Utah 1986).
A number of courts have allowed insurers to retain premium payments for insurance
policies that were obtained fraudulently. See, e.g., Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787,
796-97 (6th Cir. 2009). Several of these cases were brought by PHL Variable and involve facts
that are analogous to those that are presented here. See PHL Variable Ins. Co. v. The P. Bowie
2008 Irrevocable Trust, --- F.3d ---, 2013 WL 1943820 (1st Cir. May 13, 2013); PHL Variable
Ins. Co. v. Lucille E. Morello 2007 Irrevocable Trust, 2010 WL 2539755, at *1-2, 4 (D. Minn.
Mar. 13, 2010) (unpublished). The court agrees with the reasoning in these cases. A rule
requiring PHL Variable to repay policy premiums on a fraudulently procured life insurance
policy “would have the perverse effect of reducing the defrauder’s risk relative to the honest
policyholder; any defrauder could commit to paying premiums knowing that if the premiums
ever became unaffordable, he could simply declare his fraud and receive all of the previously
paid premiums back.” Wuliger, 567 F.3d at 796-97. Such a rule “would be an invitation to

17

commit fraud.” Lucille E. Morello 2007 Irrevocable Trust, 2010 WL 2539755, at *4.
The facts and circumstances here strongly support a finding that Windsor Securities was
aware of the fraudulent scheme that Mr. Giordano and others perpetrated on PHL Variable.
Windsor Securities was involved in the series of money transfers that obscured the true source of
the funds for Mr. Hathaway’s initial policy premium. But the court need not determine that
Windsor Securities’ intent was fraudulent to allow PHL Variable to retain the initial premium
payment. If the court ruled otherwise, PHL Variable would not be returned to the position it was
in before it issued Mr. Hathaway’s policy because PHL Variable paid commissions to Crump and
Mr. Giordano in excess of the cost of the first year premiums. In contrast, Windsor Securities
would profit from the return of the initial premium payment because Windsor Securities has
already received $40,000 from Mr. Giordano in return for financing the policy. Given these
facts, it would not be equitable to refund the policy premiums to Windsor Securities.
Windsor Securities argues that, under U.S. Fidelity v. U.S. Sports Specialty, an insurer in
Utah is barred from seeking reimbursement from an insured unless the written terms of the policy
provide for reimbursement. 270 P.3d 464 (Utah 2012). Windsor Securities contends that the
court should follow U.S. Fidelity because Mr. Hathaway’s life insurance policy, like the
insurance policy at issue in U.S. Fidelity, does not allow for an express right of reimbursement.
But U.S. Fidelity only addressed an insurer’s rights against an insured, not a third party. Here,
there is no contract between Windsor Securities and PHL Variable. The return of premiums does
not affect the insured because Mr. Hathaway did not pay for the initial premium. Consequently,
the holding in U.S. Fidelity is not apposite to the facts presented in this case.
Windsor Securities also argues that PHL Variable has a valid contractual remedy to

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recover its damages because it can file suit against Crump and Mr. Giordano for the return of the
sales commissions on the policy. But there is no reason why PHL Variable is required to recover
its damages from either Crump or Mr. Giordano. Instead, it is more equitable to place this
burden on Windsor Securities. If Windsor Securities is truly an innocent party in this matter, it
may file suit against Crump, Mr. Giordano, and the other actors who caused it to become
involved in a fraudulent scheme.
The court is not persuaded by Windsor Securities’ arguments. Instead, the court exercises
its equitable discretion to allow PHL Variable to retain the initial premiums that Windsor
Securities has already paid.
CONCLUSION
For the reasons stated above, PHL Variable’s Motion for Summary Judgment (Dkt. 131)
is GRANTED. The court ORDERS that Mr. Hathaway’s life insurance policy be rescinded. The
court FURTHER ORDERS that PHL Variable retain the initial policy premiums. Windsor
Securities’ Motion for Summary Judgment (Dkt. 128) is DENIED. The Clerk of Court is
directed to close the case.
SO ORDERED this 2nd day of December, 2013.
BY THE COURT:

______________________________
ROBERT J. SHELBY
United States District Judge

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