North American Company for Life and Health Insurance v. Watts

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
North American Company for
Life and Health Insurance
v. 	Case No. 22-cv-48-PB
Maria Bono Watts
REPORT AND RECOMMENDATION
North American Company for Life and Health Insurance
(“North American”) filed suit against Maria Bono Watts seeking
to rescind the life insurance policy it issued on the life of
Charles N. Galatis. 	In the alternative, North American seeks a
declaratory judgment that its liability is limited to an amount
equal to the premiums paid on the policy. 	On May 5, 2022, the
Clerk of Court entered default against Watts. 	Doc. No. 9.
Before the court for Report and Recommendation is North
American’s motion for default judgment, Doc. No. 10, pursuant to
Federal Rule of Civil Procedure 55(b)(2). 	For the reasons that
follow, the court recommends that North American’s motion be
granted in part and denied in part.
STANDARD OF REVIEW
When a party moves for a default judgment under Rule
55(b)(2), the court “may examine a plaintiff's complaint, taking
all well-pleaded factual allegations as true, to determine
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whether it alleges a cause of action.” 	Ramos-Falcon v.
Autoridad de Energia Electrica, 301 F.3d 1, 2 (1st Cir. 2002).
The defaulting party is “taken to have conceded the truth of the
factual allegations in the complaint.” 	Ortiz-Gonzalez v.
Fonovisa, 277 F.3d 59, 62 (1st Cir. 2002). 	Admitting the truth
of the factual allegations, however, “does not admit the legal
sufficiency of [the] claims.” 	10 James W. Moore, Moore's
Federal Practice § 55.32[1][b] (3d ed. 2013). 	For that reason,
the court reviews the admitted facts in light of the elements of
the claims pleaded before entering a default judgment. 	Sampson
v. Lambert, 903 F.3d 798, 805-06 (8th Cir. 2018); Neff v.
Mediation Processing Servs., LLC, No. 21-CV-310-JL, 2021 WL
7082838, at *1 (D.N.H. Sept. 27, 2021), report and
recommendation adopted, No. 21-CV-310-JL, 2021 WL 7082833
(D.N.H. Oct. 14, 2021).
BACKGROUND
By virtue of her default, Watts concedes the following
facts alleged in North American’s complaint. 	On March 29, 2020,
North American, an Iowa corporation, issued life insurance
policy no. LB41009915, on the life of Galatis in the face amount
of $200,000.00 (the “Policy”). 	See Doc. No. 1-1. 	Watts, a New
Hampshire resident, is listed as the primary beneficiary under
the Policy. 	Id. at 12.
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In his application for issuance of the Policy, Galatis
represented that he had not been medically diagnosed, medically
treated, or tested positive for various conditions, including
alcohol or drug abuse, in the last ten years. 	Doc. No. 1, ¶ 8.
When completing and signing his application, Galatis
acknowledged that his answers were complete and true to the best
of his knowledge and belief. 	Id. ¶ 9. 	Based on these
representations, as well as Galatis’s tender of the first
premium payment, North American issued the Policy.
Galatis died on June 4, 2020 by suicide. 	See Doc. No. 1-2.
On or around February 22, 2021, Watts submitted a claim for
benefits under the Policy. 	In response to her claim, North
American conducted a routine investigation. 	During the
investigation, North American discovered that Galatis had been
diagnosed with and treated for drug abuse in 2018 and 2019,
Doc. No. 1, ¶ 18, directly contradicting Galatis’s answer in the
application that he had not been diagnosed with or treated for
drug abuse in the previous ten years. 	North American would not
have issued the Policy if it knew Galatis’s medical history
involving drug abuse. 	Id. ¶ 20.
By letter dated December 3, 2021, North American notified
Watts that Galatis had provided false information about his
medical history in his Policy application, which entitled North
American to rescind the Policy. 	North American also stated that
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its liability under the Policy was limited to the premiums paid.
Accordingly, North American provided Watts with a release for
her to sign and return to North American in exchange for a check
in the amount of the premiums paid. 	North American advised
Watts that if she did not return the signed release by January
4, 2022, it would “take steps to protect its rights.” 	Id. ¶ 22.
Watts did not return the signed release to North American
by January 4, 2022. 	Accordingly, on February 3, 2022, North
American filed suit. 	Watts was served with the complaint and
summons on March 25, 2022, and the return of service was filed
on March 31, 2022. 	Doc. No. 8. 	When Watts did not file a
response within the time allowed, the Clerk of Court entered
default against her. 	Doc. No. 9. 	Watts was given until June 2,
2022 to move to set aside the default, but she has not done so
to date. 	North American now moves for default judgment. 	Doc.
No. 10.
DISCUSSION
North American brings three claims against Watts and a
fourth claim in the alternative. 	In Count I, North American
seeks common law rescission of the Policy due to Galatis’s
material misrepresentation regarding his medical history. 	See
Doc. No. 14. 	In Count II, North American seeks a declaratory
judgment that the Policy is rescinded. 	In Count III, North
American seeks to void the Policy because a condition precedent,
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Galatis’s receipt, and acceptance of the Policy while his health
was as stated in the application, never occurred. 	Finally, in
Count IV, North American seeks, in the alternative, to limit its
liability based on a provision in the Policy addressing death
caused by suicide.
North American moves for default judgment on Counts I, II,
and III. 	It also requests default judgment on Count IV, in the
alternative, if the court does not grant its motion as to Counts
I, II, and III.
I. 	Rescission of the Policy (Count I)
Under New Hampshire common law, the remedy of equitable
rescission may be ordered “where material misrepresentations
reasonably relied upon induce the injured party to enter into a
transaction.” 	Patch v. Arsenault, 139 N.H. 313, 317 (1995).
Unlike damages, equitable rescission is “a complete remedy which
restores the injured party to the position occupied before the
transaction.” 	Id. at 318.1 	The court, however, can only rescind
a transaction when it determines that “the respective parties
can be returned to the status quo.” 	Faiella v. Green Tree
Servicing LLC, No. 16–cv–088–JD, 2016 WL 4530452, at *1 (D.N.H.
Aug. 29, 2016) (quoting Derouin v. Granite State Realty, Inc.,
123 N.H. 145, 147 (1983)). 	Further, rescission is only proper
1 North American is not seeking damages, and therefore the
court recommends that none be awarded.
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“when in all the circumstances it appears right and just to the
parties to do so.” Patch, 139 N.H. at 318 (quoting Barber v.
Somers, 102 N.H. 38, 42 (1959)).
As relevant here, the terms of an insurance policy can be
rescinded when the insured makes a material misrepresentation to
procure the policy. 	Clark v. Union Mut. Fire Ins. Co., 40 N.H.
333, 338 (1860); see also Mooney v. Nationwide Mut. Ins. Co.,
149 N.H. 355, 358 (2003)(affirming the rescission of an
insurance policy due to the insured’s material misrepresentation
in his policy application). 	A misrepresentation is “the
statement of something, as fact, which is untrue, and which the
assured states knowing it to be untrue, and with the intent to
deceive” or which the assured “states positively as true, not
knowing it to be true, and which has a tendency to mislead.”
Clark, 40 N.H. at 338. 	When the insured has expressly
“stipulated and warranted that a certain fact is true, that
warranty makes the fact a material one . . . .” 	Amoskeag Trust
Co. v Prudential Ins. Co. of America, 88 N.H. 154, 185 A. 2, 6
(1936)(quotation omitted). 	A misrepresentation concerning the
applicant’s medical history is also deemed to be material to the
issuance of a life insurance policy. 	See id. at 7.
A. Material Misrepresentation
In his application for the Policy, Galatis misrepresented
his medical history. 	Specifically, Galatis stated that he had
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not been medically diagnosed with or medically treated for
alcohol or drug abuse, when in fact he had been diagnosed with
and treated for drug abuse in 2018 and 2019. 	Doc. No. 1, ¶¶ 8,
18. 	North American would not have issued the Policy if it knew
Galatis’s medical history involving drug abuse. 	Id. ¶ 20.
Galatis made this misrepresentation despite acknowledging
that the answers contained in his application were complete and
true to the best of his knowledge and belief. 	Id. ¶ 9. 	Where
Galatis not only misrepresented a fact concerning his medical
history, but also acknowledged that fact as being true,
Galatis’s misrepresentation was material to the issuance of the
Policy.
B. Status Quo and Balance of the Equities
Rescission is the appropriate remedy for this material
misrepresentation because the parties can be returned to the
status quo and the balance of the equities weigh in favor of
rescission. 	North American represented that it will return the
premiums paid in exchange for being released from the terms of
the Policy. 	This would return the parties to their respective
positions prior to the transaction and would prevent the unjust
enrichment of any party. 	Equity and fairness dictate that Watts
should not obtain the benefit of the Policy when it was procured
through a material misrepresentation and North American should
not bear the burden of issuing such a benefit. 	Further, it
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would be similarly improper for North American to retain the
benefit of the premiums paid when it is no longer bound to the
terms of the Policy. 	Thus, considering the undisputed facts and
applicable law, the court finds that rescission of the Policy is
the proper remedy for Galatis’s material misrepresentation.
II. 	The Remaining Claims (Counts II, III, IV)
Given the strength of North American’s claim for rescission
and assuming that judgment will enter in favor of North American
on Count I, the court declines to address the remaining claims.
CONCLUSION
For the foregoing reasons, the court recommends that the
district judge: (1) grant North American’s motion for default
judgment (Doc. No. 10) as to its claim for rescission (Count I);
(2) order rescission of the Policy and return of the premiums
paid; and (3) dismiss the remaining claims (Counts II, III, and
IV) as moot.
Any objections to this Report and Recommendation must be
filed within fourteen days of receipt of this notice. 	See Fed.
R. Civ. P. 72(b)(2). 	The fourteen-day period may be extended
upon motion. 	Only those issues raised in the objection to this
Report and Recommendation are subject to review in the district
court. 	See Sch. Union No. 37 v. United Natl Ins. Co., 617 F.3d
554, 564 (1st Cir. 2010). 	Any issues not preserved by such
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objection(s) are precluded on appeal. 	See id. 	Failure to file
any objections within the specified time waives the right to
appeal the district court's order. 	See Santos-Santos v. Torres-
Centeno, 842 F.3d 163, 168 (1st Cir. 2016).
__________________________
Andrea K. Johnstone
United States Magistrate Judge
October 6, 2022
cc: 	Counsel of Record
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