Before a party to a contract is justified in rescinding it because of its breach by the other party, the breach must be substantial; rescission is not warranted when the breach is not substantial, and does not defeat the objects of the parties.
Plaintiff, the holder of a health insurance policy issued by defendant, was hospitalized and filed for coverage, but defendant told plaintiff that the policy had lapsed for nonpayment of premiums. Plaintiff sued, rescinded the insurance contract based on defendant's repudiation, and requested the return of premiums paid. Defendant denied repudiation, pleaded mistake, and tendered the amount of plaintiff's claim to court. The lower court found that defendant repudiated by nonpayment, mistakenly did so, and plaintiff was entitled to recover; defendant was not entitled to rescission and was required to honor plaintiff's health insurance policy, including damages. Defendant appealed.
Does the right to rescission and restitution exist as an alternative remedy where there has been repudiation or a material breach of the contract?
The court held that refusal to pay claims by claiming the policy had lapsed effectively frustrated the purpose and was a substantial breach. The purpose of the contract, insofar as plaintiff was concerned, was to obtain protection in the form of defendant's promise to pay claims in case of his disability; defendant's refusal to pay claims, based upon its position that the policy had lapsed, effectively frustrated this purpose and was a substantial breach. Plaintiff was entitled to rescind for material breach of contract, but value of protection received was deducted from the premiums owed to plaintiff. Where defendant refused to pay a claim due to the mistaken belief that plaintiff had not paid premiums, the court affirmed the lower court's determination that plaintiff could recover with interest, minus the amount of protection actually received, but remanded for a determination of interest due.