Mercantile & General Reinsurance Co. v. Colonial Assurance Co.

Spanno Corporation (defendant) provided guarantees that capital equipment would have a stated residual value at a specific future date. To help meet its guarantees, Spanno procured insurance from Colonial Assurance Company (Colonial) and Union International Insurance Company (Union) (defendants). Colonial and Union purchased reinsurance from Mercantile & General Reinsurance Company (Mercantile) (plaintiff). Mercantile sued Colonial and Union, which were in liquidation, seeking to rescind the reinsurance contracts due to Spanno’s alleged material misrepresentations. Spanno responded by counterclaiming against Mercantile, alleging that Spanno was a third-party beneficiary of the reinsurance contracts and entitled to money damages due to Mercantile’s alleged breach and tortious interference with Spanno’s contracts with Colonial and Union. At trial, the supreme court treated Mercantile’s misrepresentation claim as an equitable defense and equitable counterclaim to Spanno’s contract claim. The supreme court further ruled that Spanno’s contract claim, which sounded in law, would be decided by a jury and that Mercantile’s misrepresentation allegations, which sounded in equity (because Mercantile sought the equitable remedy of rescission), would be submitted to an advisory jury. The jury found that Spanno was entitled to recover approximately $14.7 million on its contract and tort claims and that Spanno made no material misrepresentations. However, the supreme court overrode the jury’s purported advisory finding that Spanno made no material misrepresentations, ruling that Mercantile was entitled to rescission because Spanno in fact did make material misrepresentations. The appellate division reversed. Per the appellate division, the supreme court should have treated the jury’s finding with respect to the alleged material misrepresentations as dispositive, rather than as advisory. The appellate division also found that the jury’s no-misrepresentation finding was supported by the evidence. Mercantile appealed.