When a person believes that he or she has been injured by another person, our court system gives the injured party an opportunity to seek a recovery for the damages incurred. The courts also permit lawsuits designed to force people to do something. Under the common law of England (which is the source of most of our law) there were two separate ways for this to be done: through the courts of law or through the courts of equity. Today these two separate court systems have been merged into one system, but the separate remedies that each provides remain.

The first legal solution was to file an action at law. Using this method an aggrieved party would claim that a person was bound by a contract to do a certain thing that had not been done. The plaintiff would ask the court to require the other party to pay money damages for his or her failure to perform the required duties under the contract. If the court concluded that the plaintiff was right, the defendant would have to pay a specific sum of money to make the plaintiff whole. Sometimes, however, money damages were an inadequate solution to the problem. This led to actions in equity, where the plaintiff�s goal was not to obtain money damages but to put the parties in the position they were in before the contract was breached or the injustice committed. To accomplish these goals the courts of equity created new remedies designed to make the parties fix what was broken, rather than pay for the damage.

The most important equitable remedies for our purposes are declaratory judgment, interpleader, reformation, and rescission. (Each is discussed in detail shortly.) It is important to understand that these equitable remedies are not available to a plaintiff unless he or she can meet the three basic requirements of the law of equity. Before an equitable remedy may be sought, a judge (not a jury) will decide whether the plaintiff has met the requirements of entering a plea in equity. Those three requirements are as follows:

Declaratory judgment is a useful equitable remedy when the relative rights and duties of various parties in a contract or other legal relationship are in doubt. An equitable action seeking a declaratory judgment asks a court to review the facts and legal relationships of the concerned parties and define for the parties what their obligations and rights are. The parties can then move forward without question as to who owes what duties to whom. Note that a declaratory judgment does not require any party to pay any damages because this is an equitable action, not an action at law. In fact, unlike other equitable actions, the declaratory judgment does not require a party to do anything. It merely defines the parties� duties and responsibilities.

An interpleader is an equitable proceeding that a party uses when he or she holds (but does not claim to own) property that is claimed by two or more other parties. (Note that the party seeking the interpleader remedy may not assert a claim to the property in dispute.) An interpleader action may be brought in a state court, or if the parties are from different states, the interpleader may be brought in federal court. An interpleader is permitted only when multiple parties claim the same item of property that is held by a disinterested person or entity.

The mechanics of an interpleader action are relatively simple. If the insurer is presented with conflicting claims for the same proceeds, it will file a bill of interpleader with the proper court and name the conflicting claimants as the defendants. The insurer will then normally pay the proceeds to the court, and since the insurer is asserting no claim to the proceeds, it will often be dismissed from the case. Sometimes, however, the insurer is sued by one of the claimants before it can file a bill of interpleader or before it knows that there are conflicting claimants. In that case, the insurer will respond to the plaintiff�s complaint by filing a bill of interpleader as its answer to the complaint. The action will then proceed as outlined above.

It is easy to see that when two or more parties assert conflicting claims to the death benefits of a life insurance policy, an interpleader action is a proper solution for the insurer. The insurer concedes that it has no claim to the proceeds. Thus it pays the proceeds over to the appropriate court and asks it to make a determination as to which of the claimants is entitled to the proceeds. In this way the insurer avoids a multiplicity of lawsuits because all claimants are present at one time. By adjudicating all claims at one time the insurer also elminates the possibility of having to pay policy benefits more than once, which could happen if the insurer is sued by conflicting claimants for the same proceeds in the courts of two or more different states.

Assume that an agreement is reached between two or more parties. Then one of the parties asserts that the agreement does not express what he or she believed was the actual intent of the agreement. In an action at law, the court would not look behind the agreement to determine the intent of the parties. The court would either enforce the agreement as written or require one party to pay damages to the other for breaching the contract. This legal remedy could sometimes lead to an unfair result if the contract as written did not reflect the intent of the parties. It would be especially unfair if the difference was due to the mutual mistake of the parties or fraud by one party. Reformation is an equitable remedy that looks behind the written contract, discovers the intent of the parties, and rewrites or reforms the agreement.

Reformation is not an easy remedy to obtain. It is a wise and important principle of law to start from the assumption that a signed contract represents the intent of the parties. Thus the first goal of the law is to enforce written agreements. If a party wants a court to change a written agreement by reformation, he or she must present clear and convincing evidence that the agreement does not reflect what the parties intended.

There are three possible levels of proof required in our courts. The highest level, beyond a reasonable doubt, is reserved for proving guilt in criminal trials. The lowest level, a preponderance of the evidence, is applicable to civil disputes. In between these two is the clear and convincing standard of proof required to reform a contract.

There are only two grounds for reformation of a contract: mistake and misrepresentation. Both must occur at or before the time the contract is executed (although the mistake or misrepresentation will not be discovered until after the agreement has been signed).

Mistake. There are two kinds of mistake that will permit a court to reform the contract. The first is a mutual mistake. This occurs when there is a difference between the parties� intent and the written agreement at the time it is executed, but neither party is aware of the mistake. When the mistake is discovered, the agreement will be reformed to correct the mistake because equity will not permit one party to profit from the mistake at the expense of the other party. This is fair since neither party intended for the mistaken language to appear in the contract. Consequently, equity is merely doing what is right and restructuring the agreement to give the parties what they bargained for.

Sometimes an agreement is reached and when the written contract is executed, one party is aware that there is a mistake in the written document. If the other party is not aware of the mistake and signs the agreement, this is known as a unilateral mistake. If the mistake favors the party who is aware of the mistake, he or she may sign the agreement, intending that the mistaken language is now part of the agreement. Again, the courts of equity will not permit one party to take advantage of the other in this fashion. Since the written agreement does not represent the intent of the parties (because of the unilateral mistake of the party who did not discover the error), the courts will reform the contract to correct the mistake.

Misrepresentation. This can occur, for example, when one person agrees to purchase a 1975 Volkswagen Super Beetle from another person and signs the seller�s agreement of sale that describes a 1972 Volkswagen Beetle as the item to be purchased. Whether the misrepresentation is intentional or not, the result is the same�the agreement does not represent the intent of the parties. If the plaintiff can give clear and convincing evidence to prove that the written agreement misrepresents the intent of the parties, the court will reform the contract.

Rescission means to abrogate or cancel the contract. Like a reformation, the grounds for a rescission are mistake and misrepresentation. Also like a reformation, the mistake or misrepresentation must have occurred at or before the execution of the contract. Because the remedy�s consequences are so severe, rescission is available only if the mistake or misrepresentation is based on a fact that is material to the contract�s existence.

Generally, if the misrepresentation is material, it does not matter that it may have been unintentional. In a few states, however, the misrepresentation must be both material and fraudulent in order to justify a rescission. For less serious mistakes or misrepresentations the appropriate equitable remedy is reformation of the contract. The test of whether something is material is fairly clear: If the truth had been known, is it reasonable to believe that the party would still have entered into the contract? If the answer is no, the fact is material.

It is the general rule that if the insured dies before the expiration of the contestability period and the insurer discovers that there is a material misrepresentation in the application, the insurer may sue to rescind the contract, even if the cause of death is unrelated to the misrepresentation. There are exceptions to this rule, which permit rescission only if the misrepresentation was related to the cause of death. Under the exception, if an insured was killed in an automobile accident but had concealed the fact the he or she had AIDS, the insurer would be obligated to pay the claim even though the company would not have issued the policy had it known the truth. In the majority of jurisdictions, however, the policy would be rescinded on the basis of the concealment.

There are a few states that permit rescission by insurers if the misrepresentation is intentional, regardless of its materiality. However, the general rule is that to constitute fraud sufficient to permit the insurer to rescind the contract, an intentional misrepresentation must be of a material fact.

This is a very important equitable remedy for insurance companies when there has been a misrepresentation of the insured�s underwriting status that the insurer discovers before the expiration of the contestable period. The result of a rescission is that the contract is void from its inception and is treated as if it had never been created. This means that the court will return the parties to the positions they were in prior to signing the contract. In the life insurance context this means that the insurer will return the policyowner�s premiums and will be released from its obligations to pay policy benefits.

Court action is not required for a rescission to be accomplished. The parties may voluntarily agree that it is in the best interests of both to rescind the agreement. In a similar fashion, one party may decide to rescind the contract and return to the other party any property received. If the second party takes no action to continue the contract, the rescission will be effective.

Because of the requirements of the insurance contract�s incontestability clauses, the second method described above is unavailable to life insurers. A typical incontestability clause requires that the insurer must "contest" the contract within 2 years. Simply declaring a rescission and returning the policyowner�s premium payments is not a contest of the policy. Thus in order to effect a rescission, the insurer must obtain the policyowner�s consent or it must obtain a court order rescinding the policy.