Mistake. Steven Lanci was involved in an automobile accident with an uninsured motorist. Lanci was insured with Metropolitan Insurance Co, although he did not have a copy of the insurance policy. Lanci and Metropolitan entered settlement negotiations,

Question

during which Lanci told Metropolitan that he did not have a copy of his policy. Ultimately, Lanci agreed to settle all claims for $15,000, noting in a letter to Metropolitan that $15,000 was the "sum you have represented to be the . . . policy limits applicable to this claim." After signing a release, Lanci learned that the policy limits were actually $250,000, and he refused to accept the settlement proceeds. When Metropolitan sued to enforce the settlement agreement, Lanci argued that the release had been signed as the result of a mistake and therefore was unenforceable. Should the court enforce the contract? Explain.

Answer 1

Mistake
The court held that Lanci was entitled to void the settlement agreement. Lanci's mistake as to the amount of the policy limits was known or should have been known by Metropolitan. Quoting from Section 153 of the Restatement (Second) of Contracts, the court stated that "[w]here a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances . . . , the contract is voidable by him if he does not bear the risk of the mistake . . . , and . . . the other party had reason to know of the mistake or his fault caused the mistake."