East Providence Credit Union v. Geremia

Supreme Court of Rhode Island
239 A.2d 725 (1968)

ELI5:

Rule of Law:

A promise to pay an insurance premium on behalf of a borrower is an enforceable contract when the lender can add the premium to the loan balance and charge interest on it. Alternatively, such a promise is enforceable under the doctrine of promissory estoppel if the borrower foreseeably relies on it to their detriment and injustice can only be avoided by enforcement.

Facts:

On December 5, 1963, defendants borrowed money from the plaintiff, secured by a chattel mortgage on their car.
The mortgage agreement required defendants to maintain insurance and allowed the plaintiff to pay the premiums and add the cost to the loan if the defendants failed to do so.
On October 11, 1965, the insurance company notified both parties that the policy would be cancelled for non-payment of the premium.
Following the notice, the plaintiff sent a letter to the defendants stating, 'If we are not notified of a renewal Policy within 10 days, we shall be forced to renew the policy for you and apply this amount to your loan.'
Upon receiving the letter, the defendant wife telephoned the plaintiff's office and told an employee to pay the premium, explaining they were unable to pay at that time.
The plaintiff failed to pay the premium, and the insurance policy was subsequently cancelled.
On December 17, 1965, the defendants' car was demolished in an accident, a loss that would have been covered by the policy.

Procedural Posture:

The plaintiff initiated a civil action in the superior court (trial court) to collect the balance due on a promissory note from the defendants.
The defendants filed a counterclaim against the plaintiff.
The trial justice dismissed the plaintiff's complaint and entered judgment for the defendants on their counterclaim.
The plaintiff (appellant) appealed the trial court's judgment to this court.

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Issue:

Is a lender legally bound by its promise to pay a borrower's overdue insurance premium when the lender has a contractual right to add that payment to the loan balance and the borrower relies on that promise by forbearing from paying the premium themselves?

Opinions:

Majority - Kelleher, J.

Yes, a lender is legally bound by its promise under these circumstances. The court found two independent grounds for enforcing the plaintiff's promise. First, the promise was supported by valid consideration, making it a binding contract. The mortgage agreement allowed the plaintiff to add any insurance payments to the loan balance, and the court inferred the plaintiff would charge interest on such payments, which constitutes consideration. The plaintiff's failure to pay was therefore a breach of contract. Second, even if the promise were gratuitous, it would be enforceable under the doctrine of promissory estoppel. The plaintiff made a promise that it should have reasonably expected to induce the defendants' forbearance from paying the premium themselves, the defendants did in fact rely on the promise, and injustice could only be avoided by enforcing the promise.

Analysis:

This decision is significant for formally adopting the doctrine of promissory estoppel as defined in the Restatement (First) of Contracts § 90 into Rhode Island law, aligning the state with the majority of jurisdictions. By providing two alternative grounds for enforcement—breach of contract and promissory estoppel—the court strengthened protections for promisees who rely on assurances, particularly in commercial contexts like lending. The ruling clarifies that a promise is not merely gratuitous when the promisor has a financial interest in its performance, such as the ability to earn interest on an advanced sum. This precedent makes it more difficult for lenders to make assurances about protecting collateral and then evade responsibility if they fail to act on those assurances.

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