Requirements for Establishing Defense of Misrepresentation Thayla Bohn Michigan

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1 Requirements for Establishing Defense of Misrepresentation Thayla Bohn Michigan This report updates the 2005 Misrepresentation in Application summary written by Annette M. Tephly. 1. Summary of Law A false representation in an application that materially affects whether the insurer would have accepted the risk permits the insurer to cancel or rescind the policy as a matter of law, regardless as to the insured s knowledge of the falsity, and even though the statement may have been made in good faith. Michigan courts recognize exceptions exist: (1) where full disclosure would require the insured to express an opinion or evaluate information beyond the capabilities of the average person or (2) where the information not disclosed was of a trivial nature. 2. Statutes Disability insurance; false statement in application; effect The falsity of any statement in the application for any disability insurance policy covered by chapter 34 of this code may not bar the right to recovery thereunder unless such false statement materially affected either the acceptance of the risk or the hazard assumed by the insurer. (1) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless the misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make the contract. (2) A representation is a statement as to past or present fact, made to the insurer by or by the authority of the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false. (3) In determining the question of materiality, evidence of the practice of the insurer which made the contract with respect to the acceptance or rejection of similar risks shall be admissible. (4) A misrepresentation that an applicant for life, accident or health insurance has not had previous medical treatment, consultation or observation, or has not had previous treatment or care in a hospital or other like institution, shall be deemed, for the purpose of determining its materiality, a misrepresentation that the applicant has not had the disease, ailment or other medical impairment for which such treatment or care was given or which was discovered by any licensed medical practitioner as a result of such consultation or observation. If in any action to rescind any contract or to recover thereon, any misrepresentation 1

2 is proved by the insurer, and the insured or any other person having or claiming a right under the contract, shall prevent full disclosure and proof of the nature of the medical impairment, the misrepresentation shall be presumed to have been material time limit on certain defenses; incontestability [Disability Policies or Clauses] There shall be a provision as follows: TIME LIMIT ON CERTAIN DEFENSES: (a) After 3 years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such 3-year period. (The foregoing policy provisions shall not be so construed as to affect any legal requirement for avoidance of a policy or denial of a claim during such initial 3-year period, nor to limit the application of sections 3432 (change of occupation), 3434 (misstatement of age), 3436 (other insurance--same insurer), 3438 (insurance with other insurers--provision of service or expense incurred basis), and 3440 (insurance with other insurers) in the event of misstatement with respect to age or occupation or other insurance.) (A policy which the insured has the right to continue in force subject to its terms by the timely payment of premium (1) until at least age 50 or, (2) in the case of a policy issued after age 44, for at least 5 years from its date of issue, may contain in lieu of the foregoing the following provision (from which the clause in parentheses may be omitted at the insurer's option) under the caption "INCONTESTABLE":) After this policy has been in force for a period of 3 years during the lifetime of the insured (excluding any period during which the insured is disabled), it shall become incontestable as to the statements contained in the application. (b) No claim for loss incurred or disability (as defined in the policy) commencing after 3 years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss had existed prior to the effective date of coverage of this policy. (For the purpose of permitting insurers to use a uniform policy in several states, the insurer is permitted to print in the policy form in required provisions (a) and (b) above the term of "3 years". Nevertheless, the provisions of the contract and text of the statute to the contrary notwithstanding, the time limits for said defenses under any contract delivered or issued for delivery to any person in this state shall not exceed 2 years.) Entire contract; incontestability; exceptions [Individual Life or Annuity Policies] 2

3 There shall be a provision that the policy, together with the application therefor, a copy of which application shall be endorsed upon or attached to the policy and made a part thereof, shall constitute the entire contract between the parties and shall be incontestable after it shall have been in force during the lifetime of the insured for 2 years from its date, except for non-payment of premiums and except for violations of the policy relating to naval and military services in time of war, and at the option of the company provisions relative to benefits in the event of total and permanent disability and provisions which grant additional insurance specifically against death by accident may also be excepted Group life insurance policy; incontestability There shall be a provision that the policy shall be incontestable after 2 years from its date of issue, except for non-payment of premiums and except for violation of the conditions of the policy relating to military or naval service in time of war. 3. Cases In re Certified Question: Wickersham v. John Hancock Mut. Life Ins. Co., 413 Mich. 57, 318 N.W.2d 456 (1982). In an action seeking to recover the proceeds of a life insurance policy, the U.S. District court for the Eastern District of Michigan, certified the following question: Does the term materiality in a statute providing that an insurance policy may be avoided on grounds of material misrepresentation require that the subject of the misrepresentation be related to the cause of the insured s death? The Supreme Court of Michigan held that a material misrepresentation need not specifically relate to the cause of the insured s death for an insurance company to be entitled to rescind of avoid a life insurance policy. Montgomery v. Fid. & Guar. Life Ins. Co., 269 Mich. App. 126, 713 N.W.2d 801 (2005). In a complaint brought by an insured s widow, the plaintiff sought to recover benefits under a life insurance policy denied by the insurer after it discovered the insured misrepresented his smoking habits in the application. Although the insured s death was caused by an automobile accident, the Court of Appeals of Michigan allowed the insurer to rescind on the basis of a misrepresentation material to the acceptance of the risk. In holding that a rescission does not require a causal connection between the misrepresentation and the insured s death if it is material to the acceptance of the risk, the Court noted a distinction between this basis of materiality and being material to the hazard assumed. According to it, for a misrepresentation to be material to the hazard assumed, on the other hand, the misrepresentation must contribute to the insured s death in a substantial manner. Zulcosky v. Farm Bureau Life Ins. Co. of Michigan, 206 Mich. App. 95, 520 N.W.2d 366 (1994). 3

4 The court held that a misrepresentation is not material if the insurer would have issued a policy, even if the policy would have been a different one issued at a higher rate. [Overruled by Oade, infra.]. Smith v. Globe Life Ins. Co., 460 Mich. 446, 597 N.W.2d 28 (1999). In an action seeking to recover the proceeds of a credit life insurance policy, the Michigan Supreme Court held that a misrepresentation is material whenever the facts misrepresented are causally connected to the loss and when a causal relationship exists, an insurer is entitled to rescind the policy even without a showing of reliance if the misrepresentation is material to the hazard assumed. If the misrepresentation is material to the acceptance of the risk, however, the insurer must have relied on the misrepresentation in order to rescind. Am. Guar. & Liability Ins. Co. v. Jaques Admiralty Law Firm, P.C., 2003 WL , at *6 (E.D. Mich. 2003). When applying Michigan law, the United States Eastern District of Michigan thoroughly examined the difference between acceptance of the risk and hazard assumed. The court stated: Acceptance of the risk and hazard assumed have different meanings. citing Smith, 460 Mich. at 459, 597 N.W.2d 28. Acceptance of the risk refers to the time of making of the contract of insurance and to the insurance concept of risk. Whether an insurer determines to enter into a contract is affected by its assessment of the likelihood of a fact increasing the chances of the loss insured against. Id. (citing Wickersham, 413 Mich. at 63, 318 N.W.2d 456(1982)). Hazard assumed refers to the circumstances of the loss, such that a misstatement must be shown in some way to have affected [the hazard] or contributed to the loss. Smith at , 597 N.W.2d 28 (internal citation omitted). Although an insurer must have relied on the misrepresentation in the insurance application in order to show that the statement materially affected the insurer s acceptance of the risk, reliance is not required to show that the misrepresentation materially affected the hazard assumed by an insurer. Id. All that must be shown for the latter is a casual relationship between eh misrepresentation and the actual loss. Id. Oade v. Jackson Nat l Life Ins. Co. of Mich., 465 Mich. 244, 632 N.W.2d 126 (2001); The Supreme Court of Michigan held that the insured s failure to inform the insurer of hospitalization for chest pains between the time of application and delivery of the policy was a misrepresentation because the insured had a continuing duty to ensure that the answers on the application remained true as of the date he received the policy. In addition, the Court directly overruled Zulcosky, supra. Holding that a representation in an application is material even if the insurer would have issued a contract but at an increased premium rate. See also Martin v. Transamerica Occidental Life Ins. Co., 2012 WL (E.D. Mich. 2002); but see Auto Club Ins. Ass n v. Juncaj, 2002 Mich. App. LEXIS 1193 (Mich. Ct. App. 2002) (stating Oade applies only to life insurance policies). 4

5 Dorsey v. Mut. Of Omaha Ins. Co., 991 F. Supp. 868 (E.D. Mich. 1998). The district court held that an applicant s misstatement of treatment for drug and alcohol abuse was a material misrepresentation despite applicant s good health at the time of the application because if the insurer had known the applicant s true health condition and numerous instances of treatment for drug and alcohol use, it would not have provided insurance coverage. Colley v. Conseco Medico Ins. Co., 11 Fed.Appx. 487, Slip Copy, 2001 WL (6 th Cir. 2001). The 6 th Circuit court, applying Michigan law, held that the health insurer satisfied the requirement of showing materiality through (1) statement by chief underwriter that policy would not have been issued if full extent of applicant s condition had been revealed and (2) evidence from underwriting manuals confirming conclusion. Shah v. Royal Maccabees Life Ins. Co., 2000 WL (Mich. Ct. App. 2000). In an action for proceeds under a life insurance policy, the Court of Appeals of Michigan recognized that where there has been a material misrepresentation in the application for a life insurance policy, the policy will be held to be void ab initio and no amount of delay, reasonable or unreasonable, by the insurer in rejecting the application will give rise to a binding insurance contract. The court also found that the applicant, who did not read or speak English well, was still under the legal duty to know the representations made in the application and the insurer was not prevented from denying coverage on this basis. Wiedmayer v. Midland Mut. Life Ins. Co., 414 Mich. 369, 324 N.W.2d 752 (1982). The plaintiff filed a lawsuit against a group health and life insurer claiming: (1) Benefits for insured s hospitalization and medical care that insured s wife required and (2) Benefits under life portion of policy. The Circuit Court granted summary judgment for insurer, and wife appealed. The Michigan Supreme Court reversed the Court of Appeals and reinstated the Circuit Court s judgment. The fact that the insurance policy did not affirmatively provide for cancellation under such circumstances does not operate as a bar to the insurer s ability to void the policy in the face of fraud. The court held that common law has always permitted the avoidance of a contract procured by means of fraud. See New York Life Ins. Co. v. Buchberg, 249 Mich. 317, 228 N.W. 770 (1930). The Supreme Court cited a South Carolina Supreme Court holding in the case of Government Employees Ins. Co. v. Chavis, 254 S.C. 507, , 176 S.E.2d 131 (1970).In that case, the South Carolina Supreme Court upheld the right of an insurer to rescind an automobile liability policy because of fraudulent statements made in the procuring of it, although the insurer had not secured the right to do so in the policy. In doing so, the Court observed: We know of no authority which requires the insurer to reserve the right to rescind its policy for fraud or material misrepresentation. In doing so, the Supreme Court of Michigan held that insurer s failure to include provision in insurance policy which reserved right to avoid liability in event of material misrepresentation by insured did not preclude insurer form doing so. 5

6 Franklin Life Ins. Co. v. William J. Champion and Co., 350 F.2d 115 (6th Cir. 1973), cert. denied 384 U.S. 928, 86 S.Ct (1966). The court held that an insured who answered in good faith that he was in good health, when unknown to him he was suffering from brain cancer that would result in his death, could not be denied coverage under a reinstated policy. The fact that the insured had failed to disclose his headaches was not a material misrepresentation. The court noted two types of innocent misrepresentations. The first was related to opinions, such as affirmations of good health, that the court stated must be made in good faith and to be best of the applicant s knowledge. The second involved matters of a trivial nature that were not considered to affect sound health generally, such as the insured s failure to mention routine examinations for headaches, etc. See Lipsky v. Washington Nat l Ins. Co., 7 Mich. App. 632, 152 N.W.2d 702 (1967); but see Woodall Indus., Inc. v. Mass. Mut. Life Ins. Co., 483 F.2d (6th Cir. 1973); Prudential Ins. Co. of Am. v. Cusick, 369 Mich. 209, 120 N.W.2d (1963). Woodall Indus., Inc. v. Mass. Mut. Life Ins. Co., 483 F.2d 986 (6th Cir. 1973). In distinguishing the case at hand from Franklin Life Ins., 350 F.2d 115, the Sixth Circuit Court of Appeals stated that it is not for the insured to determine what is material to the risk of the insurer. Accordingly, when filling out the life insurance application the applicant was required to be truthful as to the truth known to him at the time. Seeing that the applicant clearly had knowledge of the misrepresented fact explicitly asked to be disclosed by the insurer (examination by physician and diagnosis of heart murmur) and since the fact was material, the court found that the insurer was entitled to a directed verdict granting rescission. Wojciechowski v. Franklin Life Ins. Co., 2002 WL (Mich. App. 2002). Inaccurate medial information was given by the insured in an application for group life insurance. The court found that even if the answers on the insurance application were innocent, they could still be found to be material misrepresentations. In addition, the court concluded that the sixty-day restriction in the insurance contract limiting the insurer s ability to terminate the insurance did not limit the insurer from rescinding the contract from the beginning after 60 days when there is a material misrepresentation. 1. Summary of Law Prevention of Insurer from Asserting Defense of Misrepresentation An agent s failure to record medical information provided by the applicant generally will cause his knowledge to be imputed to the insurer; this is particularly the case if the agent s failure involves the agent s interpretation of the question and the type of information it seeks. However, if the insured and agent should have known that the medical history was so serious as to preclude issuance of a policy, the action of the agent may be categorized as fraud upon the insurer. In that case, the agent s knowledge may not be imputed to the insurer. An insurer has a duty to investigate the 6

7 facts listed on the application only if something in the application gives rise to a suggestion that there may be reasons to doubt the truthfulness of the disclosure provided. A statement by the insured listed on the application cannot be introduced against him/her at trial unless a copy of the application is attached to the policy. 2. Statutes Disability insurance; application, use as evidence Disability & Health The insured shall not be bound by any statement made in an application for a disability insurance policy unless a copy of such application is attached to or endorsed on the policy when issued as a part thereof. If any such policy delivered or issued for delivery to any person in this state shall be reinstated or renewed, and the insured or the beneficiary or assignee of such policy shall make a written request to the insurer for a copy of the application, if any, for such reinstatement or renewal, the insurer shall within 15 days after the receipt of such request at its home office or any branch office of the insurer, deliver or mail to the person making such request, a copy of such application. If such copy shall not be so delivered or mailed, the insurer shall be precluded from introducing such application as evidence in any action or proceeding based upon or involving such policy or its reinstatement or renewal Life insurance; solicitor as agent of insurer Any person who shall solicit an application for insurance upon the life of another shall, in any controversy between the insured or his beneficiary and the insurer issuing any policy upon such application, be regarded as the agent of the insurer and not the agent of the insured Entire contract Every policy of life insurance hereafter issued or delivered within this state by any life insurer doing business within this state shall contain the entire contract between the parties. And nothing shall be incorporated therein by reference to any constitution, bylaws, rules, application or other writing unless the same are endorsed upon or attached to the policy when issued Statements deemed representations; provisions required [Individual Life or Annuity Policies] There shall be a provision that all statements made by the insured, shall, in the absence of fraud, be deemed representations and not warranties, and that no such statement shall avoid the policy unless it is contained in a written application and a copy of such application shall be endorsed upon or attached to the policy when issued Entire contract; application, representations [Group Life] There shall be a provision that the policy, the application of the employer and the individual applicants, if any, of the employees insured, shall constitute the entire contract between the parties, and that all statements made by the employer or by the 7

8 individual employees shall, in the absence of fraud, be deemed representations and not warranties, and that no such statement shall be used in defense to a claim under the policy, unless it is contained in a written application. 3. Cases Manufacturers Life Ins. Co. v. Beardsley, 365 Mich. 308, 112 N.W.2d 514 (1961). Insurer filed to prevent a beneficiary from recovering under a life insurance policy because the deceased insured had submitted an application with false answers. The trial judge found no actual intent to deceive on the part of the insured, but did find that the answers materially affected the acceptance of the risk by the insurer. The beneficiary claimed that the insurance agent who prepared the application did not ask the insured the specific questions listed on the application. The court found that the agent, in his wording, had asked the insured for information sufficient to answer the questions and that the insurer proved that the responses provided by the insured to those questions were false. The court held that the evidence did not support the beneficiary s claim that the agent willfully or innocently erred in filling out the application. Dedic v. Prudential Ins. Co. of America, 14 Mich. App. 274, 165 N.W.2d 295 (1968). Deceased insured had failed to disclose on his application that he had visited a doctor three times within the past five years before he submitted his application. Insurer stated that it would not have issued the policy had it known of the visits. The court held that the policy was void ab initio because of the failure to disclose. Further, invoking the physician-patient privilege brought the beneficiary directly with the purview of Insurance Code section (4). Szlapa v. Nat l Travelers Life Co., 62 Mich. App. 320, 233 N.W.2d 270 (1975). The insurer denied a death claim on a pending life insurance application, asserting the applicant had given false answers to aviation questions. The beneficiary alleged that true answers had been given by the applicant, but not recorded by the agent. Given the insurer s burden of proof to show material misrepresentation, the court noted that since the agent did not testify as to the circumstances of the application, it would be difficult to find that the insurer had met its burden. However, the court indicated that if the application did contain material misrepresentations rendering the coverage voidable, the insurer s delay in acting on the application (even if unreasonable), would not give rise to a binding insurance contract. Hughes v. John Hancock Mut. Life Ins. Co., 351 Mich. 302, 88 N.W.2d 557 (1957). The applicant for a life insurance contract allegedly gave correct answers to the insurer s examining physician who improperly recorded them on the application. The court held that when it is shown that a participant in the obtaining or filling out of an application for life insurance is in fact an agent of the insurer, the information given to such agent shall be imputed to the insurer. Fakhouri v. Banner Life Ins. Co., 157 F. Supp. 2d 751 (E.D. Mich. 2001). 8

9 An application for life insurance contained an initial questionnaire, a medical examination report and a supplemental Health Statement. The insurer denied the claim for benefits because there were material misrepresentations in the application. The beneficiary argued that the agent forged the applicant s signature on the final health statement. The court held that, under Michigan law, misrepresentations on an application for life insurance permitted the insurer to avoid payment regardless of whether misrepresentations were contained in an application containing the agent s forgery of the insured s signature. Pitcher v. World Ins. Co. of Omaha, Neb., 327 Mich. 520, 42 N.W.2d 735 (1950). The applicant for disability income insurance told the soliciting agent about medical attention for a chronic cough, a hemorrhoid operation, bronchial pneumonia and other medical treatments in the preceding five years. The agent did not record that information, saying that he was primarily concerned with questions that had involved hospitalization or confinement. The court held that the policy could not be rescinded by the insurer because the agent had received truthful answers to the medical questions, and his knowledge was imputable to the insurer. When the agent attempted to interpret the type of information elicited by a question, his interpretation of that question would be binding on the insurer, unless it could be shown that the agent and the insured committed fraud together. Henson v. John Hancock Mut. Life Ins. Co., 261 Mich. 683, 247 N.W. 102 (1933). The applicant for insurance on the life of his infant child testified that his wife had disclosed to both the soliciting agent, and later, to an investigator for the insurer that his daughter suffered from inflammatory rheumatism and endocarditis, but that the agent had not recorded the disclosures. The court accepted the assertion that the disclosures had been made but concluded that a palpable fraud had been perpetrated by the agent on the insurer. The court noted that if the true facts had been disclosed, no insurance would have been issued and the applicant reasonably could not have expected one to be issued. The court held that the insurer had grounds to rescind the policy. Ranger, Inc. v. Equitable Life Assurance Soc y of U.S., 196 F.2d 968 (6th Cir. 1952). The insurer denied a death claim, alleging misrepresentation, but the beneficiary alleged that the copy of the application attached to the policy was not legible, as required by state law, and that it would not remain legible through the expected life of the policy. The court held that the copy need only be legible to a person of normal eyesight, under normal conditions, and with reasonable ease. Further, the copy must be legible at the time the policy was issued. Michael v. World Ins. Co., 254 F.2d 663 (6th Cir. 1958). Against the insurer s defense of misrepresentation, the beneficiary asserted a failure of the insurer to investigate the statements in the application. The court stated, 9

10 In some circumstances we think the insurer cannot complacently rely upon the statements as to physical condition given by the insured or beneficiary. This generally is the rule in cases where the type of information is of a character suggesting the cautionary measure of investigation as to the accuracy or truthfulness of the statement given. Here, however, we are of the opinion that the statements as to the surgery performed on the insured, coupled with the statement as to the good condition of the insured, did not put the insurer on notice requiring further investigation or inquiry. Certainly, it did not in this case put upon the insurer the burden of controverting the truthfulness of the statements relied upon. Id. at