2013-REQUIREMENTS FOR ESTABLISHING DEFENSE OF MISREPRESENTATION. Norman L. Tolle, Esq. and Anita S. Cohen, Esq. Minnesota

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1 2013-REQUIREMENTS FOR ESTABLISHING DEFENSE OF MISREPRESENTATION Norman L. Tolle, Esq. and Anita S. Cohen, Esq. Minnesota 1. Summary of Law There have been no significant changes to the law of Minnesota regarding Establishing the Defense of Misrepresentation since the 2005 Law Report. Consequently, this report incorporates the 2005 report with minor edits and citations to additional statutes and case law. Generally, a false statement in an accident and health insurance application which materially affected the insurer s decision to accept the risk or increases the hazard assumed by the insurer entitles the insurer to void the policy as a matter of law. Where a life insurance policy is issued without a medical exam or without the knowledge or consent of the insured or party completing the application on behalf of a minor, the policy can be voided only if the material misstatements were willfully false or intentionally misleading, i.e., where the insured had knowledge of and consciously misrepresented the medical conditions. The insured s intent can be proven by objective evidence. It is not necessary for the insurer to establish that the insured had an appreciation of the severity of the misrepresented condition or that there was a causal connection between the misrepresented condition and the ultimate loss. Courts in Minnesota have evaluated materiality as whether the misrepresentation affected the decision to insure. Disclosure of medical ailments of a trivial, temporary or unimportant nature is not required. An insurer will be prevented from relying upon a misrepresentation to void coverage where the information disclosed on the application or in a subsequent interview should have alerted the insurer to inquire further. As a general rule, the Minnesota Courts have held that the acts and knowledge of an agent are imputed to the insurance company as principal. However, the courts have stated that for the knowledge of the agent to be binding upon the company, it must have been obtained within the scope of the agent s authority. 2. Statutes 61A. 03 required provision; life insurance policies (2013) Subd. 1. Generally. No policy of life insurance may be issued in this state or by a life insurance company organized under the laws of this state unless it contains the following provisions: (c) Entire contract. A provision that the policy constitutes the entire contract between the parties and is incontestable after it has been in force during the lifetime of the insured for two years from its date, except for nonpayment of

2 premiums and except for violations of the conditions of the policy relating to naval and military services in time of war; that 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 be excepted; and that a special form policy may be issued on the life of a person employed in an occupation classified by the company as extra hazardous or as leading to hazardous.employment, which provides that service in certain designated occupations may reduce the company s liability under the policy to a certain designated amount not less than the full policy reserve. (d) Representations and warranties. A provision that, in the absence of fraud, all statements made by the insured are representations and not warranties, and that no statement voids the policy unless it is contained in a written application and a copy of the application is endorsed upon or attached to the policy when issued. 61A.05 Life policies to contain entire contract (2013) Every policy of insurance issued or delivered within this state on or after the first day of January, 1908, by any life insurance corporation doing business within the state, shall contain the entire contract between the parties. Every policy which contains a reference to the application, either as a part of the policy or as having any bearing thereon, shall have a copy of such application attached thereto or set out therein. 61A.11 Misstatement, when not to invalidate policy (1986) In any claim upon a policy issued in this state without previous medical examination, or without the knowledge or consent of the insured, or, in case of a minor, without the consent of a parent, guardian, or other person having legal custody, the statements made in the application as to the age, physical condition, and family history of the insured shall be valid and binding upon the company, unless willfully false or intentionally misleading. 62A.04 Standard provision (1995) Subd. 2. (2). Time limit on certain defenses: (a) After two 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 deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such two year period. The foregoing policy provision shall not be so construed as to affect any legal requirement for avoidance of a policy or denial of a claim during such initial two year period, nor to limit the application of clauses (1), (2), (3), (4), and (5), 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 five years from its date of issue, may

3 contain in lieu of the foregoing the following provisions (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 two 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 two 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. 62A.06 Statement in application (1986) Subd. 1. Inclusion in policy. The insured shall not be bound by any statement made in an application for a policy unless a copy of such application is attached to or endorsed on the policy when issued as 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 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. Subd. 2. Alterations. No alteration of any written application for any such policy shall be made by any person other than the applicant without written consent, except that insertions may be made by the insurer, for administrative purposes only, in such manner as to indicate clearly that such insertions are not to be ascribed to the applicant. Subd. 3. Effect of applicant s statement. The falsity of any statement in the application for any policy covered by sections 62A.01 to 62A.09 hereof, 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. 3. Cases Ser Yang and Xeng Yang v. Western-Southern Life Assurance Company, 713 F.3d 429, 2013 U.S. App. LEXIS 8375 (8th Cir. 2013) The applicant in this case could not read English and only spoke it a little. In order to complete the application, the agent, who could speak the applicant s language, assisted the applicant with the process. The parents of the applicant contend that their daughter, disclosed the fact that she had Hepatitis B. The applicant, however, was later

4 contacted to verify her answers and stated that the information in the application was correct, including her answer in the negative to a question regarding whether she had received treatment for any abnormality or disease in the past five years. The applicant, however, had been diagnosed with Hepatitis B and was receiving treatment and medication for it. If this information had been disclosed to the insurer the policy would not have been issued. The lower court granted summary judgment to the insurer. The Court of Appeals reversed, noting that Pomerenke v. Farmers Life Ins. Co., 228 Minn. 256, 36 N.W.2d 703, 706 (Minn. 1949) held that if the insured accepted delivery and retained possession of a policy where the insurance agent had completed the application and the insured in good faith had signed without reading, the insured may rely upon the presumption the application was correct. The insured was not required to examine the application to ensure the answers were correct, and any failure to verify the answers would not bar any right of recovery under the policy. The Court of Appeals determined that summary judgment was not appropriate because a genuine issue of material fact existed as to whether the applicant examined the application, whether a reasonable jury could conclude that the applicant gave truthful answers regarding her medical condition, and whether the agent may have recorded the applicant s responses incorrectly. Adzick v. UNUM Life Insurance Company of America, 351 F.3d 883 (8th Cir.2003). In an action to recover disability benefits, the trial court found that the policy application s use of the terms regularly use and currently use were ambiguous and therefore the insured did not make fraudulent misrepresentations about her use of cocaine. The Eighth Circuit reversed, holding that the terms were not ambiguous, and found that where the insured had told numerous doctors and clinics about her frequent cocaine abuse spanning the previous twenty years, there was a material misrepresentation sufficient to void the contract. LeBus v. Northwestern Mutual Life Insurance Company; 55 F.3d 1374 (8th Cir.1995). The district court granted summary judgment to the insurer, finding that the insured had made material misrepresentations in his request for reinstatement. The Eighth Circuit, affirmed, finding that under Minn. Stat. 61A.11 it was not necessary that there be an intent to deceive. The court noted that where the insured, at the very least, knew that his consultations with his doctor were about something potentially much more serious than a cold and that he was undergoing tests to discover the cause of an abnormal mass found in his lung, the representation was willfully false and misleading. The court reasoned that the case turned not on the insured s subjective state of mind, but on the objective facts of which he was aware yet failed to disclose in the request for reinstatement.

5 Ellis v. The Great-West Life Assurance Company, 43 F.3d 382, 1994 U.S. App. LEXIS 36440, (8th Cir. 1994) Plaintiff was denied benefits under a life insurance policy that had been purchased by his late wife after being required to redo the application that his wife had previously completed. The plaintiff was told that the application date would be the original application date of the incorrectly filled out application. The insurer however contended that the life insurance policy was void due to misrepresentations made on his wife s application. The district court applied Minn. Stat. 61A.11 and concluded that neither plaintiff nor his wife had filled out the life insurance application with any intent to mislead the insurer. The Court found that although a statement by an insured would be willfully false or intentionally misleading if an insured acted with an intent to deceive the insurer, the phrase willfully false or intentionally misleading as used in Minn. Stat. 61A.11 did not require that there be an intent to deceive and that all is required is that the insured have full knowledge of the facts that are concealed and that those concealed facts could have probably precluded issuance of the policy if known to the insurance company. The Court found that the questions on the application were clear and that if the Plaintiff had answered differently the insurer may have been influenced in issuing the policy. The judgment was reversed in the insurer s favor. PHL Variable Ins. Co. v. Lucille E. Morello 2007 Irrevocable Trust, 2010 U.S. Dist. LEXIS 29501, (D. Minn. Mar. 2, 2010) Pursuant to Minnesota law, a life insurance policy should be declared void when, in procuring the insurance, a statement is made that is willfully false or intentionally misleading. In addition, under Minnesota law, where the insurer is induced to enter into a contract for insurance by the actual fraud of the insured, the insurer is not required to return the premiums paid. The court held that a contrary rule would be an invitation to commit fraud since a party who contemplates obtaining insurance by false representations would feel that he is taking no chances of loss, but is entering upon a transaction in which he stands to gain large returns without any possibility of endangering his investment. If the fraud is never discovered, the beneficiary under the policy which will be issued to him will receive the full benefit of the contract. If the fraud is discovered, his estate will receive back all that has been paid by the guilty party, and the trouble and expense attending upon the transaction will be thrown upon the innocent party. Hammer v. Investors Life Insurance Co., 511 N.W. 2d 6 (1994) The insured s wife, the life insurance beneficiary, sued the insurer after the insurer denied her claim on the basis of the insured s misrepresentation as to his smoking status. The trial court held for the beneficiary, and the insurer appealed on the basis that the trial court had improperly excluded certain medical records on the basis of physician/patient privilege. The Court of Appeals reversed and remanded, ruling that exclusion of the medical records was improper since the medical authorization signed by the insured at the time of application was still valid because the insured died within two years of signing it. The court also ruled that the date of the policy for purposes of

6 Minn. Stat. 61A.03, Subd. 1(c) (incontestability) was the effective date as defined in the contract and not the date of the temporary insurance agreement issued with the application. After remand, the District Court again entered judgment for the beneficiary and again the insurer appealed. The Court of Appeals affirmed and the Supreme Court granted the insurer s petition for review. The Supreme Court reversed and remanded, finding that the record clearly showed that the applicant s response to the question on the application most critical to the issuance of a nonsmoker s life insurance policy was at best, inaccurate, or at worst willfully false or intentionally misleading. It is for the jury to determine into which category the response best fits. Useldinger v. Old Republic Life Insurance Company, 377 N.W.2d 32 (1985). The court held that the failure of the decedent-insured to disclose a history of high blood pressure, alcohol abuse, and liver-related problems on a life insurance application was a misrepresentation material to the decision to insure as a matter of law. To establish willful misrepresentation under Minn. Stat., 61A.11, it was necessary to show that the insured had knowledge of the misrepresented medical condition but was not necessary to show that he had an appreciation of the seriousness of the condition. The court stated that a request for a disclosure of a serious illness or disorder should have included disclosure of chronic alcoholism resulting in cirrhosis of the liver, and that a physician s use of the term hypertension instead of high blood pressure did not create a factual issue with respect to the insured s knowledge of his medical problems. The lower court s judgment for the insurer was upheld. Waite v. American Family Mutual Insurance Company, et al., 352 N.W.2d, 1984 Minn. LEXIS 1407 (1984) The Supreme Court of Minnesota reviewed the lower court s order for judgment notwithstanding the verdict in a case where the jury had found that plaintiffs answers on a health insurance application were false but did not materially affect the risk. The Supreme Court found that the question as to whether the applicant s false answers regarding his wife s health materially affected the risk was properly left to the jury and that the jury s finding, that the falsity did not materially affect the insured s acceptance of the risk, was sustained by the evidence. While the Court found evidence to sustain the jury s verdict, the Court also agreed with the lower court s alternative order for a new trial. The Court determined that it was unclear whether the jury applied the proper definition of falsity. The Court also noted that it had been unwilling to hold that failure to record occasional visits to a doctor about minor disturbances is a sufficient reason to deny recovery under these policies. Domke v. Farmers & Mechanics Savings Bank, 363 N.W.2d 898 (1965). An insured under a mortgage disability insurance policy sought benefits after he was disabled due to a hearing loss. The insurer denied coverage, alleging that under Minn. Stat., 62A.06, Subd. 3, the applicant made a material misrepresentation of his hearing condition on the application by failing to list the physicians who treated him, and by describing his hearing losses as slight. The court left undisturbed the trial court s

7 finding that there was no material misrepresentation because the hearing loss description was the one used by the insured s physician, and his failure to list his doctor s name was due to an inability to remember. Additionally, since the insured had never received a complete copy of the policy and did not have notice of a certain policy provision, the insurer could not enforce that provision. The court stated that even if the application responses could be construed as false, the insurer s failure to inquire when a basis for inquiry was set out in the application could be a waiver of its right to rescind the policy. Howard. v. Aid Association for Lutherans, 272 N.W.2d 910 (1978). The insured misrepresented his medical treatment and history of chemical abuse on an application for life insurance. He subsequently died from a bullet wound inflicted by a co-worker. The court, relying on Minn. Stat., 61A.11, stated that the insurer needed only to show that the insured willfully misstated necessary information or intentionally misled the insurer into issuing the policy. The court examined whether the omission or misrepresentation substantially affected or impaired the insurer s ability to make a reasonable decision to assume the risk of coverage. No causal connection between the misrepresented medical history and the insured s death was necessary under Minnesota law. The court concluded that the insurer was not liable where, with reasonable probability, the disclosure of the facts concealed by the insured would have substantially influenced the insurer s decision to provide coverage. Roeder v. North American Life Insurance Company of Chicago, 259 Minn. 168, 106 N.W.2d 624 (1961). This lawsuit was brought against an insurer to recover under a life insurance policy issued without a medical examination. The Supreme Court affirmed the lower court s judgment for the beneficiary. The court held that the statements made by the insured were not considered willfully false and intentionally misleading as a matter of law where the insured s physician testified that the insured had only an insignificant and minor medical problem. The court found that the jury determination that the insured honestly believed he had no disabilities of any consequence was supported by evidence. Siemers v. United Benefit Life Insurance Company, 246 Minn. 459, 75 N.W.2d 605 (1956). This case involved the reinstatement of a life insurance policy issued on the basis of a non-medical examination. In an appeal by the insurer, the court held that the evidence did not show as a matter of law that the insured s statement as to good health was willfully false or intentionally misleading. A willfully false and intentionally misleading answer was one which was consciously made with a premeditated design so as to falsify the facts as to lead the insurer to act when it otherwise would not. The court stated that willfully false denotes knowingly concealed. Based upon the physicians statements that they had seen the insured for examination and not treatment, and where the insured s physician had told him he was in excellent physical condition even

8 though he had hypertension and dizzy spells, the court affirmed the lower court s judgment for the beneficiary. Ambroz v. Minn. Life Ins. Co., 2010 Minn. App. Unpub. LEXIS 599 (Minn. App. June 29, 2010) The insurer denied benefits and cancelled coverage based on its opinion that the wife had been diagnosed as having, and had been treated for, heart disease within the two-year period before she applied for the policy. The court found that the term "heart disease," as used in a non-technical context, was not ambiguous. "Disease" was defined as a deviation from the healthy and normal functioning of the body or special classes of pathological conditions with similar traits, such as having similar causes and affecting similar organs. The wife's medical records, combined with the testimony of respondent's medical director, reasonably supported the district court's findings that she had been informed that she had heart disease, was told to arrange treatment for that condition, and did not inform the insurer of the disease. Intent to deceive was not required; rather, the relevant inquiry was whether she knew objective facts supporting her diagnosis and whether those facts would have substantially affected the insurer's decision to issue coverage. Austin v. Farmers New World Life Ins. Co., 1996 Minn. App. LEXIS 861 (Minn. App. 1996). This was an action to recover life insurance benefits under a life insurance policy obtained by the insured shortly before he was diagnosed with cancer. The court found that the Pomerenke exception for incorrectly recorded answers made by an agent did not apply to forms completed by medical assistants retained by the insurer. Nevertheless, the court upheld the jury s verdict for the insured. The court based its reasoning on three findings: (1) the evidence indicated that the insured did not have knowledge of a more serious condition other than pneumonia; (2) the application only asked whether a physician was consulted, not what was advised; and (3) the plain meaning of the question did not require disclosure of future treatments. St. Cloud National Bank and Trust Co. v. Woodmen of the World Insurance Society, 451 N.W.2d 75 (Minn. App. 1990). The insurer denied coverage on the basis of the insured s misrepresentations regarding treatment for depression, alcoholism, and a history of hospitalizations. The trial court found that the statements were false and ruled for the insurer. The Court of Appeals reversed. It concluded that Minn. Stat. 61A.11 was applicable since the paramedical exam given to the insured fell short of a medical examination as contemplated by the statute. Thus, it applied the standard that the representations of the insured must be willfully false or intentionally misleading. The court held that this standard had not been met since the insured had some confusion about his health, the insurer had learned about the hospitalization during its telephone interview with the insured, the agent had conveyed knowledge regarding the insured s alcoholism to his manager, and the insurer had not investigated the insured s medical records.

9 Born v. Medical Life Insurance Company, 428 N.W.2d 585 (Minn. App. 1988). The wife of the deceased insured under a medicare supplement policy sued the insurer for contract and punitive damages (based on emotional distress), alleging that the insurer was negligent in not conducting a medical investigation when the application was taken, and for failure to properly notify the insured as to the consequences of replacing his prior coverage. The insurer had denied benefits and sought rescission of the policy based on material misrepresentations as to the insured s health. The wife did not dispute that material misrepresentations had been made. The court held that the insurer was reasonable in relying upon the representations in the application, and thus had no duty to conduct a further medical investigation. However, the court held the company liable for contract damages on the separate basis that the company had mistakenly sent a letter which indicated that the insured was covered for pre-existing conditions. Blazek v. North American Life & Casualty Company, 251 Minn. 130, 87 N.W.2d 36 (1957). The disability application at issue did not describe the insured s consultation with a doctor for a sore back, stiff neck, sore shoulder and sore thumb. The plaintiff-insured had signed a disability insurance application in blank and it was later filled out by the agent. The court stated that the general questions in the application did not require disclosure of ailments which were trivial, temporary, or unimportant in nature, but only those of a serious, dangerous and permanent character. The court found the jury determination that the ailments were trivial and unimportant and considered so by the insured and agent and did not need to be disclosed on the application to be supported by the evidence. In making out the application, the agent was found to be the agent of the company and not of the insured. Pomerenke v. Farmers Life Insurance Company, 388 Minn. 256, 36 N.W.2d 703 (1949). In this action by a beneficiary seeking life insurance benefits under a policy not issued on the basis of a medical examination, the court stated that the act of an agent in recording answers incorrectly on the application was considered the act of the insurer and not that of the applicant. The insurer was, therefore, estopped to assert any mistake. It was not necessary for the insured to examine the, application to determine whether the answers were correct. Gredson v. Woodmen of the World Life Insurance Society, 211 Minn. 442, N.W. 2d 413 (1941). Questions in a life insurance application were incorrectly answered because they did not disclose the insured s heart disease and prior rejections for life insurance. The agent had been informed of the accurate answers, but falsified the application answers against the directions of the insured. The court held that the company was estopped

10 from relying on the false answers because it was responsible for the misconduct of its agent.