ALABAMA A. REQUIREMENTS FOR ESTABLISHING AFFIRMATIVE DEFENSE OF MISREPRESENTATION.

Transcription

1 2013 Requirements for Establishing Defense of Misrepresentation Walter T. Gilmer, Jr. Alabama ALABAMA A. REQUIREMENTS FOR ESTABLISHING AFFIRMATIVE DEFENSE OF MISREPRESENTATION. 1. Summary of Law Although there have been new cases applying Alabama s rescission statute, Alabama law, as summarized in the 2005 report on this issue and by Sarah B. Severson in the 1998 predecessor, has remained essentially unchanged: The insurer can establish a defense of misrepresentation on any one of three bases: (1) that the representation was fraudulent; (2) that the representation was material to the risk; or (3) that the insurer in good faith would not have issued the policy as it did had there been no misrepresentation. The same principles applicable to original applications apply to reinstatement applications and to renewal policies issued on the basis of an original application. Moreover, a plea of misrepresentation must be accompanied by a payment into court of all premiums paid on the policy. Finally, as discussed in part B of this report, the Alabama Supreme Court has held specifically that misrepresentation is an affirmative defense that can be waived. 2. Statutes Ala. Code Application for policy Representations and misrepresentations, etc. a) All statements and descriptions in any application for an insurance policy or annuity contract, or in negotiations therefor, by, or in behalf of, the insured or annuitant shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under the policy or contract unless either: (1) Fraudulent; (2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or (3) The insurer in good faith would either not have issued the policy or contract, or would not have issued a policy or contract at the premium rate as applied for, or would not have issued a policy or contract in as large an amount or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise. b) No plea of misrepresentation or fraud in connection with the issuance of a life insurance policy or annuity contract shall be filed unless accompanied by a payment into court of all premiums paid on the policy or contract.

2 3. Case Law a. General National Sav. Life Ins. Co. v. Dutton, 419 So. 2d 1357 (Ala. 1982). Dutton purchased individual health insurance from National Savings Life Insurance Company. In her application for the insurance, she answered No to questions concerning whether she had ever experienced high or low blood pressure or chest pains. One and one-half months after National Savings issued the insurance, Dutton went to her doctor with several complaints, including chest pains, which she told her doctor she had suffered off and on for two or three years. The doctor admitted her into the hospital for further examination. The medical history taken in the hospital repeated this information and stated that Dutton currently took medication for high blood pressure. Subsequent hospital records showed that Dutton first received high blood pressure medication during her stay in the hospital. When she submitted a claim for medical expenses, National Savings denied the claim on grounds that she had misrepresented in her application that she had never experienced high blood pressure or chest pains. Dutton then sued the insurer for benefits under the health insurance policy and for damages from the insurer s alleged bad faith denial of her claim. The trial court instructed the jury to determine, at the time and place that she filled out this application did she [Dutton] truthfully answer to the best of her knowledge all the questions. The jury returned a verdict in favor of Dutton, and National Savings appealed, arguing that this instruction was an incorrect statement of Alabama s law regarding an insured s misrepresentation in an application for insurance. The Alabama Supreme Court agreed with National Savings and reversed the trial court, remanding the case for a new trial. The supreme court explained that (a) states three alternative tests for determining whether an insured s misrepresentations in an application for insurance provide grounds for the insurer s avoidance of the insurance policy. Only the first test, expressed in paragraph (1) of (a), requires that the insurer prove that the insured made misrepresentations in the application with actual intent to deceive. The other two tests, stated in paragraphs (2) and (3) of (a), do not require proof of such intent. The supreme court concluded: It was unnecessary, therefore, for plaintiff to have provided incorrect information with an intent to deceive. If she innocently made an incorrect statement that was material to acceptance of the risk, or would have caused National, in good faith, not to have issued the policy as it did, then National could have denied her claim and voided her policy. Inglish v. United Services Gen. Life Co., 394 So. 2d 960 (Ala. Civ. App. 1980). Inglish applied for a $10,000 life insurance policy with United Services General Life Company on June 29, The application asked him for certain details

3 of his medical history and for his subjective evaluation of his medical condition. Inglish gave the date of his last physical examination as June 10, 1977; denied medication or treatment as a result of that examination; denied any hospitalization; indicated receiving an annual Air Force physical in response to a request for names of all other physicians or practitioners consulted during the previous five years; denied ever having or having been treated for cancer, diabetes, heart disease, high blood pressure or tuberculosis; and indicated that he was then in good health and free from defect or deformity to the best of his knowledge and belief. On the basis of the information provided, United Services issued a policy on July 1, In fact, Inglish underwent an Air Force retirement physical which began May 3, 1977 and was completed June 23, During this physical, Inglish indicated he suffered from a hiatal hernia and had received treatment for it within the previous five years. Inglish died of a heart attack less than a year later. The jury found in favor of United Services and the beneficiary appealed on several grounds, including that the trial court erred in failing to recognize that United Services had not proven that Inglish made fraudulent misrepresentations in his application. The Alabama Court of Civil Appeals affirmed. The appellate court specifically confirmed that the insurer: [C]ould legally refuse to pay any death benefits to appellant if it proved that Gordan T. Inglish made misrepresentations or incorrect statements with regard to his medical condition or history in his application for insurance and that such misrepresentations or statements fell with any one of the three [categories of ]. See also Duren v. Northwestern Nat l Life Ins. Co., 581 So. 2d 810 (Ala. 1991) (The supreme court confirmed that under the current version of the statute, even an innocent misrepresentation of the type specified in entitles an insurer to void an insurance policy. This case is discussed in more detail below with other cases concerning an insurer s notice to inquire into statements made in an application); Liberty Nat l Life Ins. Co. v. Hale, 230 So. 2d 526 (Ala. 1969); In re HealthSouth Corp., 308 F. Supp. 2d 1253 (N.D. Ala. 2004) (again confirming that provides three alternative grounds for rescission). Alfa Life Ins. Corp. v. Lewis, 910 So. 2d 757 (Ala. 2005). Lewis s mother, Turner, met with an Alfa Life Insurance Corporation agent to apply for a life insurance policy with Alfa. The application asked whether she had been diagnosed with or hospitalized for congestive heart failure within the past 24 months. Alfa s agent completed the application based on Turner s negative response. Turner signed the application, verifying her response that she had not been diagnosed with congestive heart failure within the past 24 months. Approximately one year and five months later, Turner died and Lewis made a request for benefits under her mother s life insurance policy. The request indicated that the cause of Turner s death was congestive heart failure. Alfa began an investigation into Lewis request for benefits and

4 discovered that Turner s medical records indicated that she had been diagnosed with congestive heart failure within 24 months of the date she completed her application. Alfa filed a declaratory-judgment action, seeking to rescind the life insurance policy on the grounds that Turner s misrepresentations were either material to the risk or that Alfa, in good faith, would not have issued the policy, or would not have issued it at the same premium, if it had known the true facts. Subsequently, Alfa moved the court for summary judgment, offering medical evidence and testimony that demonstrated that Turner had been diagnosed with congestive heart failure. Lewis opposed Alfa s motion, offering affidavit evidence that demonstrated that Turner did not know that she had been diagnosed with congestive heart failure at the time she completed her application. Lewis argued that Turner could not provide Alfa with information she herself did not have. The trial court concluded that, although Turner s misrepresentation of this information was material to Alfa s acceptance of the risk, Turner s lack of knowledge that she had been diagnosed with congestive heart failure created a question of fact as to whether Alfa was entitled to rescind the policy pursuant to Accordingly, the trial court denied Alfa s summary judgment motion. Permission to appeal was granted, and Lewis appealed. The Alabama Supreme Court reversed the trial court, and again confirmed that, under Alabama s misrepresentation statute, even innocent misrepresentations provide a basis for the insurer to rescind the policy if the alternative requirements of (a) (2) or (3) are met. This case is also discussed below with other cases concerning whether a misrepresentation is material to an insurer s risk. See also Sweat v. Prudential Ins. Co., 744 So. 2d 949 (Ala. Civ. App. 1999) (without discussing whether insured made the misrepresentation with an intent to deceive, the court held that insured s false statement in insurance application that he had received no treatment for heart disease, hypertension, and diabetes in the past two years entitled the insurer to rescind the policy under ; the insured, in fact, had seen his cardiologist two days before signing the application). b. Material misrepresentations and whether the insurer in good faith would have issued this policy ( (a)(2) & (3)). Unionmutual Stock Life Ins. Co. of America v. Wilkerson, 367 So. 2d 964 (Ala. Civ. App. 1978), cert. denied 367 So. 2d 971 (Ala. 1979). Wilkerson failed to disclose in his application for group long-term disability insurance that he had been examined by doctors on nine occasions during the five years preceding his application. He also failed to disclose that, as a result of those examinations, he was diagnosed as having cataracts, and that undiagnosed lumps were discovered in his neck. The lumps were diagnosed as thyroid cancer one month after Unionmutual accepted the application and enrolled the insured. Wilkerson became disabled as a result of his thyroid cancer, and he filed a claim for disability benefits. When Unionmutual denied the claim on the basis that Wilkerson had made misrepresentations in his application by failing to disclose the nine examinations,

5 cataracts and undiagnosed lumps in his neck, Wilkerson sued for benefits under the policy. A jury awarded him $2,300 in the trial court. The Alabama Court of Civil Appeals affirmed. Unionmutual argued that Wilkerson had made misrepresentations in his application that fell within paragraphs (2) and (3) of (a). That is, the misrepresentations were material to the risk, and that, had Unionmutual known Wilkerson s true medical condition at the time of his application, it never would have issued a policy to him. The appellate court found that, as with life insurance, misrepresentations related to disability insurance are material if they relate to some serious ailment material to the question of the potential disability of the insured. That is, the matter misrepresented increased the risk of loss. The appellate court declined to find that Mr. Wilkerson s misrepresentations were material as a matter of law, and held that this was a question for the jury, as was the question of whether Unionmutual in good faith would not have extended coverage to Mr. Wilkerson had it known the facts regarding his health at the time he applied for coverage. Federal Kemper Life Assurance Co. v. First Nat l Bank of Birmingham, 712 F.2d 459 (11th Cir. 1983). Sometime prior to applying for life insurance, the insured had undergone an ileostomy, i.e., surgery in which the colon is disconnected from the small intestine and the small intestine is drained into a plastic bag outside of the body. Evidence at trial indicated that it is not uncommon for people to undergo additional surgery to reverse the ileostomy and that Federal Kemper was aware of this. The insured disclosed the fact of his ileostomy when he applied for life insurance. However, during the insured s examination, the doctor did not ask and the insured did not volunteer whether the insured was considering the additional reversal surgery. Federal Kemper issued $500,000 of life insurance coverage unaware that the insured had had the second surgery and was still in the hospital recovering from it. The insured developed peritonitis as a result of the second surgery, never left the hospital, and died approximately one month after the second surgery and the issuance of the life insurance. The insured s estate sued for benefits under the life insurance policy after the insurer denied its claim on the basis that the insured had made misrepresentations in his application by failing to disclose his intention of having the second surgery. A jury awarded benefits under the policy to the insured s estate. The court of appeals affirmed. The court focused on whether the insured s withholding of information was material and increased the risk of loss to the insurer. It noted that Alabama courts have held that tuberculosis, cancer, and Hodgkin s Disease materially increase the risk of loss to an insurer as a matter of law, but that syphilis, cirrhosis of the liver, cataracts, pregnancy and hysteria-neurosis do not materially increase the risk of loss to an insurer as a matter of law. The court concluded that surgery reversing an ileostomy is not an event that materially increases an insurer s risk as a matter of law. Moreover, the court

6 stated that a jury should generally be permitted to decide the issue of whether an event materially increases an insurer s risk of loss, and that the evidence in this case supported a finding that the second surgery did not materially increase the insurer s risk of loss. The court explained: The evidence suggests that Kemper was aware that persons in Ray s condition were likely at some time to undergo the surgery necessary to remove the ileostomy and restore normal bowel functions.... The company did not know when the further surgery would occur, and no testimony indicated that it was sufficiently concerned about that eventuality to ask Ray about it. The jury was entitled to find that while the reconstruction operation was performed sooner than the company expected, it was performed as expected. The jury could reasonably have rejected Kemper s contention that any surgery, and particularly surgery of this type, increased its risk of loss. (Emphasis in original). See also State Farm Ins. Co. v. Whiddon, 515 So. 2d 1266 (Ala. Civ. App. 1987) (the materiality of misrepresentations of symptoms of digestive disorder and of a doctor s appointment scheduled on the day the application for health insurance was completed is a question for the jury and will not be considered material as a matter of law). Cf. Nationwide Mut. Fire Ins. Co. v. Pabon, 903 So. 2d 759 (Ala. 2004) (holding that plaintiff s misrepresentation about bankruptcy was material to the insurer s risk as a matter of law where insurer s underwriter testified that according to the standards in effect at the time that plaintiff s application was submitted, an applicant who had filed for bankruptcy within five to seven years of filing his application was not eligible for coverage. This case is discussed in greater detail below with other cases discussing acts of an agent as preventing insurer from asserting defense of misrepresentation.) See also Alfa Life Ins. Corp. v. Lewis, 910 So. 2d 757 (Ala. 2005). 1 Alfa filed a declaratory-judgment action concerning whether it was entitled to rescind an insurance policy on the basis that the insured made several misrepresentations in the application that were material to Alfa s acceptance of the risk. Alfa filed a motion for summary judgment, arguing that the insured had misrepresented in her application that she had been diagnosed with congestive heart failure. The trial court concluded that the insured s misrepresentation was material to Alfa s risk, but held that because the insured was not aware that she had been diagnosed with congestive heart failure, there was a question of fact as to whether Alfa was entitled to rescind the policy. Alfa appealed. 1 For a complete discussion of the facts and procedural history of this case, see discussion supra Part 3. a.

7 The Alabama Supreme Court reversed the trial court, holding that it was not necessary that the insured possessed an intent to deceive because Alfa was entitled to rescind the policy as long as the misrepresentation was material to its risk. 2 The court held that the insured s incorrect statement that she had not been diagnosed with congestive heart failure was material to Alfa s risk as a matter of law. The court explained: The application states that IF ANY ANSWER TO THE FOLLOWING QUESTIONS IS YES, THE PROPOSED INSURED IS NOT ELIGIBLE FOR COVERAGE. That Alfa considered the answers to the questions following this statement significant to its issuance of the insurance policy could not be made any clearer. Alfa specifically inquired about congestive heart failure and specifically notified [insured] via the application that if the medical condition existed or had existed within the last two years, she was not eligible for coverage. (Capitalization in original). Notably, the court suggested that even if Alfa had not specifically notified the applicant that an affirmative answer in the application would make her ineligible for coverage, the fact that Alfa made the inquiry alone was sufficient to alert the applicant that Alfa considered the fact material to its risk. Mega Life & Health Insurance Co. v. Pieniozek, 516 F. 3d 985 (11th Cir. 2008). The insured overstated her income on a life insurance application, and the company issued a policy with a death benefit of $500,000 and an AD&D benefit of $300,000. The insured died in a single-car accident, and her husband filed a claim. MEGA denied the claim, contending that the insured did not qualify for the policy in that its underwriting guidelines limited the amount of a death benefit to fifteen times the proposed insured s income. MEGA filed suit seeking a declaratory judgment that the policy should be rescinded because of the misrepresentation. The trial court found that the insurer had not shown how its risk varied based on the insured s income and entered summary judgment for the insured s husband on the rescission claim. The insurer appealed. The appellate court recognized that an insurer need only act in good faith in order to rescind the policy under (a) (3). However, the court found that although the insurer had provided sufficient evidence to avoid summary judgment in favor of the insured, a fact question existed as to whether the insurer had a universally applied underwriting policy that would have compelled it to decline to issue the policy (or issue it at a reduced amount of coverage). Lexington Insurance Co. v. Wolfe, No WS-C, 2008 WL (S.D. 2 See supra Part 3. a.

8 Ala. 2008). The insurer sought rescission of a homeowner s policy where the application contained false statements regarding the owner occupied status of certain property. The court stated that rescission can be granted when the misrepresentations in the application are material either to the acceptance of the risk or to the hazard assumed by the insurer. The court further reiterated that a misrepresentation is considered material under when the insurer s liability is shown to be less if the representation had been accurate, and if a sensible underwriter knowing the accurate representation would have denied issuance of the policy or issued it at a higher premium. The court followed prior case law in stating that some misrepresentations are material as a matter of law, which includes a misstatement that a tenant occupies the premises, when in fact the occupant is adverse to the insured or when the occupant is someone unknown to the insurer. The court found it was unchallenged that the insurer would not have issued the policy at the same premium had it known the accurate state of the property s occupancy; therefore, the insurer was entitled to rescission under (a)(2) and (a)(3). Caribbean I Owners Association Inc., v. Great American Ins. Co. of New York, 600 F. Supp. 2d 1228 (S.D. Ala. 2009). The insured alleged that the insurer failed to pay benefits for hurricane damage, and the insurer moved for summary judgment based on material omissions in the application forms regarding prior water intrusion problems and litigation related to same. The court found that the insurer failed to show as a matter of law that there was a material misrepresentation in the application. The insurer provided affidavits from its underwriter and agent stating that the misrepresentations made by the insured were material in their opinion, but the court found that the question of whether a misrepresentation is material is generally a question for the jury. The court also found there were ambiguities in the application form that precluded summary judgment for the insurer. Butler v. Allstate Indemnity Co., No. 4:10-CV-3523-RBP, 2012 WL (N.D. Ala. 2012). The insurer argued that misrepresentations made in an application regarding the insured s residency were sufficient to void the policy under (a)(3). The insurer submitted employee affidavits and a copy of its risk management policy, which stated that it is a violation of the insurer s corporate guidelines to issue a home insurance policy if the insured does not occupy the home at the time of issuance. The court entered summary judgment for the insurer by concluding that the documents provided showed that it had taken a good faith position that it would not have issued the policy had it known the truth about the insured s residency.

9 Integon National Insurance Co. v. MT & R Enterprises, Inc., No. 4:10-cv HGD, 2012 WL (N.D. Ala. 2012). MT & R Enterprises failed to a list co-owner of the company as a driver on an automobile application, and the co-owner was involved in an accident. The insurer s investigation showed that the co-owner had a history of DUIs and a suspended license, and the insurer argued that the failure to list the co-owner as a driver was a material misrepresentation as a matter of law, The owner of MT & R claimed that her agent filled out the application and that she was unaware of the misrepresentations when she signed it, although there was no evidence of any fraud, false statement, or deliberate misrepresentation by the agent regarding the listing of drivers. The court stated, absent fraud or misrepresentation, people who are able to read and write are bound by what they sign. The court found that [i]t is difficult to imagine a more material fact for an automobile insurer to have than that a driver of the insured s vehicles has five prior convictions for driving under the influence of alcohol, and held that the policy was voidable under (a)(2). The court also held that the policy was voidable under (a)(3) because the insurer showed that as a matter of universally applied procedure, it in good faith would not have issued the policy where one of the drivers had a suspended license based on a DUI conviction. The Magistrate Judge thus recommended that Integon s motion for summary judgment be granted. Carolina Casualty Ins. Co. v. Law Offices of Robert M. Pears, P.C., No. 2:12- CV01828-RDP, 2013 WL (N.D. Ala. 2013). Failing to disclose prior disciplinary proceedings and 20 instances of misappropriation of client funds on a professional liability policy were material misrepresentations as a matter of law. Country Casualty Ins. Co. v. Massey, No. 3:09CV803-MEF, 2010 WL (M.D. Ala. 2010). The insured completed a home insurance application and represented that she would be living in the home ( owner occupied dwelling ). She was not living in the home at the time of the application, although she said that she intended to move in at a later date. The policy was issued, and the insured made a claim following a fire. The insurer filed a declaratory judgment action, and the court found it was undisputed that the insured did not reside at the home and therefore the misrepresentations rendered the policy void. The Magistrate Judge recommended that the insurer s motion for summary judgment be granted. c. Misrepresentation defense may be applied to a renewal policy. Ex Parte Quality Casualty Ins. Co., 962 So. 2d 242 (Ala. 2006).

10 The insured applied for automobile insurance, but failed to include his son as a regular driver and resident of the household on the application because it would have cost an extra $1,300. The insurer issued a policy to the insured and later issued a renewal policy. With respect to the renewal, the insured did not complete a new application, and the insurer did not investigate whether there had been any changes regarding answers on the original application. The insured s son was involved in an automobile accident, and the insured sought coverage based on the renewal policy. The insurer refused to pay, seeking a judgment declaring that it was exempt from covering the claim because the insured had misrepresented material information in the application. The trial court held that the insurer was not exempt from covering the damages, basing its holding on Alfa Mutual General Insurance Co. v Oglesby, which held that only applied to original policies, not renewal policies. The Alabama Supreme Court reversed and held that applies to a renewal policy that is issued based on the original application, finding that nothing in indicates that it applies only to the initial application and the initial policy. Id. at 246. The Alabama Supreme Court found no plausible basis on which to read as applicable to an original policy and not applicable to a renewal policy, when the renewal policy is issued on the basis of the original application, and overruled prior case law to the contrary. Id. B. PREVENTION OF INSURER FROM ASSERTING DEFENSE OF MISREPRESENTATION 1. Summary of Law The Alabama courts have addressed several situations that may prevent an insurer from asserting a defense of misrepresentation to a claim for coverage under the policy: a) Incontestability. The incontestability provision will prevent an insurer from asserting a misrepresentation defense to a policy. The incontestability period is renewed when a policy is reinstated. b) Attachment of the Application. The insurer may be prevented from asserting a defense of misrepresentation where the application is not attached to the policy. However, the application may be used as evidence of a misrepresentation made with intent to deceive, i.e., a fraudulent misrepresentation. c) Notice to Inquire. The insurer can be prevented from asserting a defense of misrepresentation if in possession of sufficient information to be placed on notice of a health problem. In this event, the insurer has a duty to make a reasonable inquiry and is bound by the facts that a reasonable inquiry would have revealed. d) Acts of an Agent. An agent s knowledge of the actual facts that have been misrepresented can be attributed to the insurer and prevent the insurer s assertion

11 of a misrepresentation defense. Similarly, a misrepresentation resulting solely from an agent s acts or omissions, without the insured s knowledge, will prevent the insurer from asserting a misrepresentation defense. e) Waiver. An insurer may waive its defense of misrepresentation in certain circumstances including, but not limited to, the following: where the insurer receives notice of facts that were allegedly misrepresented, but continues to provide coverage; where the insurer fails to plead misrepresentation as an affirmative defense; and where the insurer, by the terms of the policy, waives part, or all, of its statutory defense. The Alabama Supreme Court has decided several important cases in the area of waiver. As mentioned at the outset, the supreme court has held that the misrepresentation defense is an affirmative defense that can be waived. 2. Statutes Ala. Code Life insurance policy provisions Incontestability. There shall be a provision that the policy, exclusive, at the option of the insurer, of provisions relating to disability benefits or to additional benefits in the event of death by accident or accidental means, shall be incontestable, except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of two years from its date of issue. Ala. Code Life insurance policy provisions Entire contract; representations. There shall be a provision that the policy, or the policy and the application or a summary of such application, if a copy of the application or a summary thereof is endorsed upon or attached to the policy when issued, shall constitute the entire contract between the parties and that all statements contained in the application shall, in the absence of fraud, be deemed representations and not warranties. In the event of discrepancies between the original application and the summary, the contents of the original application shall govern. When a summary of the application is attached to the policy, the insurer shall keep and maintain the original application for insurance or a copy thereof for a period of not less than three years from the date on which the policy was issued. Ala. Code Effect of incontestability clause. A clause in any policy of life insurance or annuity contract providing that such policy or contract shall be incontestable after a specified period shall preclude only a contest of the validity of the policy or contract and shall not preclude the assertion at any time of defenses based upon provisions in the policy or contract which exclude or restrict coverage, whether or not such restrictions or exclusions are excepted in such clause.

12 Ala. Code Annuity and pure endowment contract provisions Incontestability. If any statements, other than those relating to age, sex and identity, are required as a condition to issuing an annuity or pure endowment contract, other than a reversionary, survivorship or group annuity and subject to , there shall be a provision that the contract shall be incontestable after it has been in force during the lifetime of the person, or of each of the persons, as to whom such statements are required for a period of two years from its date of issue, except for nonpayment of stipulated payments to the insurer; and at the option of the insurer, such contract may also except any provisions relative to benefits in the event of disability and any provisions which grant insurance specifically against death by accident or accidental means. Ala. Code Contestability of reinstated policies. A reinstated policy of life insurance or annuity contract may be contested on account of fraud or misrepresentation of facts material to the reinstatement only for the same period following reinstatement and with the same conditions and exceptions as the policy provides with respect to contestability after original issuance. Ala. Code Policy provisions Incontestability [Industrial Life Insurance]. There shall be a provision that the policy, exclusive of provisions relating to disability or dismemberment benefits or to additional benefits in the event of death by accident or accidental means, shall be incontestable, except for nonpayment of premiums, after it has been in force during the lifetime of the insured for a period of two years from its date of issue. Ala. Code Policy provisions Incontestability [Burial Insurance]. There shall be a provision, with respect to benefits provided in the form of merchandise and services incident to the burial of the insured, that the policy shall be incontestable from its date of issue except for nonpayment of premiums and, with respect to benefits payable in cash, monuments, waiver of premium benefits and disability benefits, a provision that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of two years from its date of issue, except for nonpayment of premiums and except, at the option of the insurer, as to provisions relating to benefits in event of dismemberment or disability or to additional benefits for death by accident or accidental means. Ala. Code Policy provisions Incontestability [Group Life Insurance]. The group life insurance policy shall contain a provision that the validity of the

13 policy shall not be contested, except for nonpayment of premium, after it has been in force for two years from its date of issue and that no statement made by any person insured under the policy relating to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two years during such person s lifetime nor unless it is contained in a written instrument signed by him. Ala. Code Policy provisions Copy of application; representations; statements as evidence [Group Life Insurance]. The group life insurance policy shall contain a provision that a copy of the application, if any, of the policyholder shall be attached to the policy when issued, that all statements made by the policyholder or by the persons insured shall be deemed representations and not warranties and that no statement made by any person insured shall be used in any contest unless a copy of the instrument containing the statement is or has been furnished to such person or to his beneficiary. Ala. Code Mandatory policy provisions Time limit on certain defenses [Disability Insurance]. There shall be a provision as follows: Time Limit on Certain Defenses: (1) 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 to 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 sections through 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 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 two years during the lifetime of

14 the insured, (excluding any period during which the insured is disabled), 3 it shall become incontestable as to the statements contained in the application.) (2) 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. Ala. Code (2000). Effect of misrepresentation; field issuance [Disability Insurance]. (a) For a policy or certificate that has been in force for less than six months an insurer may rescind a long-term care insurance policy or certificate or deny an otherwise valid long-term care insurance claim upon a showing of misrepresentation that is material to the acceptance for coverage. (b) For a policy or certificate that has been in force for at least six months but less than two years an insurer may rescind a long-term care insurance policy or certificate or deny an otherwise valid long-term care insurance claim upon a showing of misrepresentation that is both material to the acceptance for coverage and which pertains to the condition for which benefits are sought. (c) After a policy or certificate has been in force for two years it is not contestable upon the grounds of misrepresentation alone but may be contested only upon a showing that the insured knowingly and intentionally misrepresented relevant facts relating to the insured s health. (d)(1) No long-term care insurance policy or certificate may be field issued based on medical or health status. (2) For purposes of this section, field issued means a policy or certificate issued by an agent or a third-party administrator pursuant to the underwriting authority granted to the agent or third-party administrator by an insurer. (e) If an insurer has paid benefits under the long-term care insurance policy or certificate, the benefit payments may not be recovered by the insurer in the event that the policy or certificate is rescinded. (f) In the event of the death of the insured, this section shall not apply to the remaining death benefit of a life insurance policy that accelerates benefits for long-term 3 Sarah Severson supplied the parenthesis in her 1998 report. The statute contains none, but based upon this same statute in other states, she opined that this was an oversight by the Alabama Legislature because, without the parenthesis here, it is unclear what clause is applicable.

15 care. In this situation, the remaining death benefits under these policies shall be governed by Section In all other situations, this section shall apply to life insurance policies that accelerate benefits for long-term care. (Act , p. 1876, 5). 3. Case Law a) Attachment of Application. Copeland v. United Sec. Life Ins. Co., 154 So. 2d 747 (Ala. 1963). Copeland sued to recover on a sickness and accident policy for the hospitalization of his wife, an insured under the policy, after United Securities denied benefits due to misrepresentations in the application. Copeland argued that the statements in the application were not binding because the application was not attached to or endorsed on the policy when issued. The supreme court agreed and, citing section 426(A), title 28, Code of Ala. 1940, now , stated that: The effect of 426(A) is to require the application form to be made a part of the policy itself and issued therewith; otherwise, the insured will not be bound by any statement made in the application. b) Notice to Inquire Bankers Life & Cas. Co. v. Long, 345 So. 2d 1321 (Ala. 1977). The insured disclosed in his application for life insurance that he had been hospitalized for six months for hepatitis approximately two years prior to his application. He also gave the name and address of a doctor who knew of this hospitalization. The insured affirmatively stated in the application that he was free from physical disease when he submitted the application. In fact, Mr. Long had not been hospitalized for six months, but had been hospitalized three separate times, totaling just over three months, during an eight-month period. These hospitalizations were not simply for hepatitis, but were for cirrhosis, hepatitis, and alcoholism. The insured died from cirrhosis of the liver sometime after the insurer issued insurance on his life (presumably within the contestable period). When the insured s beneficiary made a claim for benefits under the policy, the insurer denied coverage under the statutory predecessor of the current (a), on the basis that the insured had misrepresented in his application that he was free from physical disease, when the insured must have known at the time of the application that he was suffering from cirrhosis of the liver. A jury nevertheless awarded benefits under the policy to the insured s beneficiary. On appeal, the Alabama Supreme Court affirmed, writing in pertinent part as follows: Hepatitis and cirrhosis are conditions or diseases of the liver.... [I]n light of the information that was given hospitalization, hepatitis, doctor s name and address we believe there was sufficient notice that

16 he had suffered from, and was treated for, a liver disease, to put the insurer on sufficient notice to impose a duty of inquiry. The supreme court concluded that the case fell within a well-recognized common law exception to the statutory rule that an insurer may void an insurance policy on proof that the insured made material misrepresentations in his application for the policy. The court stated the exception as follows: The policy is not avoided if the insurer knows the true facts, or the falsity of the statements, or has sufficient indications that would put a prudent person on notice so as to induce an inquiry which, if done with reasonable thoroughness, would reveal the truth. Stephens v. Guardian Life Ins. Co. of America, 742 F.2d 1329 (11th Cir. 1984). The common law exception recognized in Long is a defense to an insurer s proof under the current (a), that an insured made a material misrepresentation in his application. Duren v. Northwestern Nat l Life Ins. Co., 581 So. 2d 810 (Ala. 1991). The insured disclosed in his application for life insurance that he had been hospitalized for pneumonia; he told the paramedical examiner that he was under observation by a doctor for pneumonia and had had chest X-rays and a CAT scan; and listed both his personal physician and the physician treating him for the pneumonia. He did not disclose that he had lung cancer and Northwestern did not contact either of the listed physicians for additional information. The supreme court affirmed a summary judgment for Northwestern and held that the disclosures about pneumonia and Mr. Duren s treatment and observation for that condition cannot be said to be sufficient indications that he had cancer so as to constitute such notice as would prompt a prudent insurer to conduct further inquiries. c) Acts of an Agent Martin v. Pate, 749 F. Supp. 242 (S.D. Ala. 1990). In applying for group health insurance, the insured did not tell the insurer s soliciting agent about his triple vessel coronary disease, and he gave a negative answer to the question on the application asking whether he had a serious disease or disorder (i.e., diabetes, cancer, heart disease, etc.). However, prior to the time the application was completed, the agent had learned, from an agent for the previous insurer, that the insured had had a checkup regarding his heart. The insurer denied the claim for group health insurance benefits, citing the insured s misrepresentations in his application. The district court agreed that the insured had made material misrepresentations

17 in his application, but found that the insurer had sufficient indications that would put a prudent person on notice so as to induce an inquiry because the agent had been informed of the recent heart check-up. Quoting an Alabama Supreme Court case, Pacific Mutual Life Insurance Co. of California v. Edmonson, 179 So. 185 (Ala. 1938), the court noted that [i]t is well recognized that the knowledge of an agent of an insurance company as to matters within the general scope of his authority is knowledge to the company. Herricks v. Mutual Life Ins. Co. of New York, 318 So. 2d 683 (Ala. 1975). In applying for life insurance, an alcoholic suffering from cirrhosis who had been placed on a strict diet gave a negative answer to questions on the application asking whether he was in impaired physical health or on any diet. The question of the knowledge of the agent, whom the court identified as only a soliciting field underwriter, was raised by an affidavit of another agent, submitted by the plaintiff, stating that: Based upon my years of experience in the life insurance business, it is my opinion that all persons engaged in selling life insurance who were acquainted with [the insured] were aware of and knew of his problem with alcohol and the effect that it had upon his insurability. The Alabama Supreme Court held that the insurer could not be charged with facts known to an agent who was only a soliciting field underwriter, stating that: The rule in this state is that ordinarily, knowledge by the local agent authorized to solicit insurance, take and forward applications, and collect premiums, of misrepresentations by the applicant, is not available as a waiver of such breach in the face of a stipulation to the contrary in the policy. Inter-Ocean Cas. Co. v. Ervin, 156 So. 844 (Ala. 1934). The insured, who was deaf and dumb, could neither read nor write. The agent asked her if her hearing was impaired, and, answering through her brother using sign language, she answered that she could not hear. The agent filled out the application, which included a representation that neither my hearing nor vision is impaired. The Alabama Supreme Court held: It is fully settled in this jurisdiction that misrepresentations resulting solely from the act or oversight of the soliciting agent taking the application, without the knowledge of the insured or the beneficiary, are not available to the insurer, although the issuing authority acts upon the application as presented, and without knowledge of the misfeasance of its agent. Miller v. Dobbs Mobile Bay, Inc., 661 So. 2d 203 (Ala. 1995).

18 The insurer denied a claim on a credit life insurance policy on the grounds that the insured had misrepresented that he was in good health. Mr. Miller purchased a new car in In connection with this purchase, the car salesman asked whether Mr. Miller wanted credit life insurance. Mr. Miller declined the coverage, stating that he was sick. Another employee, who was also an agent for the insurer, asked Mr. Miller again if he wanted credit life insurance, to which Mr. Miller gave the same response. The agent stated that Mr. Miller would not be able to buy the car without the insurance and that Mr. Miller s health would not be a problem. Mr. Miller signed the necessary paperwork, including a health certificate stating that he was in good health. In reversing a trial court decision in favor of the insurer, the Alabama Supreme Court stated that: It is well settled that an insurance company cannot defend its refusal to pay benefits on grounds that the insured made a misrepresentation in the application if the misrepresentation was the fault of the agent and that fault was without participation by the insured. Nationwide Mut. Fire Ins. Co. v. Pabon, 903 So. 2d 759 (Ala. 2004). The insurer denied insured s claim for coverage for fire loss on the basis that the insured made several misrepresentations in the application, including that the insured had filed for bankruptcy, was involved in ongoing litigation, and had made previous insurance claims due to fire loss. The insured argued that the insurer s agent was responsible for the misrepresentations on the application because she improperly recorded the insured s responses, and the insured simply failed to notice the inaccuracies before she signed the application. The Alabama Supreme Court, reversing the trial court, held that because the insured was given the opportunity to review the answers on the application before she signed it, she was bound by her answers. The court, citing First National Life Insurance Co. of America v. Maxey, 145 So. 589 (Ala. Ct. App.1932), stated: Absent misrepresentations, fraud, or other deceit by the agent, a person able to read and write is bound by an insurance application signed by him or her, whether or not he or she reads it. American Heritage Life Ins. Co. v. Blackmon, 7 So. 3d 1028 (Ala. Civ. App. 2008). The insured applied for life insurance and failed to disclose on the application the fact that one of her children had previously been diagnosed with cerebral palsy. A life insurance policy was issued by the insurer, and the insured brought a claim under the children s term rider after that child had died. The insurer answered the complaint with an affirmative defense under , and the insured claimed that the insurer s agent had instructed her not to include the fact that her child was sick and that there was no reason to list the child on the application. The trial court entered judgment for the

19 insured for $10,000. On appeal, the court reversed and found the insurer was entitled to a judgment in its favor as a matter of law. The court followed the holding in Pabon and found that the insured was bound by her answers given on the application and could not rely on contradictory information allegedly given by, or given to, the insurer s soliciting agent. In this regard, the court also noted that the application itself provided that no agent of the insurer had authority to waive any answer or to modify the application or bind the insurer by any representations not appearing on the face of the application. Hillery v. Allstate Indemnity Co., 705 F. Supp. 2d 1343 (S.D. Ala. 2010). The plaintiff met with an Allstate agent regarding an insurance policy on his residence. The plaintiff orally answered questions while the agent recorded them on the application form. The insured signed the completed form without reviewing it, and the policy was issued. The parties agreed that the application was inaccurate in many respects, including the failure to acknowledge that more than four people were living in the home, that pets were kept in the home, that a business was being run out of the home, and that the insured had been cancelled for similar insurance previously. The insured s house subsequently burned down, and Allstate refused to pay the benefits allegedly owed. The insured filed suit, and Allstate alleged misrepresentations were made in the application and moved for summary judgment. The court held that it is well settled that an insurance company cannot defend its refusal to pay benefits on grounds that the insured made a misrepresentation in the application if the misrepresentation was the fault of the agent and that fault was without participation by the insured. The court ultimately found that there was a jury question as to who was responsible for the misrepresentations and thus the insurer s motion for summary judgment was denied because there was a reasonable inference that the insured s responses to the agent were truthful, that the agent distorted these responses in transcribing them, and that the insured was unaware of the agent s error as he never read the completed application before signing it. d) Waiver Nationwide Mut. Ins. Co. v. Clay, 525 So. 2d 1339 (Ala. 1987). The insurer argued that it was entitled to refuse to pay disability income benefits because the insured had misrepresented that he would cancel another policy and had misrepresented his average monthly earnings. However, after receiving notice of the true facts and beginning to pay disability benefits, the insurer continued regularly withdrawing a monthly premium from the insured s checking account even though the policy had a waiver of premium provision. The Alabama Supreme Court held that, as a matter of law, Nationwide waived its misrepresentation defense by continuing to demand and collect premiums after receiving notice of facts allegedly misrepresented. The court stated that Nationwide s actions ratified the existence of a contract and were

20 inconsistent with its position that misrepresentation voided the insurance policy. Patterson v. Liberty Nat l Life Ins. Co., 903 So. 2d 769 (Ala. 2004). Patterson purchased a life insurance policy from Liberty National covering the life of her son, Bruce. Bruce completed an application in connection with the policy concerning his medical history in which he misrepresented his history of alcohol and/or drug abuse and depression. Almost one year later, Bruce was killed, and Patterson made a claim for benefits under the life insurance policy. Liberty National investigated and learned of Bruce s misrepresentations. Liberty National wrote Patterson a letter, citing Bruce s misrepresentations as grounds for denying the claim and rescinding the policy. On August 10, 2001, Patterson sued Liberty National alleging breach of contract and bad faith refusal-to-pay a claim, and later amended her complaint to include fraudulent suppression. In both its answer to Patterson s original complaint and her amended complaint, Liberty National denied the averments and set forth 31 affirmative defenses. None of Liberty National s defenses, however, referred to the alleged misrepresentations contained in the application. In January 2004, Liberty National filed a motion for summary judgment. In its motion, Liberty National contended for the first time that gave it the right to rescind the policy based on the misrepresentations in the application. In her opposition to Liberty National s summary judgment motion, Patterson argued that Liberty National was precluded from asserting a misrepresentation defense because it had not affirmatively pled such a defense in its answer as required by Rule 8(c) of the Alabama Rules of Civil Procedure. Liberty National s motion was denied and the case proceeded to trial. At trial, over Patterson s objection, Liberty National presented evidence to the jury in support of its misrepresentation defense. Additionally, the trial court charged the jury on misrepresentation as a defense to Patterson s breach of contract claim. The jury returned a verdict in favor of Liberty National. Patterson appealed, arguing that the trial court erred in allowing Liberty National to submit evidence of misrepresentation and charging the jury on misrepresentation when Liberty National did not affirmatively plead the defense. The Alabama Supreme Court, as a matter of first impression, held that the defense of misrepresentation under is an affirmative defense that is waived if not pled, and reversed the trial court s order entering a judgment in favor of Liberty National. Notably, the court expressly rejected Liberty National s argument that is considered a part of every insurance contract entered into in Alabama, stating that this did not change the affirmative nature of the defense and how it must be asserted. Moreover, the court cited (b), which provides: No plea of misrepresentation or fraud in connection with the issuance of a