2013 Requirements for Establishing Defense of Misrepresentation Walter T. Gilmer, Jr. Texas TEXAS A. REQUIREMENTS FOR ESTABLISHING DEFENSE OF MISREPRESENTATION 1. Summary of the Law There have been no substantive changes in the law since the 2005 report, which updated Dwain Aiken s 1998 report. In 2005, the insurance code was reorganized for the sole purpose of compiling the relevant law, arranging it in a logical fashion, and rewriting it without altering its meaning or legal effect. Misrepresentations by policyholders is located in Title 5, Subtitle F, Chapter 705. Accordingly, it still holds true that if an insured makes representations in the application for coverage, the insurer may avoid coverage and subsequent liability for denying coverage by pleading and proving: (1) there was a misrepresentation, (2) the representation was false, (3) the insurer relied on the representation, (4) the applicant intended to deceive the insurer by making the representation, and (5) the representation was material. There is no requirement that the misrepresentation actually cause the loss insured against. Significantly, in order to assert a defense based on misrepresentation, the insurer must notify the insured or beneficiary, if the insured is deceased, within 90 days after discovery of the material misrepresentation of its refusal to be bound by the policy. 2. Statutes Tex. Ins. Code Ann. 705.004 Policy Provision: Misrepresentation in Policy Application 1 (a) An insurance policy provision that states that false statements made in the application for the policy or in the policy make the policy void or voidable: (1) has no effect; and (2) is not a defense in a suit brought on the policy. (b) Subsection (a) does not apply if it is shown at trial that the matter misrepresented: (1) was material to the risk; or 1 Formerly Tex. Ins. Code Ann. art. 21.16 Misrepresentation by Policyholder.
(2) contributed to the contingency or event on which the policy became due and payable. (c) It is a question of fact whether a misrepresentation made in the application for the policy or in the policy itself was material to the risk or contributed to the contingency or event on which the policy became due and payable. Tex. Ins. Code Ann. 705.005 Notice to Insured of Misrepresentations. 2 (a) This section applies to any suit brought on an insurance policy issued or contracted for after June 29, 1903. (b) A defendant may use as a defense a misrepresentation made in the application for or in obtaining an insurance policy only if the defendant shows at trial that before the 91st day after the date the defendant discovered the falsity of the representation, the defendant gave notice that the defendant refused to be bound by the policy: (1) to the insured, if living; or (2) to the owners or beneficiaries of the insurance policy, if the insured was deceased. (c) This section does not: (1) make available as a defense an immaterial misrepresentation; or (2) affect the provision of Section 705.004. Tex. Ins. Code Ann. 705.051 Immaterial Misrepresentation in Life, Accident, or Health Insurance Application. 3 A misrepresentation in application for a life, accident, or health insurance policy does not defeat recovery under the policy unless the misrepresentation: (1) is of a material fact; and (2) affects the risks assumed. 3. Regulations See regulations cited below in Part B. 2 3 Formerly Tex. Ins. Code Ann. art.21.17 Notice of Misrepresentation. Formerly Tex. Ins. Code Ann. art. 21.18 Immaterial Misrepresentation.
4. Cases Since the 2005 report, Texas courts have issued several opinions discussing the misrepresentation defense. The pre-2005 cases are repeated below, and the more recent opinions are discussed thereafter in chronological order. Robinson v. Reliable Life Ins. Co., 569 S.W.2d 28 (Tex. 1978). The Texas Supreme Court affirmed judgment in favor of the insurer in a dispute arising out of the insurer s failure to pay a life insurance claim. The court held that the insurer need only show that the misrepresentation was material, not that the misrepresented condition actually contributed to the loss. The petitioner argued that the word or in former Art. 21.16 should be read as meaning and and that the misrepresented condition could only be the basis for avoiding liability if it was the cause of the claim. The court refused to adopt this analysis, concluding that: [T]he materiality of the risk must be viewed as of the time of the issuance of the policy, rather than at the time the loss occurred. * Mayes v. Massachusetts Mutual Life Ins. Co., 608 S.W.2d 612 (Tex. 1980). In this leading case, the insured failed to advise the insurer of changes in his health that occurred between the date of application and the date the policy was delivered. The Texas Supreme Court noted the absence of a good health clause and held that the insured s certification on the application that the answers were true and correct at the time of delivery of the policy should be considered a representation rather than a condition precedent. The court held that it was settled law in Texas that to establish a defense of misrepresentation, five elements must be shown: (1) representation; (2) falsity; (3) reliance by the insurer; (4) intent to deceive by the applicant; and (5) materiality. The defense of misrepresentation failed because there was no finding that the applicant intended to deceive the insurer. Carter v. Service Life & Casualty Ins. Co., 703 S.W.2d 349 (Tex. Ct. App. 1985). In Carter, the plaintiff asserted that the insured was led to believe that he was insurable for credit life insurance. The court of appeals held that in order to avoid liability based on misrepresentations by the applicant, the insurer must not only prove the falsity of the answers, but that the insured knew or should have known that they were untrue, and that he made them willfully with the intention of inducing the insurer to issue him a policy. The court reasoned, If he in fact believed he was insurable, then he did not have the requisite intent to deceive... The court reversed the order granting summary judgment and remanded the case and observed that the materiality of any false representation is a question of fact. Flowers v. United Ins. Co. Of America, 807 S.W.2d 783 (Tex. Ct. App. 1991). The trial court granted United s motion for summary judgment. On appeal,
Flowers beneficiary contended that United failed to prove as a matter of law its defense of misrepresentation, and specifically, that Flowers had made false representations with an intent to deceive. The court of appeals reiterated the five elements an insurer must prove to establish a misrepresentation defense. It reversed and remanded the case and held that although a jury might determine that knowledge shows intent to deceive, mere knowledge of one s health condition is insufficient to prove intent to deceive as a matter of law. Garcia v. John Hancock Variable Life Ins. Co., 859 S.W.2d 427 (Tex. Ct. App. 1993). The trial court granted summary judgment in favor of John Hancock, approving Hancock s rescission of a life insurance policy. The court of appeals, however, rejected Hancock s argument that it had proved intent to deceive as a matter of law for summary judgment purposes. The court noted that: Our research has found no reported Texas case in which a plaintiff suing for fraud has ever proven the element of intent to deceive as a matter of law in a summary judgment proceeding. Further, we see at least some analogy, albeit a different standard of proof (beyond a reasonable doubt) to the mens rea or guilty mind element in the criminal law. It is axiomatic, of course, that intent, or mens rea, is a fact question for the jury in a criminal case. We think it to be a rare instance where subjective intent could be established as a matter of law. Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278 (Tex. 1994). Insurers under a health policy sued Union Bakers ( UB ) because of its rescission of the policy based on a misrepresentation. The jury answered all questions against the insureds, except that the misrepresentation was made with an intent to deceive. The trial court rendered judgment in favor of UB, and the court of appeals reversed because of the jury s failure to find intent to deceive. UB contended that former Tex. Ins. Code Ann. art. 3.70-3(A)(2)(a) implied that an insurer may cancel a health insurance policy within two years on the basis of an innocent misrepresentation. After analyzing NAIC model law legislative history, the Texas Supreme Court held that Art. 3.70-3(A)(2)(a) was not intended to affect the determination whether an intent to deceive must be proven to rescind a health insurance policy within two years of its issuance. The supreme court held that it was well established under the common law of Texas that an intent to deceive to avoid a policy was required. Bates v. Jackson Nat l Life Ins. Co., 927 F.Supp. 1015 (S. D. Tex. 1996). In Bates, the beneficiary brought suit to recover life insurance proceeds, and Jackson National moved for summary judgment. The United States District Court reviewed the five elements that must be proven in Texas to establish the misrepresentation defense. It held that a material misrepresentation does not defeat recovery if the misrepresentation was made innocently and in good faith and that
[i]ntent to deceive, however, cannot be presumed from the existence of material misrepresentations alone. The court found that there was a genuine issue of material fact regarding intent to deceive and denied Jackson National s motion for summary judgment. Essex Ins. Co. v. Redtail Products Inc., No. Civ. A3:97CV212OD, 1999 WL 627379 (N.D. Tex. Aug. 17, 1999). The court examined the elements of the misrepresentation defense as defined by Mayes v. Massachusetts Mutual Life Ins. Co., 608 S.W. 2d 612 (Tex. 1980). The court held that the insurer proved all the elements of the misrepresentation defense, except the intent to deceive element. Legion Ins. Co. v. Texas Timber Group, No. 3:99-CV-0932-BC, 2000 WL 1456447 (N.D. Tex. Sept. 29, 2000). The insurer clearly established the misrepresentation defense as set forth in Mayes v. Massachusetts Mutual Life Insurance Co., 608 S.W. 2d 612 (Tex. 1980). The application incorrectly identified Texas Timber Group, the insured, as a sole proprietorship rather than a partnership. Moreover, one of the partners, Scott Claiborne ( Claiborne ), forged the signature of his partner, James Hennis ( Hennis ), on the application in order to keep the insurer from knowing that Claiborne was involved in the business. The insurer relied on the misrepresentation because it would not have issued the policy in light of Claiborne s involvement. The insurer knew Claiborne was a poor insurance risk due to his failure to pay premiums in the past. Claiborne admitted to forging Hennis signature. Accordingly, due to the intentional material misrepresentation, the court held that the insurer was entitled to summary judgment. In re National Health Ins. Co., 109 S.W. 3d 607 (Tex. App. 2003). The insurer petitioned the court for a writ of mandamus in a discovery dispute. The court granted the writ based on evidence indicating that the insurer had a viable misrepresentation defense. The insured represented in his application that he had never abused alcohol, illegal drugs, or narcotics. The insurer discovered that the insured had been hospitalized for GI bleeding. The hospital records revealed that the insured drank heavily and occasionally used marijuana and cocaine. The insured sued, claiming that due to the insurer s dilatory handling of the application, he incurred medical bills not covered by the policy. The insurer asserted the misrepresentation defense. During his deposition, the insured refused to answer questions regarding his drug use. The appellate court ordered the deposition reconvened and ordered the insured to answer questions regarding his drug use. The court opined that the information sought by the insurer was relevant to its misrepresentation defense.
Protective Life Ins. Co. v. Russell, 119 S.W.3d 274 (Tex. App. 2003). In a case similar to a leading Texas case, Mayes v. Massachusetts Mutual Life Insurance Co., 608 S.W. 2d 612 (Tex. 1980), the insured s health changed between the application date and the date he signed the declarations section in the policy, paid the first premium, and received the policy. Following Mayes, the court held that the language in the application and declarations section were representations as to the insured s health, and not a condition precedent to a valid contract because a good faith provision is a condition precedent to a valid contract, whereas a representation is subject to the misrepresentation defense. The court determined that when the insured signed the declarations page claiming that his health had not changed since his application, he made a representation subject to the misrepresentation defense. Accordingly, the court focused on whether the insured s representation was false. The insured represented in the application on November 20, 1998, that he had not been told he had cancer. The insured first experienced symptoms on November 12, 1998. He returned to the doctor on November 19 and was told that he probably had cancer. The insured was diagnosed with cancer on November 25. The court held that the insured truthfully represented on the application that he had never had, been told he had, or been treated for cancer. Id. at 283. Thus, the insurer was liable for the face amount of the policy. In addition, the court, in dicta, stated that the incontestability clause, which purportedly allowed the insurer to contest fraud beyond two years from the date the policy inception, was invalid. The court stated that the language conflicted with Texas statutory law. Bosch v. Dallas General Life Ins., No. 14-04-00661-CV, 2005 WL 757254 (Tex. App. 2005). The insurer refused to pay the insured s medical expenses based on a claimed misrepresentation in the health insurance application. The insurer contended that the insured could not prove he had fulfilled all conditions precedent to recover under the contract because he could not demonstrate that he gave accurate and complete information on the application, but the court reiterated that it is well-settled in Texas that responses in an application for insurance that are declared true and correct constitute representations and not conditions precedent. Therefore, the burden of proof regarding the alleged false representations rested on the insurer. Hinna v. Blue Cross Blue Shield of Texas, No. 4:06-CV-810-A, 2007 WL 3086025 (N.D. Tex. 2007).
The insured misrepresented on her individual health insurance application that she had not previously suffered from migraines, and the insurer rescinded the policy. The insured filed suit for medical bills incurred regarding a liver condition, and the insurer moved for summary judgment. The insured argued that the insurer had not met the fourth and fifth elements of a misrepresentation defense (the intent to deceive and the materiality of the misrepresentation). Regarding the materiality element, the court found that [m]ateriality to the risk is viewed as of the time of the issuance of the policy, not at the time the loss occurred. [T]he principal inquiry in determining materiality is whether the insurer would have accepted the risk if the true facts had been disclosed. The court held that the summary judgment record established that the insured s misrepresentations were material because the insurer assumed the risk of the insured s migraines in the policy at issue. An insurance policy can be avoided upon a finding that the misrepresentation was material to the risk without proof that the condition misrepresented contributed to the event that caused the loss. However, the court found that fact questions precluded summary judgment on the intent to deceive element. The court observed that, under certain circumstances, intent to deceive can be established as a matter of law but described those as being narrow and broke them down into three categories: (1) when an applicant utters a false statement, with intent to induce action, this is equivalent to an intent to deceive; (2) when an applicant warrants that representations are true (noting that representations in an application are not in and of themselves warranties and observing that Texas courts disfavor warranties in insurance applications); and (3) when an applicant colludes with the insurance agent. In this case, the insurer failed to establish intent to deceive as a matter of law because it did not show that the representations were made as a result of anything other than negligence, mistake, or carelessness. Soto v. International Medical Group, Inc., No. 14-05-00956-CV, 2007 WL 968893 (Tex. App. 2007). The insured represented on a medical insurance application that she had no reportable medical history and was approved for coverage. One year later, the insured ratified that she was in good health, but the insurer subsequently found otherwise as its investigation showed that the insured had problems related to an abnormal menopause and depression. The insurer determined these to be material misrepresentations and rescinded the policy. The insured sued the insurer, and the trial court found that the insured had indeed made material misrepresentations on her application. The insured first argued that the insurer was required to plead each particular element of rescission, but the
court rejected this position by noting that the insurer had specifically listed rescission as an affirmative defense, which was sufficient. The insured next claimed that an actuary was required to prove materiality, and that the trial court had therefore erred in admitting the testimony of the final underwriter to prove materiality; however, the court found there was no case law requiring an expert to prove materiality and that the testimony of the physician who made final underwriting decisions was sufficient. The court of appeals affirmed the trial court s decision that the policy was properly rescinded. Perez v. Old American County Mutual Fire Ins. Co., No. 14-09-00456-CV, 2010 WL 3168389 (Tex. App. 2010). The court found that the insurer proved all the elements of its misrepresentation defense as set forth in Mayes. Here, the applicant for automobile insurance represented that he and his wife were the only drivers in the household and further denied that there were any residents of the household over the age of 15 who were not listed. In fact, he had a 17-year-old unlicensed daughter who lived in the household. She was involved in an accident, and litigation followed. The insurer moved for summary judgment on the basis of the misrepresentation, and the trial court granted that motion. On the element of intent to deceive, the court found that this had been conclusively established by the insured s deemed admissions that he intentionally failed to disclose information about his unlicensed teenager in order to avoid higher premiums. The appellate court affirmed. Texas Farm Bureau Mutual Ins. Co., v. Rogers, 351 S.W. 3d 103 (Tex. App. 2011). After a fire, the insurer discovered that the insured had failed to report her criminal record in the application for homeowner s insurance. The insurer notified the insured that the policy was null and void based on a provision in the application that voided the policy when the insured intentionally conceals or misrepresents any material facts. The insured filed suit. The jury found that the insured made a material misrepresentation but that the insurer had ratified its contract with the insured and thus awarded damages to the insured. On appeal, the court affirmed that the insured had made a material misrepresentation in the policy application and found that a void contract generally cannot be ratified. The court thus reversed the trial court s judgment and rendered judgment for the insurer. One Beacon Ins. Co. v. T. Wade Welch & Associates, No. H-11-3061, 2012 WL 1155739 (S.D. Tex. 2012). The insureds filed a motion to dismiss a declaratory judgment suit arising from alleged misrepresentations given on a professional liability insurance application. The
alleged misrepresentations involved the failure of a lawyer to report the past imposition of sanctions (in the form of paying attorney s fees) for unreasonable and vexatious conduct. The court rejected an argument at the motion to dismiss stage that the alleged misrepresentation could not have been material and found it was plausible that the insurer would have refused coverage if it had known about the sanctions order even though the professional liability policy excluded coverage for attorney s fees. Medicus Ins. Co. v. Todd, No. 05-11-01040-CV, 2013 WL 1928519 (Tex. App. 2013). Medicus, a medical malpractice insurer, filed a declaratory judgment action against its insured, Dr. Todd, seeking a declaration that it was not bound by the policy and that it had no duty to defend or indemnify Dr. Todd. The insurer relied on the fact that the doctor had failed to disclose that he had been investigated by the Texas Medical Board. Moreover, the application failed to include all of the lawsuits that had been filed against him. A jury found in favor of Dr. Todd, and the appellate court affirmed. The court rejected the insurer s argument that it was not required to prove that Dr. Todd intended to deceive it regarding his claims history. Holding that there is only one cause of action for rescinding a policy due to a misrepresentation and that it requires proof of an intent to deceive, the court observed that Texas courts have consistently held that an insurer may not rescind a policy due to a misrepresentation... unless the insurer proves the insured intended to deceive the insurer with the misrepresentation. Although noting that the statue itself (dating back some 110 years) has never expressly required intent to deceive, the courts have required it consistently. In summarizing its ultimate conclusion, the court said: We cannot vary from this long history of case law imposing this duty upon insurers. B. PREVENTION OF INSURER FROM ASSERTING DEFENSE OF MISREPRESENTATION 1. Summary of the Law The summary of law has not changed since the 2005 report, which updated Dwain Aiken s 1998 predecessor report. There are two types of agents in Texas (Solicitors and Local Recording Agents). Local Recording Agents have authority to write, sign, execute and bind companies on insurance risks. Solicitors have much more limited authority. While Solicitors are deemed the agent of the company in any dispute between the insured or beneficiary and the insurer, the Solicitor does not have power to waive or modify terms in the contract or application, unless cloaked with apparent authority. In addition to the argument that the insurer s agent was informed about the health condition and the argument that the agent represented that the medical history was not needed, etc., the insurer s defense of misrepresentation is frequently
prevented because of the insurer s failure to prove the insured s intent to deceive, the failure of the insurer to attach the application to the policy, or the failure of the insurer to provide timely notice that it refuses to be bound by the policy. All statements in an application are deemed representations, not warranties, and this prevents a defense based on a good health clause. The insurer is then forced to rely on the affirmative defense of misrepresentation, which requires the insurer to establish the insured s intent to deceive. 2. Statutes Tex. Ins. Code Ann. 705.005 Notice to Insured of Misrepresentations. 4 (a) This section applies to any suit brought on an insurance policy issued or contracted for or after June 29, 1903. (b) A defendant may use as a defense a misrepresentation made in the application for or in obtaining an insurance policy only if the defendant shows at trial that before the 91st day after the date the defendant discovered the falsity of the representation, the defendant gave notice that the defendant refused to be bound by the policy: (1) to the insured, if living; or (2) to the owners or beneficiaries of the insurance policy, if the insured was deceased. (c) This section does not: (1) make available as a defense an immaterial misrepresentation; or (2) affect the provision of Section 705.004. Tex. Ins. Code Ann. 4001.052. Solicitor of Application for Insurance Considered Agent of Insurer 5 (a) A person who solicits an application for life, accident, or health insurance or property or casualty insurance is considered the agent of the insurer issuing a policy on the application and not the agent of the insured in any controversy between the insurer and the insured, the insured s beneficiary, or the insured s dependents. (b) The agent may not alter or waive a term or condition of the application or 4 5 Formerly Tex. Ins. Code Ann. art. 21.17 Notice of Misrepresentation. Formerly Tex. Ins. Code Ann. art. 21.04. Solicitor Deemed Company s Agent.
policy. Tex. Ins. Code Ann. 1101.002. Policy Provisions Required 6 (a) Except as provided by this section, a life insurance policy must contain provisions that are substantially the same as the provisions required by this subchapter. (b) A single premium life insurance policy is not required to contain a provision under this subchapter to the extent that the provision is not applicable to a single premium insurance policy. Tex. Ins. Code Ann. 1101.006. Incontestability 7 (a) Except as provided by Subsection (b), a life insurance policy must provide that a policy in force for two years from its date of issue during the lifetime of the insured is incontestable, except for nonpayment of premiums. (b) At the option of the company, a life insurance policy may provide that the policy may be contested at any time for violation of policy conditions relating to naval and military service in a time of war. Tex. Ins. Code Ann. 1101.003. Entire Contract 8 A life insurance policy must provide that the policy or the policy and the application for the policy constitute the entire contract between the parties. Tex. Ins. Code Ann. 705.103. Documents to Accompany Policy 9 Except as otherwise provided by this code, a life insurance policy must be accompanied by a copy of: (1) the policy application; and (2) any questions and answers given in connection with the application. Tex. Ins. Code Ann. 705.104. Misrepresentation in Application for 6 Formerly Tex. Ins. Code Ann. art. 3.44. Policies Shall Contain Certain Provisions. 7 Formerly Tex. Ins. Code Ann. art. 3.44. Policies Shall Contain Certain Provisions. 8 9 Formerly Tex. Ins. Code Ann. art. 21.24. Policies to Contain Entire Contract. Formerly Tex. Ins. Code Ann. art. 21.35. Policies and Applications.
Life Insurance 10 A defense based on a misrepresentation in the application for, or in obtaining, a life insurance policy on the life of a person in or residing in this state is not valid or enforceable in a suit brought on the policy on or after the second anniversary of the date of issuance of the policy if premiums due on the policy during the two years have been paid to and received by the insurer, unless: (1) the insurer has notified the insured of the insurer s intention to rescind the policy because of the misrepresentation; or (2) it is shown at the trial that the misrepresentation was: (A) material to the risk; and (B) intentionally made. Tex. Ins. Code Ann. 705.105. Applicability of Other Law 11 Subchapter A does not apply to a life insurance policy: (1) that contains a provision making the policy incontestable after two years or less; and (2) on which premiums have been duly paid. Tex. Ins. Code Ann. 1131.104. Incontestability of Policy 12 A group life insurance policy must provide that: (1) the validity of the policy may not be contested, except for nonpayment of premiums, after the policy has been in force for two years after its date of issue; and (2) a statement made by any insured under the policy relating to the insured s insurability may not be used in contesting the validity of the insurance with respect to which the statement was made after the insurance has been in force before the contest for a period of two years from its date of issue during the insured s lifetime and unless the statement is contained in a written instrument signed by the insured making the statement. 10 11 Formerly Tex. Ins. Code Ann. art. 21.35. Policies and Applications. Formerly Tex. Ins. Code Ann. art. 21.35. Policies and Applications. 12 Formerly Tex. Ins. Code Ann. art. 3.50. Group Life Insurance Standard Provisions.
Tex. Ins. Code Ann. 1131.105. Application for Policy; Statements of Insured 13 A group life insurance policy must provide that: (1) a copy of any application for the policy by the policyholder must be attached when issued; (2) a statement made by the policyholder or an insured is considered a representation and not a warranty; and (3) a statement made by an insured may not be used in any contest under the policy unless a copy of the instrument containing the statement is or has been furnished to the person or the person s beneficiary. Tex. Ins. Code Ann. 1131.107. of Insured is Misstated 14 Adjustment of Premiums or Benefits If Age (a) A group life insurance policy must specify an equitable adjustment of premiums, benefits, or both, to be made if the age of an insured has been misstated. (b) The provision required by Subsection (a) must contain a clear statement of the method of adjustment to be used. (c) This section does not apply to a policy to which Section 1131.703 applies. Tex. Ins. Code Ann. 1201.207. Changes 15 Policy Provision: Entirety of Contract; Policy An individual accident and health insurance policy must contain the following provision: Entire Contract; Changes: This policy, including the endorsements and the attached papers, if any, constitutes the entire contract of insurance. A change in this policy is not valid until the change is approved by an executive officer of the insurer and unless the approval is endorsed on or attached to the policy. An agent does not have authority to change this policy or to waive any of its provisions. Tex. Ins. Code Ann. 1201.208. Policy Provision: Incontestability 16 13 Formerly Tex. Ins. Code Ann. Art. 3.50. Provisions. 14 Formerly Tex. Ins. Code Ann. art. 3.50. Provisions. Group Life Insurance Standard Group Life Insurance Standard 15 Formerly Tex. Ins. Code Ann. art. 3.70-3 Accident & Sickness Policy Provisions. 16 Formerly Tex. Ins. Code Ann. art. 3.70-3 Accident & Sickness Policy
(a) Except as provided by Subsection (c), an individual accident and health insurance policy must contain the following provision: Time Limit on Certain Defenses: (a) After the second anniversary of the date this policy is issued, a misstatement, other than a fraudulent misstatement, made by the applicant in the application for the policy may not be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) beginning after that anniversary. (b) A claim for loss incurred or disability (as defined in the policy) beginning after the second anniversary of the date this policy is issued may not 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 existed before the effective date of coverage of this policy. (b) Clause (a) of the provision required by Subsection (a) does not: (1) affect any legal requirement for avoidance of a policy or denial of a claim during the initial two-year period; or (2) limit the application of Section 1201.219, 1201.220, or 1201.221 in a case of a misstatement regarding age, occupation, or other insurance. (c) For a policy that provides that the insured is entitled to continue the policy in force by the timely payment of premiums until the insured reaches at least 50 years of age or, if the policy was issued after the insured reached 44 years of age, until at least the fifth anniversary of the policy s date of issuance, an insurer may use the following clause instead of Clause (a) of the provision required by Subsection (a): 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 incontestible as to the statements contained in the application. (d) The provision provided by Subsection (c) must be under the caption Incontestable. An insurer that uses the provision may omit the parenthetical clause. Tex. Ins. Code Ann. 1201.220. Policy Provision: Misstatement of Age An individual accident and health insurance policy must contain the following provision if the policy addresses the subject matter of the provision. Misstatement of Age: If the age of the insured has been misstated, the amounts payable under this policy are the amounts the premium paid would have purchased at Provisions.
the correct age. Tex. Ins. Code Ann. 1201.273. Binding Statements 17 An insured may not be bound by a statement made in an application for an individual accident and health insurance policy unless a copy of the application is attached to or endorsed on the policy as a part of the policy when issued. Tex. Ins. Code Ann. 1201.274. Reinstatement or Renewal 18 Insurer s Evidentiary Use of Application for (a) If an individual accident and health insurance policy is reinstated or renewed, and the insured or the beneficiary or assignee of the policy makes a written request for a copy of the application for reinstatement or renewal, the insurer shall, not later than the 15th day after the date the insurer receives the request at its home or branch office, deliver or mail a copy of the application to the person who made the request. (b) An insurer that fails to comply with this section may not introduce the application for reinstatement or renewal as evidence in any action or proceeding based on or involving the policy or its reinstatement or renewal. Tex. Ins. Code Ann. 1201.271. Alteration of Policy Application 19 (a) A person may not alter a written application for an individual accident and health insurance policy unless the person has the written consent of the applicant. (b) Notwithstanding Subsection (a), an insurer may make an insertion to an application solely for administrative purposes in a manner that indicates clearly that the insertion is not attributed to the applicant. Tex. Ins. Code Ann. 1201.272. False Statements 20 The falsity of a statement in an application for an individual accident and health 17 Formerly Tex. Ins. Code Ann. art. 3.70-5. Accident and Sickness Insurance Application. 18 Formerly Tex. Ins. Code Ann. art. 3.70-5. Accident and Sickness Insurance Application. 19 Formerly Tex. Ins. Code Ann. art. 3.70-5. Accident and Sickness Insurance Application. 20 Formerly Tex. Ins. Code Ann. art. 3.70-5. Accident and Sickness Insurance Application.
insurance policy does not bar a right to recovery under the policy unless the statement materially affected the acceptance of the risk or the hazard assumed by the insurer. Tex. Ins. Code Ann. 1201.011. Coverage for Premium Period with Limitations by Age or Date; Misstatement of Age of Insured 21 (a) Regardless of a provision in an individual accident and health insurance policy that specifies a date, by age limitation or otherwise, after which coverage under the policy is not effective, coverage continues in force, subject to any right of cancellation, until the end of the period for which the insurer accepts a premium if: (1) the insurer accepts the premium after the specified date; or (2) the specified date falls before the end of the period for which the insurer accepts the premium. (b) Notwithstanding Subsection (a), if the age of the insured is misstated and, because of the insured s correct age, coverage of the insured would not have become effective or would have terminated before the insurer s acceptance of a premium, the liability of the insurer is limited to the refund, on request, of the premiums paid for the period not covered by the policy. 3. REGULATIONS 28 TAC 3.103. Entire Contract (Individual life) (a) The policy must provide that the policy, or policy and application, shall constitute the entire contract between the parties. Regardless of any statement to the contrary, the policy will be deemed incomplete if it attempts to incorporate by reference the provisions of any instrument which changes or adds to the terms of the policy. 28 TAC 3.104. Incontestable Clause (Individual Life) (a) The policy must provide that it shall be incontestable not later than two years from its date as provided in the Insurance Code article 3.44(3). If a reinstatement is contested for misrepresentation, no representation other than one causing the reinstatement may be used to contest the policy, any contest of the reinstatement may be for a material and fraudulent misrepresentation only and reinstatement may not be contested more than two years after it is effectuated; provided, this provision does not affect the company s right to contest a policy for a representation respecting the initial policy insurance or a different reinstatement during the incontestable period applicable to such issuance or reinstatement. Accidental death benefits and disability benefits 21 Formerly Tex. Ins. Code Ann. art. 3.70-5. Accident and Sickness Insurance Application.
need not be subject to such provision. (b) Any provision which could lengthen the contestable period of a policy beyond two years from its date is prohibited. For example, the policy may not state that it is incontestable after two years "while the policy is continuously in force." (c)... (d)... (e) If more than one person is insured, the policy form must state that it is incontestable with respect to each insured. 28 TAC 3.105. Statements of the Insured (a) The policy must provide that all statements made by the insured shall, in the absence of fraud, be deemed representations and not warranties. The policy may provide that statements made on behalf of the insured shall also, in the absence of fraud, be deemed representations and not warranties. 28 TAC 3.106. Misstatement of Age (a) The policy must provide that if the age of the insured has been understated, the amount payable under the policy shall be such as the premium paid would have purchased at the correct age. The word misstated may be used instead of understated. (b) If more than one life is insured (e.g., by inclusion of premium payor benefits or under family group plan) the amount payable on the death of deceased may be adjusted because of a misstatement in the age of a surviving insured, if the actual construction of the contract so requires. 28 TAC 3.5106. Prohibited Provisions and Practices (a)... (2)(B) Entire contract. The policy and any application shall constitute the entire contract between the parties. (This requirement is an optional provision for certificates of insurance.) (C) Representations by insureds. In the absence of fraud, all statements made by the policyholders or the persons insured shall be deemed representations and not warranties. (D) (i) Incontestability. For individual coverage, the policy shall be incontestable after it has been in force during the lifetime of the insured for two years from its date, except for nonpayment of premium. No material
misstatement made by the applicant in the application for the policy shall be used to contest the validity of the policy, during the contestable period, unless the misstatement contained in a written statement signed by the applicant, and a copy of the statement is furnished to the applicant or to his beneficiary. Companies may elect to provide an additional statement to clarify that fraudulent misstatements regarding credit disability coverage may be contested without regard to the two-year time limitation. (ii) For group coverage, the validity of the policy shall not be contested by the insurer, except for nonpayment of premiums, after it has been in force for two years from its date of issue. 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 and unless it is contained in a written instrument signed by him, a copy of which instrument has been furnished to such person or to his beneficiary. Companies may elect to provide an additional statement to clarify that fraudulent misstatements regarding credit disability which are made by the persons insured under the policy coverage may be contested without regard to the two-year time limitations. (E) Misstatement of age. If the age of the debtor has been misstated, and according to the correct age the debtor would not have been eligible for insurance coverage, the company shall specify the method of adjustment to be used. If coverage is inadvertently issued to a debtor who correctly stated his age and his age exceeds the eligibility age, the insurer has the right, within 90 days of the effective date of coverage, to terminate the coverage and refund the full charge for insurance, provided such termination is accomplished and the appropriate refund is made prior to the incurred date of a claim; otherwise, the coverage remains in full force. 28 TAC 3.5501. (3)(B). Credit Accident and Health Insurance (3) The credit accident and health insurance contract may require written and signed evidence of insurability (inclusive of age and gainful employment) and where offered, shall be offered to all eligible debtors, and shall contain: (B) no provision for validity of insurance more restrictive than contestability based on material misrepresentation and no other provision which excludes or restricts liability in the event of disability caused in a specified manner except that it may contain provisions excluding or restricting coverage in the event of: (i) elective abortion;
(ii) (iii) (iv) (v) normal pregnancy; intentionally self-inflicted injuries; flight in nonscheduled aircraft; foreign travel or foreign residence; and (vi) loss resulting from war or military service. An insurer may not rely on material misrepresentation as a defense against the payment of a claim unless the insurer required the insured to sign a written statement in which the alleged material misrepresentation was made;... 4. CASES Since the 2005 report, there have been a few opinions discussing the notice requirement of cancellation. Those opinions are found below in chronological order following the pre-2005 cases. Johnson v. Prudential Ins. Co. of America, 519 S.W.2d 111 (Tex. 1975). Suit was brought to collect under a group life insurance policy, and the insurer defended on the ground that the insured willfully deceived the company by making misrepresentations. The plaintiff beneficiary argued that the insured s misrepresentations were inadmissible because copies of the instruments in which the statements were made were not furnished to the insured as required by f o r m e r Article 3.50 Sec. 2(3), which provided in part that no statement made by any person insured shall be used in any context, unless a copy of the instrument containing the statement is or has been furnished to such person or to his beneficiary. The insured did not receive copies of the application instruments prior to her death, although her beneficiary was given copies after being told that the insurer would not pay. The trial court on a verdict held in favor of the insurer, and the court of appeals affirmed. The Texas Supreme Court reversed the decision of the lower courts, holding that the misrepresentations were inadmissible. The court also observed that the underlying legislative intent was to require that the insured have the material terms of the contract at hand during his life, so that he can examine and correct any misrepresentation. The court observed that [s]hould the insured die immediately after his coverage is in effect and before the insurer has had reasonable opportunity to furnish him with these copies, they may be furnished to the beneficiary. Washington v. Reliable Life Ins. Co., 581 S.W.2d 153 (Tex. 1979). The Texas Supreme Court recognized the rule that: Where an application for insurance is attached to and made part of the policy and is accepted and retained by the insured, the insured is conclusively presumed to have knowledge of its contents and to have ratified any false statements; however, the court held that this does not
automatically establish the defense of misrepresentation as there is still the issue of intentional deception. Guthrie v. Republic Nat l Life Ins. Co., 682 S.W.2d 634 (Tex. Ct. 1984). This case does not involve misrepresentations made by an insured, but rather alleged misrepresentations made by a soliciting agent in describing the preexisting condition limitation in a group health insurance policy. The court held that former Article 21.04 ( solicitor deemed company s agent ) does not apply to group health insurance. Absent actual authority, the insurance agent can bind the insurer only if the agent had apparent authority to act for the carrier and the carrier must confer that apparent authority by committing actions that would induce a person to believe the agent had authority. The court distinguished a soliciting agent from a local recording agent noting that the authority of the former was much more limited. The court found that the agent was a soliciting agent with no statutory, actual, or apparent authority to bind the company and affirmed the trial court s judgment in favor of the insurer. Paramount Nat l Life Ins. Co. v. Williams, 772 S.W.2d 255 (Tex. App. Ct. 1989). The beneficiary alleged that the disputed medical history had been disclosed to the agent who completed the application and that the agent had said he needed history only for the preceding five years. It was also alleged that the agent filled out the application with the information he deemed pertinent. Although the agent was merely a soliciting agent, the court found there was sufficient evidence to support the jury s finding that the agent had apparent authority to bind the insurer. The court of appeals also found that there was sufficient evidence that the insurer had waived its right to rescind the health policy after discovering false representations by failing to give timely notice of its intent to rescind. Southwestern Life Ins. Co. v. Green, 768 S.W.2d 445 (Tex. Ct. App. 1989). The insurer sought to defend a claim brought by a beneficiary based upon the insured s failure to disclose treatment of alcoholism. The court noted that the insurer had the burden of proof on the element of intent to deceive. In this case, the court found no intent to deceive because testimony was presented to the jury that alcoholics often deny having a problem and believe they do not have a problem. The court stated that intent of a person can be deduced from circumstances surrounding the event in question. Koral Indus., Inc. v. Security-Connecticut Life Ins. Co., 788 S.W.2d 136 (Tex. Ct. App. 1990), cert. denied, 802 S.W.2d 650 (Tex. 1990). In this case involving a key-man life insurance policy, the insurer asserted the defense of misrepresentation, and the central issue on appeal was whether the insurer
knew facts which would have caused a prudent person to inquire and whether an inquiry made with reasonable diligence would have disclosed the questioned omissions made by the deceased. The insurer prevailed on appeal on its misrepresentation defense, and the court of appeals relied on and quoted from Isenhower v. Bell, 365 S.W.2d 354 (Tex. 1963): Where one has been induced to enter into a contract by fraudulent representations, the person committing the fraud cannot defeat a claim for damages based upon a plea that the party defrauded might have discovered the truth by the exercise of proper care. The court found that only actual knowledge of the falsity of misrepresentations would defeat a defense based on those false representations. It then reversed the judgment of the trial court and granted judgment in favor of the insurer. Adams v. John Hancock Mutual Life Ins. Co., 797 F.Supp. 563 (W. D. Tex 1992). The plaintiff sought recovery of benefits under a group life insurance policy. The court, in rejecting Hancock s motion for summary judgment, in essence, recognized that there were material issues of fact regarding whether former Article 3.50 Sec. 2(3) was complied with and whether the insured had an intent to deceive when the misrepresentations were made. The court held that the application must be returned to the insured within a reasonable time in order for any misrepresentation to be admissible. Fredonia State Bank v. General American Life Ins. Co., 906 S.W.2d 88 (Tex. Ct. App. 1995). This case involved an attempt to defeat the misrepresentation defense by arguing that the insurer had failed to attach the application to the policy. The court of appeals held that the act of attaching the application to policies was not a sixth element of the insurer s fraudulent misrepresentation defense. The court concluded that the burden of proof as to whether an insurer attached an application so as to preclude the assertion of the affirmative defense of misrepresentation should be borne by the party who would avoid such defense. Riner v. Allstate Life Ins. Co., 131 F.3d 530 (5th Cir. 1997). Beneficiaries sued life insurer to recover benefits under a temporary insurance agreement. Allstate defended on the theory that alleged misrepresentations were made in the application. The agent issued a receipt and temporary insurance agreement and left a copy with the applicant/insured, but did not leave a copy of the application. Six days after the medical examination, but before the policy had been issued, the applicant/insured died. The beneficiary argued that Allstate could not rely upon any misrepresentations in the application to the temporary insurance agreement. Allstate maintained that its delivery of the application and temporary insurance agreement to the beneficiaries after the death claim was filed satisfied the statute. The U.S. District Court entered summary judgment for Allstate, and the beneficiaries appealed. The Fifth Circuit Court of Appeals reversed, rejecting Allstate s
argument that truthful answers were a condition precedent to coverage. It held that under Texas law, responses in an application are mere representations. The court recognized Allstate s defense based on misrepresentations in the application but held that such misrepresentations are not admissible unless the application is attached to and made part of the policy. Concluding that the temporary insurance agreement issued in this case was a contract of insurance, the court found that a contract affording temporary life insurance coverage was included within former Article 21.35 and that a copy of the application should have been provided to the applicant to afford him the opportunity to review his responses. Levy v. Hunt, No. 14-00-00549-CV, 2001 WL 306149 (Tex. App. May 29, 2001). This case considered an incontestability clause in a life insurance policy. A widowed spouse claimed proceeds from a life insurance policy. The court analyzed the language in the policy to determine the appropriate beneficiary. As part of the widow s argument, she claimed that the insurer could not contest the policy because it contained an incontestability clause mandated by Texas law. The court stated [t]here is a distinction between contesting the validity of an insurance contract and contesting its coverage, meaning or application. Here, [the insurer] is not contesting the validity of the policy it issued; rather, it is insisting upon observance of the policy terms. Id. at *8. The court denied the widow s claim to the proceeds, in part because her contest fell outside the reach of the incontestability clause. Bosch v. Dallas General Life Ins., No. 14-04-00661-CV, 2005 WL 757254 (Tex. App. 2005). The insured brought a breach of contact claim against the insurer for benefits allegedly due under a health insurance policy, and the insurer claimed misrepresentations had been made in the application. The trial court granted summary judgment in favor of the insurer, and the insured appealed. The insured argued on appeal that the insurer failed to give proper notice of cancellation of the policy, and the insurer argued that mailing a notice of termination was sufficient to constitute proper notice regardless of whether the insured received the notice. The insurer relied on cases that all involved an explicit provision that mailing of notice as aforesaid shall be sufficient proof of notice. However, the insurer s policy contained no such provision, and the court found that although the insurer proved that the termination noticed was mailed, the insurer failed to conclusively prove that the insured actually received the notice. The court thus reversed the trial court s summary judgment ruling. Myers v. Mega Life & Health Ins., No. 07-06-0233-CV, 2008 WL 1758640 (Tex. App. 2008). The insured appealed from a judgment in favor of insurer, arguing, inter alia, that the trial court erred in failing to include a jury instruction regarding whether the insurer gave proper notice of termination. Statutory notice is an essential element of a defense based on misrepresentation or rescission and therefore the insurer has the burden of proof on that point. The court found that there was a fact issue raised regarding the
time when the insurer discovered the falsity of the representations and therefore a question as to the date a notice of rescission was due. The appellate court found that the failure of the trial court to instruct the jury as to the issue of notice constituted reversible error. In support of its argument that proper notice was given, the insurer claimed that the period of 91 days under Section 705.005 does not begin to run until the insurer discovers the falsity of the representation and determines the misrepresentations are material. The court held that the statute had no such pre-condition, and that it would not create one. The court clarified that the statute begins to run not on the discovery of any misrepresentation, but upon discovery of those representations that are material to a coverage determination. The court reversed the trial court s judgment and remanded for further proceedings. One Beacon Ins. Co. v. T. Wade Welch & Associates, No. H-11-3061, 2012 WL 1155739 (S.D. Tex. 2012). The insureds filed a motion to dismiss a suit arising from misrepresentations on a professional liability insurance application and claimed that the insurer failed to show compliance with the notice provision. Although the insurer did not plead that it gave notice in its original complaint, the first amended complaint alleged that the insurer discovered the misrepresentations and notified the insured that their policy had been rescinded within the required time period of 91 days. Accordingly, the court denied the insured s motion to dismiss on this basis without deciding whether the insurer was required to plead such compliance in the first place.