So They Say You Lied – Misrepresentation, And Deceit – But Can You Still Recover Under The Policy?
It becomes an all too familiar scenario. The client who purchased major medical insurance coverage suffers a severe medical diagnosis requiring surgery and thousands of dollars in treatment. The insurer faced with these enormous expenses for the insured’s lifetime engages in post loss underwriting to determine if the condition was disclosed. Discovering that the condition should have been but was not, the insurer tells the overwhelmed insured that there will be no payment, the policy is being rescinded, and the insured misrepresented facts when applying for the policy. The insured walks into your office distraught asking what does he do?
Texas insurance law has specific statutory provisions addressing misrepresentation and ultimately rescission. An allegation of misrepresentation, while easy to make, is hard to substantiate in order to result in forfeiture of a policy. The line from misrepresentation to rescission is anything but automatic. The path is paved with numerous roadblocks which disfavor rescission and forfeiture.
This paper seeks to survey statutes, cases, and rules dealing with misrepresentations by insureds and by the insurer. However, one must be aware of the distinction between a misrepresentation and warranty/condition precedent. The difference is critical.
I. Definitions
A. Misrepresentation Defined
A “misrepresentation” has been defined as a statement made by the insured which qualifies as a statement of fact which is untrue and which tends to mislead or deceive an insurer. 46 Tex.Jur.3d Representations, Generally; Definitions §543 (1995). A representation (misrepresentation) is a statement, oral or written, of facts not a part of the contract, made before the formation of a contract, but designed to influence an insurer on whether to issue coverage and the premium charged. See Lane v. Travelers Indemnity Co., 391 SW2d 399, 401 (Tex. 1965). A misrepresentation may also consist of an omission of a necessary statement. Essex Ins. Co. v. Redtail Products, 1999 WL 627379 (N.D. Tex. 1999), aff’d 213 F.3d 636 (5th Cir. 2000). Even if the representations made are repeated in the policy, they still remain representations.
B. Warranty and/or Condition Precedent Defined
A warranty and/or condition precedent is different from a representation. “…generally speaking, warranties are statements, stipulations, or conditions which form a part of the contract, whereby the insured contracts as to the existence of certain facts, circumstances, or conditions, the literal truth as to which is essential to the validity of the contract.” Trinity Universal Ins. Co. v. Winter, 67 SW2d 926, 928 (Tex. Civ. App. – El Paso 1934, writ dism’d) cited in Lane, 391 SW2d at 401. The significance of a warranty is that the materiality of the warranty is not relevant, unlike a representation:
A warranty in an insurance contract is a statement made therein by the assured, which is susceptible of no construction other than that the parties mutually intended that the policy should not be binding unless such statement be literally true.
Phoenix Assurance Co. v. Munger Imp. Cotton Machine Mfg. Co., 92 Tex. 297, 49 SW 222, 225 (1898) cited in Lane, 391 SW2d at 402.
A condition precedent, like a warranty, means that the condition must be satisfied before the policy becomes effective. Great National Life Ins. Co. v. Hulme, 134 Tex. 539, 136 SW2d 602, 603 (Tex. 1940). The language for a condition precedent often used is “no insurance shall take effect during the lifetime. . .” Assurity Life Ins. Co. v. Grogan, 480 F. 3d 743, 745-746 (5th Cir. 2007).
C. Contrasting
The failure of warranty and/or condition precedent equates to forfeiture regardless of whether the statement (warranty) was material to the risk. A warranty can obviously produce harsh results.
Many warranties and/or condition precedents may be found in life insurance policies. In Hulme, the Texas Supreme Court held the language “the insurance hereby applied for shall not take effect until . . . delivered to and accepted by me while I am in good health” was a condition precedent. Hulme, 136 SW2d at 603. In Beck v. Connecticut General Life Ins. Co., the following was determined to be a condition precedent: “no insurance shall take effect unless . . . the first premium is paid during the lifetime and good health of the proposed insured . . .” 456 F. 2d 1010, 1041 (5th Cir. 1971). And in Bryant v. Standard Ins. Co., this language was viewed as condition precedent: “no insurance shall be considered in effect . . . until the first full premium is paid and delivered . . . during the continued good health of the proponed insured.” 348 F. 2d 649, 654 n.6 (5th Cir. 1965). See also Assurity, 480 F. 3d at 746.
Texas courts typically construe statements in an insurance policy as representations rather than warranties or conditions precedent. Cartusciello v. Allied Life Ins. Co., 661 SW2d 285, 287 (Tex. App. – Houston [1st Dist.] 1983, no writ). This judicial construction comes from the Texas Insurance Code which holds that in the absence of fraud, statements made by an insured are viewed as representations rather than warranties. American States Life Ins. Co. v. Monroe, 762 SW2d 633, 636 (Tex. App. – Texarkana 1988, writ denied); Allied Bankers Life Ins. Co. v. De La Cerda, 584 SW2d 529, 533 (Tex. Civ. App. – Amarillo 1979, writ ref’d n.r.e.).
The likelihood that the statement will be viewed as a warranty and/or condition precedent versus a representation appears less likely from a historical perspective as well. Lane, 391 SW2d at 403. Simply alleging that the statement is a warranty and/or condition precedent rather than a representation does not improve an insurer’s chances of success in proving a warranty and/or condition precedent. Id.
II. Statutes On Misrepresentation
Texas has broad statutory pronouncements on misrepresentations and whether they operate to preclude coverage. In some respects, the statutory framework is broken down by types of policies. The following discussion will be geared toward specific statutes. Each statute is stated for easy reference.
A. Tex. Ins. Code Ann. §705.001 – 705.005
Section 705.001 – 705.005 generally deal with provisions related to misrepresentations by policyholders for all types of policies, with certain exceptions.
§ 705.001. Definition
In this subchapter, “insurance policy” means a contract or policy of insurance.
§ 705.002. Applicability of Subchapter
Except as provided by Section 705.005, this sub-chapter applies to each insurance policy issued or contracted for in this state.
These two sections are self explanatory but broad. Section 705.001 states that the section applies to insurance policies which seems logical. Section 705.002 provides a broad reach – that is it covers all policies issued or contracted for in this state since June 29, 1903 with certain specific exceptions. One should note that Section 705.002 covers policies issued or contracted in this state. In other words, the policy need not be issued here – only contracted for. Issued may relate to any property or person being insured in this state. Tex. Ins. Code Ann. §21.42 (Vernon 2007):
B. §705.003. Policy Provision: Misrepresentation in Proof of Loss or Death
(a) An insurance policy provision that states that a misrepresentation, including a false statement, made in a proof of loss or death makes 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 misrepresentation:
(1) was fraudulently made;
(2) misrepresented a fact material to the question of the insurer’s liability under the policy; and
(3) misled the insurer and caused the insurer to waive or lose a valid defense to the policy.
This statute addresses the specific proof needed by an insurer in order to avoid a claim. This section applies to proofs of loss and death, not to the application itself, although that may well be a distinction without a difference. This provision outlines the elements of proof required.
1. Intent
When avoiding a policy or payment based on a proof of loss or death, the insurer has the burden of demonstrating an intent to deceive. Westchester Fire Ins. Co. v. English, 543 SW2d 407, 414-415 (Tex. Civ. App. – Waco 1976, no writ). Merely showing a misrepresentation is not enough. A jury issue is required to be submitted to substantiate a factual basis for avoidance based on intent. Gallagher v. Fire Ins. Exchange, 980 SW2d 833, 837-838 (Tex. App. – San Antonio 1998, pet. denied). This element will be discussed later and may be hardest for the insurer to satisfy.
2. Materiality
Section 705.003, formally Texas Ins. Code Ann., art. 21.19, is a antitechnicality statute, meaning that the insurer must show fraud, and the representations were material to the insurer’s liability or caused the insurer to waive or lose a valid defense to the policy. United States Fire Ins. Co. v. Skatell, 596 SW2d 166, 169 (Tex. Civ. App. – Texarkana 1990, write ref’d n.r.e.). Inconsistent statements made by the insured during the investigation of their claim were not material where the insurer was not misled by such statements and the insured’s statements were not made with the intent to alter the effect of the policy. Aetna Casualty & Surety Co. v. Guynes, 713 F.2d 1187, 1190-1192 (5th Cir. 1983). Even where an insured deliberately misrepresented the value of inventory which was subject of the claim, the insurer did not satisfy the materiality requirement; the insurer did not pay on the amount submitted, was not misled by the overevaluation, and did not lose a valid defense. Delta Lloyds Ins. Co. v. Williamson, 720 SW2d 232, 233 (Tex. App. – Beaumont 1986, no writ).
While this provision applies to proofs of loss, it would likewise be applicable to examinations under oath. Skatell, 596 SW2d at 168-169. And where a spouse is guilty in violating Section 705.003, his wife may be prohibited from recovery, as well. McEwin v. Allstate Texas Lloyds, 118 SW3d 811, 816 (Tex. App. – Amarillo 2003, no pet). Finally, this section does not apply for purposes of litigation where the insured submitted two contradictory affidavits to the court in response to knowledge of stolen property. Vernon v. Aetna Ins. Co., 301 F.2d 86, 89-90 (5th Cir. 1962).
3. Waiver or Loss of a Defense
A defense is not lost when it cannot be presented or litigated by the insurer; thus, the submission of this issue to the jury with an negative finding does not equate to a loss of a defense. Stokes v. State Farm Lloyds, 1997 WL 96608 2-3 (Tex. App. – Houston [14th Dist.] 1997, writ denied).
Cases decided under this statute demonstrate the tremendous burden that the insurer must meet to avoid payment from a proof of loss or death. Not only must the insurer
prove fraud, it also must show materiality and the loss and/or waiver of a valid defense.
C. § 705.004. Policy Provision: Misrepresentation in Policy Application
(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
(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.
Section 705.004 deals with applications for insurance as opposed to proofs of loss and death. Section 705.004 addresses preclaim conduct as opposed as to post loss behavior. The language is remarkably similar to the preceding statute, save and except the element of fraud.
This statute has a lot of legs and many elements to meet. The elements however remain consistent.
1. Elements
The elements that the insured must satisfy to prevent payment pursuant to Section 705.004 is: (1) a representation by the insured; (2) falsity of the representation; (3) reliance on the representation by the insurer; (4) intent to deceive by the insured; and (5) materiality of misrepresentation. Progressive County Mutual Ins. Co. v. Bowman, 780 SW2d 436, 439 (Tex. App. – Texarkana 1989, no writ). Shelton v. Union Bankers Ins. Co., 889 SW2d 278, 281-282 (Tex. 1994).
2. Materiality
In order to be material to the risk under Section 705.004(1), the insurer must show that it was induced to assume the risk by the misrepresentation. English, 543 SW2d at 412-413. Manhattan Life Ins. Co. v. Harkrider, 396 SW2d 207, 215 (Tex. Civ. App. – Austin 1965, writ ref’d n.r.e.). This determination is almost always fact specific.
For example, when the insured represented his boat would only be used for chartering but instead specifically used it to carry passengers for hire, such representation was material to the risk. Fireman’s Fund Ins. Co. v. Wilburn Boat Co., 300 F2d 631, 641-643 (5th Cir. 1962). When a government housing agency sought recovery on mortgage insurance for three loans that were in default, misrepresentations on the commitment document constituted material information which the insurer could rely on to deny coverage. Texas Dept. of Housing & Community Affairs v. Verex Assurance, Inc. 68 F3d 922, 930 (5th Cir. 1995). In contrast, simply because an insured failed to disclose that she had diabetes in a life insurance application did not justify a denial where the diabetes did not cause or contribute to the insured’s death. Southern Life & Health Ins. Co. v. Grafton, 414 SW2d 214, 218 (Tex. Civ. App. – Tyler 1967, writ ref’d n.r.e.). Additionally, where a couple represented themselves as being married and living in same home but in fact were not married and the insureds suffered a casualty loss, such representation was not material to the loss.
English, 543 SW2d at 412. And when a pilot made a false representation to the FAA to obtain a medical certificate, such representation was not imputed to the policy and not material to issuance of the policy including the “pilot clause.” Ranger Ins. Co. v. Bowie, 574 SW2d 540, 542 (Tex. 1978).
Lastly, omissions may qualify misrepresentations just as in Section 705.003 where the insured failed to disclose that a demand letter had already been received alleging trademark infringement when applying for a liability policy. Essex, 1999 WL 627379 at * 5-6.
In evaluating materiality under this section, several points should be kept in mind. A misrepresentation is not material to the risk simply because the insurer might have charged a higher premium if disclosed. Harrington v. Aetna Casualty & Surety Co., 489 SW2d at 176-177; Horne v. Charter National Ins. Co., 614 SW2d 182, 184-185 (Tex. Civ. App. – Fort Worth 1981, writ ref’d n.r.e.). When assessing whether the information given is material to the risk, inquiry is to be made at the time the policy was issued, not at the time of loss. Robinson v.
Reliable Life Ins., 569 SW2d 28, 28-30 (Tex. 1978). The insurer need only prove the misrepresentation was material to the risk or actually contributed to the loss or contingency which made the policy payable; it need not prove both. Id. at 28-29.
3. Intent
Intent is a specific fact driven inquiry. Of course, intent for one type of claim may be wholly different for another. For example, an insured’s statement on a life insurance application that he did not have a prior heart condition was not determinative where the insured did not believe the information was false and was not material to the insured’s cause of death. Accidental Life Ins. Co. v. Bob LeRoy’s, Inc. 413 F2d 819, 823 (5th Cir. 1969). In contrast, summary judgment was proper where insured denied any accidents or moving violations in a thirty-six (36) month period in applying for automobile insurance, yet the insured had seven (7) moving violations and two (2) accidents in that period. Odom v. Ins. Co. of Pennsylvania, 441 SW2d 584, 591 (Tex. Civ. App. – Austin 1969, aff’d, 455 SW2d 195 (Tex. 1970)). Summary judgment was reversed in another case where the insured failed to list his diabetes on a credit life policy and subsequently died. Fact issues and the effect of diabetes on the insured’s health defeated the summary judgment. Carter v. Service Life & Casualty Ins. Co., 703 SW2d 349, 352 (Tex. App. – Corpus Christi 1985, no writ).
Absent an egregious set of circumstances, intent will be a fact issue.
4. Reliance
The elements in Section 705.004 are virtually the same as fraud. This is true when considering reliance. Where the insurer does not rely on the misrepresentation, the policy cannot be voided. Texas State Life Ins. Co. v. Barton, 118 SW2d 617, 618 (Tex. Civ. App. – Galveston 1938, no writ) (holding applicant who claimed that she was 42 rather than 70 was of no effect where the insurer did not rely on such representation). There was no reliance where the insurer would not have issued the renewal for the same premium based on the misrepresentation, as an increased premium does not satisfy the reliance element. Harrington, 489 SW2d at 177-178.
In a curious twist of cases which appear to be inopposite, one court has held that there can be no reliance when a prudent person would be on notice of the disclosed facts to make further inquiry. Republic-Vanguard Life Ins. Co. v. Walters, 728 SW2d 415, 419 (Tex. App. – Houston 1987, no writ). However, in Koral Industries, Inc. v. Security-Connecticut Life Ins. Co., the Court held there was no duty on the part of the insurer to discover the misrepresentations even when a reasonably prudent person would have made such discovery. 788 SW2d 136, 141-146 (Tex. App. – Dallas 1990, writ denied. 802 SW2d 650 (Tex. 1990)). The Supreme Court disapproved of Walters in denying review in Koral. Koral, 802 SW2d at 651.
In comparing sections, 705.003 and 705.004, the same reasoning and substantive elements apply.
D. §705.005 Notice to Insured of Misrepresentations
(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.
Section 705.005 is the notice requirement to an insured of a misrepresentation defense or avoidance. In simple terms, the insurer is required to notify the insured by the 91st day after the insurer learned of the misrepresentations that it refuses to be bound by the policy.
It is insurer’s burden to demonstrate such notice in order to avoid the policy. Womack v. Allstate Ins. Co., 156 Tex. 467, 296 SW2d 233, 235-236 (1956). Thus, a reservation of rights type letter and a letter regarding the ongoing investigation did not qualify as notice
under the statute. National Union Fire Ins. Co. v. Hudson Energy Co., 780 SW2d 417, 424-425 (Tex. App. – Texarkana 1989, aff’d 811 SW2d 552 (Tex. 1991)). The obligation of notice though does not arise until the misrepresentation is discovered. Redtail Products, 1999 WL 627379 at * 8; Koral, 788 SW2d at 149.
This provision may not apply to life insurance policies where there may be a two year contestability period. See Tex. Ins. Code Ann. §705.104.
D. Summary
Sections 705.001 – 705.005 provide an insured several safe harbors to avoid a policy forfeiture and in turn present numerous significant obstacles for the insurer to prevent payment. The statutes apply fraud like elements with causally related consequences in dealing with misrepresentation. The insurer must act prudently and swiftly in addressing misrepresentations once they are discovered.
III. IMMATERIAL MISREPRESENTATIONS
A whole section of Texas Statutes deals with immaterial misrepresentations in insurance policies.
Section 705.051
§ 705.051. Immaterial Misrepresentation in Life Accident, or Health Insurance Application
A misrepresentation in an 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.
This statute is textually different from the preceding statutes in section 705.001 et seq. However, the statute’s practical effect is no different.
The same five elements for section 705.004 apply to this statute: An insurer cannot survive on a defense of false representations in an application for life, accident or health insurance absent: 1. a false representation; 2. in reference to a material fact; 3. made with knowledge of its falsity; 4. made with an intent to deceive; and 5. with action taken in reliance upon the representation. Roosth v. Lincoln Nat’l Life Ins. Co., 269 F 2d 171 (5th Cir. 1959). As with other statutes, materiality must be shown. United American Ins. Co. v. Harp, 290 SW2d 392, 394-395 (Tex. Civ. App. – Amarillo 1956,
no writ). An application filled out by agent and signed by the husband did not satisfy the materiality requirement where the husband did not read the answers before the signing application and where the insurer investigated the application before wife’s death. See John Hancock Mut. Life Ins. Co., 324 SW2d 610, 612-613 (Tex. Civ. App. – San Antonio 1959, writ ref’d n.r.e.). A waiver defense may be available to a claim of misrepresentation. Walters, 728 SW2d at 419. Finally, the burden to establish a misrepresentation defense of a policy is on the insurer. Lumbermens Mutual Casualty Co. v. Klotz, 251 F.2d 499, 501-502 (5th Cir. 1958).
IV. STATUTORY LAW ON LIFE INSURANCE POLICIES
Section 705.101 et seq. addresses misrepresentations and life insurance policies. The language is similar to other statutes discussed previously with a few nuances.
A. Definition and Applicability
§ 705.101. Definition
In this subchapter, “insurance policy” means a contract or policy of insurance.
Added by Acts 2003, 78th Leg., ch. 1274, § 2, eff. April 1, 2005.
§ 705.102. Applicability of Subchapter
This subchapter applies to any insurance policy issued or contracted for in this state.
These provisions are self explanatory and denote that a life insurance policy means what is says and the statutes apply to policies issued or contracted for in this state. See Tex. Ins. Code Ann. §21.42.
A. Documents to Accompany Policy
§ 705.103. Documents to Accompany Policy
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.
Unlike other insurance policies, life insurance policies must have the application and questions and answers attached. The purpose of this statute is to prevent the use of statements by the insured which were not attached to the application where the insurer is seeking to avoid payment based on misrepresentations. Johnson v. Prudential Ins. Co., 519 SW2d 111, 113-114
(Tex. 1975). Thus there can be no reliance where the application is not attached. Fredonia State Bank v. General American Life Ins. Co., 881 SW2d 279, 288 (Tex. 1994); Riner v. Allstate Life Ins. Co., 131 F.3d 530, 537-538 (5th Cir. 1998). However, this provision will not prevent the insured from offering the contents of the application. National Educators Life Ins. co. v. Morgan, 295 SW2d 713, 715-716 (Tex. Civ. App. – Amarillo 1956, writ ref’d n.r.e.). The burden to prove the insurer’s failure to attach the application to the policy is on the party who is seeking to avoid consideration of the misrepresentation claim. Fredonia State Bank v. General American Life Ins. Co., 906 SW2d 88, 90 (Tex. App. – Tyler 1995, no writ).
C. Misrepresentation in Application for Life Insurance
§705.104 Misrepresentation in Application for Life Insurance
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 he 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.
This statute sets out a time frame to contest misrepresentations in a life insurance policy – two (2) years. The insured must be current on his premiums. A policy which permits contestability after two (2) years is invalid. Protective Life Ins. Co. v. Russell, 119 SW3d 274, 283-284 (Tex. App. – Tyler 2003, pet. denied).
Like other statutes, the insurer to succeed on a misrepresentation defense must show that the false statement was material to the risk and intentionally made. An insured’s failure to advise the insurer of changes in prior answers is a misrepresentation. Id. at 283-284. Where language in a policy affirms that the answers are true and correct at the time of delivery of the policy, same is a representation; but where the language states coverage does not take effect unless the applicant is in good health, such provision is a condition precedent. Id. at 281-282. Reinstatement may entitle an insurer to seek reaffirmance of insurability. Great Southern Life Ins. Co. v. Doyle, 136 Tex. 377 151 SW2d 197, 200-201 (1941).
D. Applicability of Other Laws
§ 705.15. Applicability of Other Law 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.
Sections 705.001 – 705.005 do not apply to life insurance policies where the policy contains a two year incontestability clause and where the premiums are paid. This would eliminate the 90 day notice provision of Section 705.005 and the proof of death misrepresentation in Section 705.003.
V. Misrepresentations In Health Insurance
An individual health policy may be cancelled when misrepresentations are involved:
§ 1202.051. Renewability and Continuation of Individual Health Insurance Policies
(a) This section applies only to an individual health insurance policy that provides
benefits for medical care under a hospital, medical, or surgical policy.
(b) Except as provided by Subsection (c), an insurer shall renew or continue an individual health insurance policy at the option of the individual.
(c ) An insurer may decline to renew or continue an individual health insurance policy:
(1) for failure to pay a premium or contribution in accordance with the terms of the policy;
(2) for fraud or intentional misrepresentation;
(3) because the insurer is ceasing to offer coverage in the individual market in accordance with rules adopted by the commissioner;
(4) because an individual no longer resides, lives, or works in an area in which the insurer is authorized to provide coverage, but only if all policies are not renewed or not continued under this subdivision uniformly without regard to any health-status related factor of covered individuals; or
(5) in accordance with federal law, including regulations.
(d) The commissioner shall adopt rules
necessary to:
(1) implement this section; and
(2) meet the minimum requirements of federal law, including regulations.
Tex. Ins. Code Ann. § 1202.051 (Vernon Supp. 2008). Emphasis added.
This section seems repetitious and duplicative of other statutes. This section does use the term “intentional misrepresentation” which other statutes do not. This section does not change the applicability of Sections 705.001 et seq. and 705.051.
VI. RESCISSION OR WHAT HAPPENS WHEN THE MISREPRESENTATION IS BAD ENOUGH
A. Background
Typically, rescission is viewed as an equitable remedy. Humphrey v. Camelot Retirement Community, 893 SW2d 55, 59. (Tex. App. – Corpus Christi 1994, no writ). Possible grounds included mistake, breach of contract, and of course, fraud. Id. Rescission usually ends the contract. Baty v. ProTech Ins. Agency, 63 SW3d 841, 855 (Tex. App. – Houston [14th Dist.] 2001, pet denied). Contractual rights and liabilities are extinguished and the parties are returned to their respective position as if no contract was ever made. Id.
While rescission is usually thought of as equitable, it can be argued statutory rescission may exist with regard to insurance policies. See generally Tex. Ins. Code Ann. § 705.004, 705.005, and 705.104. Whether it is statutory or equitable, the rules and applications may not be same.
With regard to misrepresentation and insurance polices, rescission is statutory in nature. Courts treat insurer claims for misrepresentation like rescission if avoidance is the objective. Shelton, 889 SW2d at 282; Parsaie v. United Olympic Life Ins. Co., 29 F.3d 219, 220 (5th Cir. 1994); and National Union Fire Ins. Co. v. Hicks, Muse, Tate, & Furst, Inc., 2002 WL 1482625 (S.D.N.Y. 2002).
B. Rescission Requirements
When seeking equitable rescission, a party must give timely notice that rescission is being sought and a return or an offer to return the benefits or proceeds received. Humphrey, 893 SW2d at 59. But see Tex. Ins. Code Ann. § 705.005 (91 day requirement). The party that seeks rescission bears the burden of proof. Carrow v. Bayliner Marine Corp., 781 SW2d 691, 696 (Tex. App. – Austin 1989, no writ).
In specific terms, rescission requires a return of the premium, all premiums made by the insured. Costley v. State Farm Fire and Casualty Co., 894 SW2d 380, 387 (Tex. App. – Amarillo 1994, writ denied). Rescission cannot be partial; it must on the entire policy. Id; Neill v. Neill, 386 SW2d 642 (Tex.Civ.App. – Austin 1965, writ dism’d). Consequently, an insurer can not seek to rescind parts of a policy and demand compliance with the remainder. Nass v. Chadwick, 70 Tex. 157, 7 SW 828 (1888). Partial rescission may be allowed if the provision sought to be rescinded is entirely divisible from the rest of the policy. Hanks v. GAB Business Services, Inc., 644 SW2d 707, 708 (Tex. 1982); Costly, 894 SW2d at 387.
The rescission requirements are the same as the statutory elements in section 705.001 et seq. and 705.100 et seq. Banner Life Ins. Co. v. Pacheco, 154 SW3d 822, 830 (Tex. App. – Houston [14th Dist.]) 2005, no pet.).
VII. CLIMBING EVEREST TO MEET THE EVIDENTIARY BURDEN
Even the most extreme misrepresentation will not result in rescission or avoidance. The most difficult of all elements –
one rarely satisfied for summary judgment purposes and even trial is the “intent to deceive”. Shelton, 889 SW2d at 282. Enserch Corp. v. Shand Morahan & Co., Inc., 952 F. 2d 1485, 1495 (5th Cir. 1992). What constitutes an intent to deceive is fact specific but rarely met.
There can be no intent to deceive unless the insured actually, but not constructively, knew the representation is not true. A jury question that the insured knew “or should have known” is not proper to determine intent. Allen v. American National Ins. Co., 380 SW2d 604 (Tex. 1964). Therefore, negligence or even carelessness is not the criterion to judge “intent to deceive”. Soto v. Southern Life & Health Ins. Co., 776 SW2d 752, 756 (Tex. App. – Corpus Christi 1989, no writ).
The mere existence of a material misrepresentation is not enough. Bates v. Jackson National Life Ins. Co., 927 F. Supp. 1015 (S.D.Tex. 1996). An intent to deceive is a question of fact, precluding summary judgment. Id. at 1021; see also Tex. Ins. Code Ann. § 705.004 (c). Some cases have held intent to deceive can never be proved as a matter of law. Lee v. National Life Association Co., 632 F.2d
524, 528 citing Washington v. Reliable Life Ins. Co., 581 SW2d 153 (Tex. 1979). However, a footnote in Shelton may give the insurer some comfort: “the utterance of a known false statement, made with intent to induce action … is equivalent to an intent to deceive.” Shelton, 889 SW2d at 282, n.7.
Without establishing an intent to deceive, it makes little difference whether the insurer can establish an avoidance (rescission) based on misrepresentations. Even where the misrepresentation was material to risk and relied on by the insurer, it is not enough to avoid payment where no intent to deceive can be shown.
VIII. Conclusion
It is important to distinguish between misrepresentations, warranties, and conditions precedent. Texas has a statutory framework for dealing with misrepresentation which makes it difficult for the insurer to satisfy. Avoiding a policy equals rescission. In meeting the requirements for rescission, an insurer must prove an intent to deceive, a very difficult burden. A misrepresentation by itself will not bar recovery under an insurance policy.
