The Texas Supreme Court reaffirmed common law precedent that insurers cannot avoid liability under an insurance policy based on a misrepresentation in an application unless the insurer can show, among other things, that the insured intended to deceive or induce the insurer to issue the policy.
In American National Insurance Co. v. Arce, the insured’s answer to questions about his medical history on his life insurance application was inaccurately recorded by the agent as “no”, even though he had disclosed some adverse medical history. Upon the insured’s death shortly thereafter, his mother, the beneficiary of the policy, filed a claim that was later denied, prompting her to sue the insurer for breach of contract and violations of the Texas Insurance Code.
Section 705.051 of the Texas Insurance Code states that “[a] misrepresentation in an application for a life, accident, or health insurance policy does not bar recovery under the policy unless the misrepresentation (1) is a material fact and (2) affects the risks assumed”.
Before section 705.051 was recodified in 2003, the Texas Supreme Court had established a five-part common law test that required proof of “intent to deceive” in order to void a policy based on an insured’s misrepresentation. In Arce, the insurer claimed that no benefits were owed under the policy because the insured had made material misrepresentations of fact in the application that affected the risks assumed by the insurer in issuing the policy. The insurer argued that the language of section 705.051 included every element of the common law test except intent to deceive, indicating that the statute did not require intent to deceive. However, the Texas Supreme Court rejected this argument, holding that under this interpretation, insurers could avoid paying on a policy based on an innocent, unknowing or inadvertent misrepresentation in an insurance application, so long as the misrepresentation was of a material fact and either induced the issuance of the policy or affected the premium charged.
The Texas Supreme Court analysed the history of the 2003 recodification of the statute and found that the Texas legislature not only declared that the 2003 recodification was not substantive, but also left the language of section 705.051 substantially unchanged. Thus, based on precedent, the lack of substantive change demonstrated that the legislature did not intend to eliminate the common law requirement. Next, in analysing the plain language of the statute, the court rejected the insurer’s argument that the statute’s language encompassed every element of the common law test except intent to deceive. The court focused on the statute’s use of the word “unless”, which implied that the two enumerated elements in the statute were merely necessary, not sufficient, to defeat recovery. The court went on to say that “as written, section 705.051 does not guarantee that the insurer can ‘defeat recovery under the policy’ if both of the enumerated conditions are met; it only guarantees that recovery cannot be defeated if one or the other is not met”. The court went on to say that even if “unless” were read as “except if”, as the insurer urged, this would not alter the plain meaning of section 705.051 as establishing minimum conditions that do not guarantee denial of recovery. Thus, the court found that the statute was not inherently or necessarily inconsistent with established law requiring pleading and proof of intent to deceive in addition to the statutory conditions.
Accordingly, the Texas Supreme Court held that insurers must plead and prove intent to deceive to avoid contractual liability based on a misrepresentation in a life insurance application, regardless of whether the policy is rescinded. Proof of a material inaccuracy is not sufficient.
