The
Misrepresentation Defense in Life and Disability Insurance Cases:
The Issue of Causation
I.
Introduction
Every
person wants to put their best foot forward concerning their life history when
a life or disability insurance application is taken. This helps ensure coverage is written, the risk is assumed, or
the premium is lower. In most cases,
the issue of misrepresentation in the application arises after the beneficiary
acquires the automatic sympathy created by death or disability. It is in this difficult scenario that defense
attorneys and claims examiners must make their assessment whether to deny due
to a misrepresentation.
One of the
most litigated issues in life and health insurance continues to be whether
there was a misrepresentation in the application for insurance entitling the
insurer to avoid paying the contracted benefits. A combination of case law and statutory law has developed around
the question of whether misrepresentations will allow an insurer to void its
policy obligations. These rules have
typically been formulated in terms of whether the misrepresentation was
“material.” In some states, the
insurance company’s right to defend or rescind is further limited by an
additional requirement that the matter misrepresented actually contributed to
the loss, contingency, event or hazard for which the claim is made. In other words, in a limited number of
states, the insurance company may not deny a claim or seek rescission unless a
“causal relation” exists between the misrepresentation and the actual
loss. Under such statutes or case law,
when there is an applicant who falsely claims to be a nonsmoker, the insurance
company can escape liability if the then insured dies of lung cancer due to
smoking, but not if the insured later dies of AIDS. Finally, in some cases, the insurance company cannot avoid
liability even when the policy has been procured through outright fraud.
Judges,
accustomed to dealing with issues of a causation in many of their cases, may be
receptive to a suggestion that the medical condition omitted in the application
and the cause of loss be the same, or at least related, for a policy to be
avoided. Such a suggestion is
particularly appealing when the balance of the equities in a case is tipped in
the insured’s favor. A previous article
on this subject was written in 1991 by this author.[1] This article updates its predecessor with
the addition of a number of cases that have been decided since the earlier
writing. Further, it will discuss the
“causal relation” statutes in much more detail and expand and add to the public
policy arguments against requiring a causal connection.
II.
Statutes
and Case Law not requiring a Causal Connection
Most state
statutes do not contain a requirement that the misrepresentation “contributed
to the loss” for an insurer to avoid a policy.
In addition, a majority of courts have concluded that insurers need not
be required to prove a causal connection between the misrepresentation and the
ultimate loss.[2] A fundamental principle found in many of
these cases is that the actual cause of death or disability is immaterial. There is no contract if the insured conceals
a medical or other condition, the knowledge of which would have caused the
insurance company to act differently, regardless of whether the condition
contributed to the loss suffered. The
inquiry these courts use to determine whether the policy should be declared
void at its inception focuses solely on the materiality of the misrepresentation.
The most
common state statute provides that a misrepresentation, omission, concealment,
or incorrect statement will defeat recovery under a policy of life or health
insurance, when: (1) the omission, concealment or incorrect statement was
fraudulent; or (2) the omission, concealment or incorrect statement was
material either to the acceptance of the risk or to the hazard assumed by the
insurer; or (3) the insurer in good faith would not have issued a policy at the
same premium or rate, or in as large an amount, or would not have provided
coverage with respect to the hazard resulting in the loss, if the true facts
had been known to the insurer.
Clause two
of this three-element statute concerns omissions and concealments that are
material either to the acceptance of the risk or to the hazard assumed by the
insurer. The concepts of risk and
hazard are concerned with estimation of the probability of harm on the basis of
incomplete data.[3] Looking closer at this requirement we see
that:
“Risk”
and “hazard” are words with technical meanings in the insurance industry. “Risk is uncertainty concerning loss,” while
“hazard is . . . a condition that may create or increase the risk of loss
arising from a given peril.” . . . However, these technical definitions are not
closely followed by courts and legislatures, and it would seem that the two
terms are virtually synonymous as used in the law.[4]
In the
oft-cited case of Wickersham v. John
Hancock Mutual Life Insurance Co.,[5]
the insured misrepresented his medical history on the policy application and
died as a result of a swimming pool accident.
No causal connection existed between the misrepresentation and the
loss. The state statute provided:
The
falsity of any statement in the application for any disability insurance policy
covered by chapter 34 of this code may not bar the right to recovery thereunder
unless such false statement materially
affected either the acceptance of the risk or the hazard assumed by the insurer.[6]
The court
found that the insurer did not have to prove a causal connection between the
misrepresentation and the death of the insured, and therefore it allowed the
insurer to rescind the policy. Although
the court found in favor of the insurer, its analysis of the statute is
contrary to the weight of authority.
The court found that “acceptance of the risk relates to the evaluation
made before issuance of an insurance policy and differs from ‘hazard assumed’
which refers to the circumstances of the loss.”[7] The court ruled that the insured did not
have to prove a causal connection because the misrepresentation related to the
“acceptance of the risk” rather than to the hazard assumed. However, had the insurer relied on the
“hazard assumed” language in the statute, it would have had to prove a causal
connection. The court’s analysis of the
phrases “acceptance of the risk” and “hazard assumed” differs from other
authorities that find virtually no difference between the terms “risk” and
“hazard” in a legislative context. The Wickersham court had no problem
interpreting “acceptance of the risk” and conceded that it refers to the
inception of the contract. According to
the court, the “hazard assumed,” in that case, was the insured’s death.
In the 1999
Michigan Supreme Court case of Smith v.
Globe Life Insurance Co.[8]
the distinction was again drawn between the terms “acceptance of the risk” and
“hazard assumed.” In Smith, the insured misrepresented his
health, stating he had no heart problems.
He later died of a heart attack.
The court restated that a causal connection between the
misrepresentation and the loss is not necessary if the misrepresentation
effects the insurer’s “acceptance of the risk.” Proof of a causal connection is
only required when the insurer relies on the “hazard assumed” language.
The court
held that the insurer was not under an obligation to show it had relied on the
misrepresentations contained in the application because this was a situation in
which the misrepresentation unquestionably affected the “hazard assumed” by an
insurer, since the insured’s heart ailments led to his death. The supreme court
stressed that when there is such a causal connection, “[the] insurer is
entitled to rescind the policy . . . without a showing of reliance.”[9]
In a
misrepresentation statute, the term “hazard assumed” is typically interpreted
to mean “hazard thereby assumed,” or “hazard when assumed.” In one instance,
the usually-understood word was supplied directly in the statute:
All
statements, declarations and descriptions in any application for an insurance
policy or for the reinstatement of an insurance policy shall be deemed
representations and not warranties. No
statement in an application or in any affidavit made before or after loss under
the policy shall bar a recovery upon a policy of insurance unless it is clearly
proved that such answer or statement was material
to the risk when assumed and was untrue.[10]
In Martin v. Mutual of Omaha Insurance Co.,[11]
“hazard assumed” was interpreted as meaning “hazard thereby assumed,” again relating to the time of issuance of the
policy.[12]
It has been
thought that the best analysis, and the one most favorable to the insurer, is
to interpret “acceptance to the risk” and “hazard assumed” as having the same
meaning in misrepresentation statutes.
However, as indicated in Smith,
that distinction enabled the insurer to rescind a policy without having to show
reliance.
In Randono v. CUNA Mutual Insurance Group,[13]
the insured answered “no” to a question on his life insurance application
concerning treatment for high blood pressure.
The insurer denied liability because the insured had in fact been
treated for high blood pressure. The
record indicated that the insured had knowledge of the condition and recalled
his past treatment for high blood pressure at the time he filled out the
application for insurance. The record
further indicated that, had the insurer known of all of this, the premiums
charged would have been three times greater.
The widow, and beneficiary of the policy, argued that recovery should
not be barred because the insured died from an ailment unrelated to high blood
pressure. However, the Nevada Supreme
Court granted summary judgment because the misrepresentation was “material to
the acceptance of the risk” and because the misrepresentation resulted in a
“lower premium” for the insured.[14] Nevada’s three-pronged misrepresentation
statute, requires that the insurer prove only one of these elements. [15] Nevertheless, the sympathy of the court was
clearly with the beneficiary. In his
dissenting opinion, Justice Mowbray, citing no legal authority, disagreed with
the majority on the grounds of fairness, because the misrepresentation did not
relate to the cause of death.[16]
In two
states, intermediate appellate courts have unsuccessfully attempted to adopt
causal connection rules that were rejected by their respective supreme
courts. In the case of Massachusetts Mutual Life Insurance Co. v.
Manzo,[17] the
New Jersey Supreme Court expressly rejected its intermediate court’s
requirement that there be a causal connection between the cause of death and
the insured’s false statements in the application. In so doing, the supreme court adopted the majority rule that
there need not be a nexus between the cause of death and the misrepresentation.
Similarly,
in the case of Carroll v. Jackson
National Life Insurance Co.[18]
the South Carolina Supreme Court reversed its court of appeals and followed the
majority rule. The South Carolina
Supreme Court held that when an insured died during the two-year contestability
period, in order to void the policy by reason of the insured’s
misrepresentation in his application, the insurer need not prove a causal
connection between the insured’s death and the material misrepresentation. The insurer must only show: (1) that “the statements
complained of were untrue;” (2) that “their falsity was known to applicant;”
(3) that “they were material to the risk;” (4) that “the insurer relied on the
statements;” and (5) that “they were made with the intent to deceive and
defraud the company.”[19]
Over the
last decade, a number of courts have adopted or followed the majority rule that
there does not have to be a causal connection between the misrepresentation and
the loss.[20] The Sixth Circuit Court of Appeals in Davies v. Centennial Life Insurance Co.[21]
held that, in ERISA cases, no contribution to the loss is necessary to permit
rescission. In that case, the insured,
under group health insurance, misrepresented on her application that she had no
circulatory system problems despite the fact she had a history of heart
abnormalities. The insured made a claim
for her hospitalization for a routine pregnancy. The insurer sought to rescind its coverage because of the
misrepresentation. The district court
held that a misrepresentation is material only if it is related to the illness
or injury for which the insured is seeking payment. However, the Sixth Circuit reversed that holding by deciding that
no connection is required between the misrepresentation and the claim.
In a case
of first impression, the West Virginia Supreme Court in Massachusetts Life Insurance Co. v. Thompson[22]
adopted the majority rule that an insurer need not prove a casual connection
between the facts misrepresented and the disability sustained. However, the court may have confused the
situation, out of a desire to reduce a possibility of harm to innocent
insureds. It stated, that to prove
materiality, the insurer need not prove that the insured’s disability was
related to the ailment misrepresented.
However, the insured can defeat the defense by presenting evidence that
the misrepresentation or concealment related to “a minor ailment suffered by
the insured which was so unrelated and disconnected from the disabling
condition suffered by the insured that it could not have possibly been material
to the issuance of the policy.”[23] Even though the court was persuaded by the
majority rule, it sought to “temper” the rule because it was more troubled by
the possibility that the insurer could avoid liability on a disability policy
based on an “innocent misrepresentation concerning a seemingly minimal ailment,
totally unrelated to the insured’s disability.”[24]
Within the
past ten years, several courts have addressed and rejected causal connection
rules in cases involving cigarette smoking.[25] In New
York Life Insurance Co. v. Johnson,[26]
the United States Court of Appeals for the Third Circuit held that the policy
was void ab initio because the
insured failed to disclose his smoking history in the application. The insured
died of reasons unrelated to smoking.
The court based its decision on the Pennsylvania misrepresentation
statute. The statute provided that an
insurance policy is void if the insurer establishes that: (1) “the
representation was false;” (2) “the insured knew that the representation was
false when made or made it in bad faith;” and (3) “the representation was
material to the risk being insured.”[27] The court refused to carve out an exception
for misrepresentations concerning smoking.
It ruled that misrepresentations concerning smoking should be treated
like other misrepresentations concerning medical condition or health
background. Acknowledging the strong
public policy considerations, the court stated:
If
the only consequence of a fraudulent misrepresentation in a life insurance
application is to reduce the amount paid under the policy, there is every
incentive for applicants to lie. If the
lie is undetected during the two year contestability period, the insured will
have obtained excessive coverage for which he has not paid. If the lie is detected during the two year
period, the insured will still obtain what he could have had if he had told the
truth. In essence, the applicant has
everything to gain and nothing to lose by lying. The victims will be the honest applicants who tell the truth and
whose premiums will rise over the long run to pay for the excessive insurance
proceeds paid out as a result of undetected misrepresentations in fraudulent
applications.[28]
III.
State Statutes Requiring A
Causal Connection
A few
jurisdictions have adopted statutes that require the insurer to prove a causal
connection between the matter misrepresented and the ultimate loss. Those statutes are often a difficult
obstacle for the insurer to overcome when asserting a misrepresentation
defense. In analyzing how to assert a
misrepresentation defense in these states, these causal connection statutes
must be examined very closely to determine whether the statute applies to all
insurance or only to one particular type.
Certain classes of insurance, such as life, health or disability, may be
excluded. A number of these statutes
have a limited application, and in analyzing them one needs to determine if
there is an exception to the causal connection rule.
A. Kansas
1. Life Insurance
Kansas
has two causal connection statutes, one for life insurance and one for accident
and sickness insurance. Both provide
that a misrepresentation will not be deemed material, and cannot render a
policy void, unless the misrepresentation has actually contributed to the loss.
The
Kansas statute applicable to life insurance provides:
No
misrepresentation made in obtaining or securing a policy of insurance on the
life or lives of any person or persons, citizens of this state, shall be deemed
material or render the policy void unless
the matter misrepresented shall have actually contributed to the contingency or
event on which the policy is to become due and payable.[29]
In Becker v. Kansas Casualty & Sureties Co.,[30]
the strict language of the statutory causation requirement was judicially
weakened by a case wherein an insured died from an alleged accidental gunshot
wound. The Kansas Supreme Court adopted a “moral risk” exception to the causal
relation statute. It held that a causal
connection was not required when the misrepresented facts increased the “moral
risk” and would probably have prevented issuance of a policy.[31] In its holding, the court recognized that a
misrepresentation concerning the existence or amount of other insurance would
never contribute to the contingency of death, but would effect a “moral risk.”[32] However, thirty-five years later the Kansas
Supreme Court reversed itself and held that “[I]n view of the clear and
explicit language of the statute, it was unwarranted in engrafting on that
statute an exception the legislature did not see fit to include . . . .”[33]
An
unreported decision interpreting the Kansas misrepresentation statute is Bettis Asphalt & Construction Co. v.
Executive Life Insurance.[34] In that case, the insured represented that a
physician had not treated him within the previous three years, despite the fact
that he had seen a psychiatrist who prescribed medication for depression. On a motion for summary judgment, the United
States District Court for the District of Kansas held that the misrepresentation
regarding psychiatric treatment contributed to the insured’s suicide. In doing so, the court noted uncontradicted
evidence that the insured had misrepresented his health by failing to disclose
that he had been treated for depression.
According to the court, the recurrence of this depression contributed to
his suicide and rendered the policy void under section 40-418 of the Kansas
Statutes.
2. Accident and Sickness
Insurance
The Kansas
statute applicable to accident and sickness insurance provides:
(C)
The falsity of any material statement in the application for any policy covered
by this act may not bar the right to recovery thereunder unless the false statement has actually contributed to the contingency
or event on which the policy is to become due and payable: Provided, however, That [sic] any recovery
resulting from the operation of this section shall not bar the right to render
the policy void in accordance with its provisions.[35]
To
date, no Kansas court has construed this causal connection statute for accident
and sickness policies.
B. Missouri
The
Missouri causal connection provisions are similar to those found in the Kansas
life insurance statute.
1. Life Insurance
The
Missouri life insurance statute provides as follows:
No
misrepresentation made in obtaining or securing a policy of insurance on the
life or lives of any person or persons, citizens of this state, shall be deemed
material, or render the policy void, unless
the matter misrepresented shall have actually contributed to the contingency or
event on which the policy is to become due and payable, and whether it so
contributed in any case shall be a question for the jury.[36]
In the case
of Derickson v. Fidelity Life Association,[37]
the Eighth Circuit Court of Appeals held that a “matter misrepresented in an
application for life insurance must have ‘actually contributed’ to the
insured’s cause of death to be deemed material and to thus render the policy
void.”[38] The insured stated on his application that
his driver’s license was not revoked in the past three years. He later died in a car accident. The insurer discovered that the insured had
nine suspensions and four revocations in the previous three years. The insurer denied coverage and returned the
premiums to the policy beneficiary. It
stated that it would not have issued the policy to the insured with knowledge
of his driving record. The District
Court for the Eastern District of Missouri granted summary judgment for the
insurer. The court of appeals, however,
believed that a jury could reasonably find that the insured was not negligent
or reckless in driving at the time of the fatal accident. Therefore, a jury
could find that the matter misrepresented, a reckless or negligent driving
record, did not contribute to the accident.
The case was retried in July of 1996, and the jury returned a verdict in
favor of the beneficiary and against the insurer.[39]
In a more
recent case also involving driving history, the District Court for the Eastern
District of Missouri, in Humphries v.
Northwestern Mutual Life Insurance Co.,[40]
granted an insurer’s motion for summary judgment. The insured misrepresented his driving history on his
application, indicating he had no accidents, violations, or restrictions in the
past five years. However, he had in
fact been convicted of drunken driving and his license was suspended the
previous year. He subsequently died
following a one-car accident and was found to have a blood alcohol content of
.229. The court found that the
decedent’s condition of sleep apnea and family history of heart attacks alone,
without any specific facts linking these factors to the accident, did not
present sufficient evidence for a reasonable jury to find it was a cause of the
death. Therefore, the court granted the
insurer’s motion for summary judgment.
2. Health and Accident
Insurance
The
Missouri statute applicable to health and accident insurance provides as
follows:
Anything
in the law to the contrary notwithstanding, no misrepresentation made in
obtaining or securing a policy of insurance covered by sections 376.770 to
376.800 shall be deemed material or render the policy void, or constitute a
defense to a claim thereunder unless the
matter misrepresented shall have actually contributed to the contingency or
event on which any claim thereunder is to become due and payable, and
whether it so contributed in any case shall be a question for the jury.[41]
In White v. American Republic Insurance Co.,[42]
the plaintiff was kicked by a horse and demanded medical benefits for the
injuries inflicted. The insurer
contended the policy was void because the application did not disclose that the
insured already had other policies that covered the same risk. The insurer could not meet the “causal
connection” requirement because the insured’s misrepresentations were unrelated
to the injuries suffered. The Missouri
Court of Appeals held that the statute applies to misrepresentations concerning
other insurance.[43] Accordingly, in order to void liability, the
insurer was required to prove that misrepresentations with respect to other
insurance contributed to the event as to which insured’s claim became due and
payable. Evidence that
misrepresentation affected the acceptance of the risk or the hazard assumed by
the insurance company was insufficient as a matter of law.
The
Missouri Court of Appeals, in White,
did not completely foreclose a misrepresentation defense in situations in which
the insured misrepresented the availability of other insurance for the same
risk. The court commented:
In
those cases where there is evidence offered that the existence of extra
insurance coverage was a motive for the insured to assert bogus, fictitious or
fraudulent claims or prompted him to malinger or fake accidents or ailments in
order to collect the coverage, then the matter misrepresented (i.e., excessive
insurance coverages) might be determined to have actually contributed to the
event on which the claim became due. In
such event § 376.800 and § 376.783.3 would be available as a defense to the
insurance company if it met its burden of proof of convincing the trier of fact
(judge or jury) of such facts.[44]
The insurer offered no evidence
that the insured had an improper motive in securing excessive amounts of
insurance. Accordingly, the court held
that liability on the policy could not be avoided.[45]
The White case is important to insurers
defending claims in a causal connection state.
It raises the possibility that, in some instances, the definition of
causal connection can be broadened, thereby enabling an insurer to successfully
defend on the grounds of misrepresentation.
C. Nebraska
At least
one authority characterizes Nebraska as a causal connection state.[46] However, an analysis of the statutes and
cases calls that into question. The
Nebraska statute that applies only to accident and sickness insurance, section
44-710.14, provides: “[t]he falsity of any statement in the application for any
policy of sickness and accident insurance covered by sections 44-709 to 44-767
may not bar the right to recovery thereunder unless such false statement
materially affected either the acceptance of the risk or the hazard assumed by
the insurer.”[47] The Nebraska statute applicable to all
insurance policies, section 44-358, provides:
No
oral or written misrepresentation or warranty made in the negotiation for a
contract or policy of insurance by the insured, or in his behalf, shall be
deemed material or defeat or avoid the policy, or prevent its attaching, unless
such misrepresentation or warranty deceived the company to its injury. The breach of a warranty or condition in any
contract or policy of insurance shall not avoid the policy nor avail the
insurer to avoid liability, unless such breach shall exist at the time of the
loss and contribute to the loss,
anything in the policy or contract of insurance to the contrary withstanding.[48]
Under
Nebraska law, all statements by insureds are deemed representations rather than
warranties.[49] The “contribute-to-the-loss” language in
section 44-358 seems to apply only to warranties and conditions. Thus one might reasonably conclude, from a
reading of the statute, that Nebraska is not a causal connection state.[50]
In
construing the statutes in relation to misrepresentations in an accident and
sickness policy, the Nebraska Supreme Court has determined that sections
44-710.14 and 44-358 must be read together.[51] In Glockel
v. State Farm Mutual Automobile Insurance Co.,[52]
involving the rescission of an automobile liability policy, the court addressed
the issue of whether an insurer has the common law right to rescind, noting,
“[p]erhaps it is most accurate to state that in Nebraska there is a common law
right to rescind or avoid insurance policies for material misrepresentations,
which is recognized in and limited by § 44-358.”[53] In Zimmerman
v. Continental Casualty Co.,[54]
involving the rescission of an accident policy, the court refused to impose the
requirement of proving a causal connection on the insurer. Finally, in Equitable Life Assurance Society v. Joiner,[55]
the court allowed the insurance company to successfully assert a misrepresentation
defense, even though the matter misrepresented was not causally related to the
loss.
D. Oklahoma
In
1957, Oklahoma enacted a causal connection statute that applies only to limited
stock life, accident, and health insurers.
The statute provides as follows:
No
representation made in obtaining or securing a policy of insurance on the life
or lives of any person, or persons, shall be deemed material, or render the
policy void, unless the matter
misrepresented shall have actually contributed to the contingency or event on
which the policy is to become due and payable.[56]
There are
no reported cases that have applied or interpreted this statute. The general misrepresentation statute for
Oklahoma does not require a causal relationship between the matter misrepresented
and the loss.[57]
E. Rhode Island
In Rhode
Island, an insurance company must show a causal connection between the
misrepresentation and the loss in life insurance cases, but not in accident and
health insurance cases. The life
insurance statute provides:
No
misstatement made in procuring a policy of life insurance shall be deemed
material or render the policy void unless
the matter thus represented shall have actually contributed to the contingency
or event on which the policy is to become due and payable. Whether the matter so represented
contributed to that contingency or event, in any case, shall be a question for
the jury.[58]
Rhode
Island allows the insurance company to cancel before a loss, during the life of
the insured, on the ground of misrepresentation.[59]
IV.
Statutes Incorporating Causal
Connection As Alternative To Materiality
Wisconsin,
Utah and Texas have statutes that use a “causal connection” formulation in
determining the effect of a misrepresentation. The Wisconsin statute reads as
follows:
No misrepresentation, and no breach of an
affirmative warranty, that is made by a person other than the insurer or an
agent of the insurer in the negotiation for or procurement of an insurance
contract constitutes grounds for rescission of, or affects the insurer's
obligations under, the policy unless, if a misrepresentation, the person knew
or should have known that the representation was false, and unless any of the
following applies:
1.
The insurer relies on the misrepresentation or affirmative warranty and the
misrepresentation or affirmative warranty is either material or made with
intent to deceive.
2.
The fact misrepresented or falsely warranted contributes to the loss.[60]
The
Utah statute reads as follows:
[N]o
misrepresentation or breach of an affirmative warranty affects the insurer’s
obligations under the policy unless: (a) the insurer relies on it and is either
material or is made with the intent to deceive; or (b) the fact misrepresented or falsely warranted contributes to the
loss.[61]
The Texas
statute reads:
Any
provision in any contract or policy of insurance issued or contracted for in
this State which provides that the answers or statements made in the
application for such contract or in the contract of insurance, if untrue or
false, shall render the contract or policy void or voidable, shall be of no
effect, and shall not constitute any defense to any suit brought upon such
contract, unless it be shown upon the trial thereof that the matter or thing
misrepresented was material to the risk or
actually contributed to the contingency or event on which said policy became
due and payable, and whether it was material and so contributed in any case
shall be a question of fact to be determined by the court or jury trying such
case.[62]
The courts
in Wisconsin, Utah and Texas have interpreted these statutes as written,
allowing misrepresentation as a defense when it is material or fraudulent, even
if it did not contribute to the loss.[63] It may be theoretically possible for a
misrepresentation to contribute to the loss even though it did not increase the
risk. In such a situation, a
contribution to the loss standard would be less favorable to the policyholder
than an increase of risk standard. But
even if the standards as interpreted create this theoretical possibility, the
occasions of its occurrence in fact are rare.[64]
Commentators
perceive causal connection as the highest standard of materiality.[65] Although the Wisconsin, Utah and Texas
statutes are worded as though proving a causal connection were an alternative
to proving materiality, insurers should exercise caution in taking the position
that these statutes provide an additional defense. As the Utah Supreme Court observed:
[T]he
insurer must prove that the misrepresentation was made with the intent to
deceive or that the matter
misrepresented was material or that
the insurer in good faith would not have issued the policy if the true facts
had been made known to the insurer. Our
construction is consistent with other courts interpreting similar statutory
schemes. We note, however, that we have
not found a case, under the statute relevant here, where the insurer argued
that it should escape liability because the alleged misrepresentation was made
with an intent to deceive but was material neither to acceptance of the risk
nor to the issuance of the policy. This
hypothetical but troubling construction is thus of little realistic concern as
the cases consistently focus on materiality and reliance.[66]
V.
The
Arkansas Statute and Case Law
In
Arkansas, the causal connection requirement was judicially adopted initially,
but the Arkansas Supreme Court later reversed its position. The Arkansas Legislature then attempted to
reverse the effect of the Arkansas Supreme Court decision.
In National Old Line Insurance Co. v. People,[67]
the Arkansas Supreme Court was called upon to interpret the three-element
misrepresentation statute that read:
(a) All statements in any application for a life or disability
insurance policy or annuity contract, or in negotiations therefor, by or in
behalf of the insured or annuitant, shall be deemed to be representations and
not warranties. Misrepresentations,
omissions, concealment of facts, and incorrect statements shall not prevent a
recovery under the policy or contract unless either:
(1) Fraudulent;
(2) Material either to the acceptance of the risk or to the
hazard assumed by the insurer; or
(3) The insurer in good faith would not have issued the policy or
contract or would not have issued a policy or contract in as large an amount or
at the same premium or rate or would not have provided coverage with respect to
the hazard resulting in the loss if the facts had been made known to the
insurer as required by the application for the policy or contract or otherwise.[68]
In National Old Line the insured died, but
not because of the misrepresented condition.
The question remained whether a “contribute to the loss” test was to be
applied for the insurer’s defense to be valid.
The Arkansas Supreme Court, affirming the lower court’s judgment, held
that such a standard applied. Basing
its reasoning on the grounds of fairness, the court stated:
It is our conclusion that, under the Code, the insurer
must show a causal relation between the applicant’s misrepresentation and the
eventual loss. . . .
Fairness and reason support the view that a causal
connection should be essential.
Otherwise, when the insured is killed by a stroke of lightning or by
being run over by a car, the insurance company could successfully deny
liability by showing that the insured was suffering from diabetes when he
stated that he was in good health.[69]
The
Arkansas Supreme Court later overruled National
Old Line in the case of Southern Farm
Bureau Life Insurance Co. v. Cowger.[70] In Cowger
the insured stated that he had no stomach or liver problems nor had he used
alcohol to excess in the past ten years.
In fact, he had been hospitalized for cirrhosis of the liver, acute
alcoholism, and delirium tremens and evidence clearly showed that the insured
was aware of those conditions when he applied for the policy. He was subsequently killed, being pinned
under a tractor that overturned on a slope as he attempted to mow grass. The insured was released from
hospitalization for alcoholism just the day before the accident. However, there was no evidence of
pre-accident alcohol consumption.
The
Arkansas Supreme Court was squarely faced the issue of whether a
misrepresentation in the issuance of the life policy would bar recovery even
when the subsequent loss was unrelated to the fact misrepresented. The court, overruling National Old Line, reasoned that even though fairness weighed in
favor of the insured, the decision of whether to allow recovery despite a
misrepresentation must be left to the Arkansas legislature. The court noted that of seventeen states
that adopted statutory misrepresentation rules similar to the Arkansas statute,
none had construed the statute to incorporate the type of causation requirement
found in National Old Line, and three
states had expressly rejected that type of construction.[71] Two justices dissented from the holding
arguing that years of inaction after the earlier decisions evidenced a
legislative intent to adopt a causal connection requirement.[72]
In 1989,
the Arkansas Legislature attempted to reverse the effect of Cowger.
It amended section 23-79-107 to add the following paragraph: “(c) In any
action to rescind any policy or contract or to recover thereon, a misrepresentation is material if there is
a causal relationship between the misrepresentation and the hazard resulting in
a loss under the policy or contract.”[73]
An argument
can be made that this amendment is not effective for two reasons. First, the new wording provides that a
misrepresentation is material if there is a causal relationship between the
misrepresentation and the loss. It does
not say that misrepresentation is (deemed) material only if there is such a relationship. Second, whether the relationship is material would appear
significant only for the purposes of one of the three circumstances under which
misrepresentation prevents a recovery, as specified in the statute. Namely, that there is no recovery unless the
misrepresentation is (1) fraudulent, or (2) material either to the acceptance
of the risk or to the hazard assumed, or (3) if the insurer would not have
issued the policy. Therefore, the
amendment to the statute would appear to speak only to the second of these
elements of proof.
Unfortunately,
the bill that enacted this provision contained a preface stating its purpose. That is “to clarify the insurance code and
to reaffirm the intention of the General Assembly to assure that no insurer may
defend a policy claim on the grounds of misrepresentations unless related to a
loss sustained; and for other purposes.”[74] Under the Arkansas Code such a preamble is
not codified into law. However, the
preamble could be shown to a court as persuasive authority when asked to
interpret the statute.
One source
has suggested that the new provision may not be a shield for the insured, but
rather, a sword for the insurer.[75] The statute does not require proof of a
causal relation to rescind, but holds that when a causal relation exists it is
material. Therefore, an insured may not
argue that a causal relationship loss is not material to the risk or to the
hazard assumed.
To date, no
cases have been decided under the new Arkansas statute.
VI.
Case
Law Requiring A Causal Connection
In addition
to those states with statutes that explicitly require a causal connection,
courts in other states have stated that the misrepresentation will be deemed
material only if it contributes to the loss.
A.
Ohio
The Ohio
Supreme Court has yet to speak on the necessity of causal connection in
insurance misrepresentation cases.
However, in Thompson v. New York
Life Insurance Co.,[76]
the Ohio Court of Appeals found that the trial court improperly granted summary
judgment in favor of the insurer in such a case. The court of appeals stated that the insurer failed to prove that
the misrepresentations of the plaintiff were material to the risk because,
“[i]n order for a prior medical claim to be material to an insurance
application, there must be a relationship between the prior infirmity and the
infirmity which forms the basis of the claim.”[77] Since the basis of the plaintiff’s claim was
a back injury, a medical condition unrelated to her previous medical problems,
the court of appeals, using its newfound causal connection analysis, decided
that the insurer failed to prove the materiality of her misrepresentations. However, in Estate of Barnhart v. Acceleration Life Insurance Co.,[78]
the court of appeals affirmed summary judgment in favor of the insurer denying
death benefits because of misrepresentation by the applicant. Here the insured
had falsely denied a history of kidney disease but died of heart disease. The court rejected the plaintiff’s
contention that coverage should not be denied because there was no causal
connection between the misrepresentation and the death, saying that the court
had previously held that such a causal connection is not required.
B. Arizona
Arizona’s
appellate court has imposed a causal connection requirement in cases where the
insurer claims that the insured misrepresented facts that were material to the
hazard assumed by the insurer. The
Arizona misrepresentation statute provides:
All
statements and descriptions in any application for an insurance policy or in
negotiations therefor, by or on behalf of the insured, shall be deemed to be
representations and not warranties.
Misrepresentations, omissions, concealment of facts, and incorrect
statements shall not prevent a recovery under the policy unless:
(1) Fraudulent.
(2) Material either to the acceptance of the risk, or the hazard
assumed by the insurer.
(3) The insurer in good faith would either not have issued the
policy, or would not have issued a policy in as large an amount or would not
have provided coverage with respect to the hazard resulting in the loss, if the
true facts had been made known to the insurer as required either by the
application for the policy or otherwise.[79]
A causal
connection between the matter misrepresented and the risk assumed was required
by the Arizona Appellate Court in Central
National Life Insurance Company v. Peterson.[80] In Peterson
the insured failed to disclose his prior hospitalization for back and heart
problems on his application for an insurance policy. The insurer denied his claim for disability benefits following a
heart attack, but the trial court awarded him the benefits. The Arizona Court of Appeals reversed and
remanded the case for a new trial. In
propounding its causal connection requirement, the Peterson court stated that, “[i]t is clear that as the law now
stands, if the insurer is relying on the fact that it would not have provided
coverage with respect to a certain hazard, that particular hazard must be the
one which actually caused the loss.”[81] The necessary causal connection was found to
exist in Peterson because the
insured’s disclosure of the hospitalization for treatment of his back problem
would have also revealed the untreated heart condition that apparently led to
the disability.
In 1987,
another Arizona court affirmed the Peterson
court’s imposition of a causal connection requirement in misrepresentation
cases in State Compensation Fund v. Mar
Pac Helicopter Corp.[82] Although the Mar Pac court reiterated Peterson
in requiring a causal relationship where the insurer relies on the “hazard
assumed” portion of the Arizona misrepresentation statute, it also cautioned
against interpreting Peterson to mean
that a causal connection would be required in “all cases.”[83]
VII.
Practical
Considerations and Public Policy:
Reasons
Why the Casual Connection Requirement Should Not Be Adopted
Counsel for
the insured or beneficiary will argue that the insurer should not be able to
cry foul when the matter misrepresented had nothing to do with the eventual
loss. They believe that to allow the
insurance company to avoid liability is too severe a penalty, even for
intentional fraud, because rescission would strip the insured of coverage that
he has relied upon. Furthermore, in
cases in which the loss has already occurred, the insured will be unable to
secure other coverage and innocent beneficiaries may suffer the loss.[84]
In the face
of these arguments, defense counsel will be aided by the considerable case law
that has rejected the causal connection argument. In addition, there are many practical and public policy reasons
why the causal connection argument should not be adopted.
1. A dishonest applicant will receive insurance benefits that
he would not have been entitled to receive had he been truthful. This reward for deception will only
encourage dishonest behavior by life or health insurance applicants. It is contrary to public policy for the courts
to adopt rules of law that encourage, and even reward, misrepresentations in
business dealings.
The courts have specifically recognized the inequity of
requiring a causal connection between the misrepresentation and the loss. In Wickersham
v. John Hancock Mutual Insurance Co.,[85]
the court stated that “[A]bsent clear direction, we cannot conclude that the
Legislature intended to place applicants who deliberately misrepresent or
conceal material facts in such an advantageous legal position as compared to those
who reasonably disclose them.”[86]
In the words of the New Jersey Supreme Court in Massachusetts Mutual Life Insurance Co. v.
Manzo,[87] “the
law should encourage insureds to tell the truth, not to conceal information
from the insurer and gamble that they will not die of a concealed disease.”[88]
In Southern Farm
Bureau Life Insurance Co. v. Cowger,[89]
the court found that: “This [the causal connection rule] places the policy
applicant in the position of being able to gamble that he or she will not
sustain a loss caused by the existence of the fact misrepresented. . . . On the other hand, the honest applicant who
has the same facts to reveal will be denied insurance because of telling the
truth.”[90]
In Mutual Benefit
Life Insurance Co. v. JMR Electronics Corp.,[91]
the court expressed similar concerns, holding that an insured’s
misrepresentation of his status as a smoker warrants policy rescission because
“a contrary result would reward the practice of misrepresenting facts critical
to the underwriter’s task because the unscrupulous (or merely negligent)
applicant ‘would have everything to gain and nothing to lose’ by making
material misrepresentations in his application for insurance.”[92]
The significance of the accuracy of the information on
an insurance application cannot be overstated.
The application for insurance is one of the most important and
fundamental of the underwriter’s risk assessment tools and serves as the basis
of the contract between the company and the policyholder. If an underwriter, because of false
information in an insurance application, wrongly accepts an individual for
coverage or wrongly classifies that person as a lower risk and charges a lower
premium based on that perceived lower risk, the insurer will suffer a financial
loss when the insured makes a claim.
Those financial losses are distributed among the insurer’s honest
policyholders in the form of higher insurance premiums.
2. A causal connection requirement creates situations in which
different insureds with identical risk characteristics will receive radically
different treatment in the courts, with the further absurdity that the most
favorable treatment will be afforded to the dishonest applicant who is
“fortunate” enough to die from a condition unrelated to the misrepresentation. No legitimate public policy goal is served
by such irrational results.
Commentators have constructed examples that illustrate
how the causal connection requirement actually rewards the dishonest insured
and punishes the honest applicant. In
one such hypothetical, two women suffering from the same ailment apply for life
insurance coverage. One lies about her
condition in order to obtain coverage, and the other tells the truth and her
application is rejected. Should both
applicants die soon after as a result of an event unrelated to their ailment,
the theory of causal connection would allow the fraudulent applicant to collect
on what is essentially an invalid policy, while the family of the honest
applicant would receive nothing.
3. A causal connection requirement makes it impossible for a life insurer to rescind a policy when it discovers a misrepresentation in the application prior to the insured’s death. If the insurer can rescind only for a material misrepresentation, and materiality depends on a causal connection between the death and the misrepresentation, an insurer must wait until after death occurs and the causal connection, or the lack of it, is established.
4. A causal connection requirement must be viewed from the standpoint of those (other than the insured) who are most able to prevent misrepresentations in applications, the agents. In causal connection jurisdictions, agents have no financial motive to demand precise and honest applications, because incorrect and even fraudulent responses will not defeat an insured’s claim. In order to sell a policy, some agents may encourage concealment of misrepresentation of facts that might cause the insurer to deny the application, increase the premium, or lower the benefit. Thus, the unethical agent and the dishonest insured would both benefit from a causal connection requirement, to the detriment of honest insureds, insurance companies and the public at large.
5. When an insured dies, the person’s doctor may not be interested in determining an exact cause of death.