Conditions In A Life Insurance Policy And Lawyers

Insureds in Grand Prairie, Fort Worth, Saginaw, Southlake, Roanoke, Keller, North Richland Hills, and other places in Tarrant County need to understand what their life insurance policy says.
The United States 5th Circuit Court of Appeals issued an opinion in 2008, that is on point. The style of the case is, Quihong Liu v. Fidelity and Guaranty Life Insurance Company.
Here is some of the factual and procedural background.
On September 4, 2003, Chen applied for a Fidelity life insurance policy. At that time, he paid the initial premium of $60 and signed a conditional receipt, which provided conditional insurance, becoming effective on September 8, 2003, when Fidelity received the initial premium payment at its home office.
The application asked a number of health related questions. Of relevance, question seven asked, “Within the past 10 years, has any person proposed to be insured been treated for or diagnosed by a physician or other health care professional as having … b. Cancer, cyst, or tumor?” Chen marked the box indicating “No.” The application also contained the following provision:
AUTHORIZATION I have read the questions on this application. The statements made in this application are: complete; true; and correctly recorded. I agree that a copy of this application will form a part of any policy issued by the Company. I also agree that, except as provided in this application’s Receipt, if issued, no insurance will take effect unless and until both the following conditions are satisfied during the proposed insured’s lifetime and while each proposed insured’s health is as stated in this application: (1) this policy is delivered to and accepted by the Owner; and (2) the full initial premium for the mode of payment chosen is paid at out Home Office.
On September 9-10, 2003, Chen was diagnosed with lung cancer. On September 12, 2003, Fidelity issued the life insurance policy and delivered it to Chen by mail. Fidelity did not know of Chen’s cancer diagnosis when it issued the policy. Chen died from hepatic failure and lung cancer on January 23, 2004.
Liu then made a claim for benefits. In a letter dated June 16, 2004, Fidelity denied Liu’s claim, rescinded the policy, and refunded the initial premium. Liu refused the return of the premium and did not deposit the check.
Liu filed a lawsuit and cross motions for summary judgment were filed. According to Fidelity, Chen did not satisfy the Health as Stated Clause because his health was not “as stated” in the application at the time that Fidelity delivered the policy.
The “General Conditions” section of the policy stated, “We rely on all statements made in an application. Those statements will be considered representations and not warranties. We will not use any statement in defense of a claim unless that statement is made in an application which is part of the entire contact.” According the district court, the “General Provisions” section unambiguously provided that the Health as Stated Clause was a representation. Because Fidelity did not contend that Chen made a misrepresentation, the district court held that coverage existed under the policy, and ruled in favor of Liu and Fidelity filed this appeal.
The central issue on appeal was whether the language that Fidelity included in its life insurance application operated as a condition precedent or a representation about Chen’s health. If the insurance contract contained a condition precedent that Chen did not satisfy, then there was no contract and Fidelity had no obligation to pay.
The Court summarized the substantive law relevant to the case:
“Under Texas law, the responses given in a life insurance application are mere representations, rather than warranties that would be capable of making coverage void or voidable. Short of inserting an unambiguous ‘good health warranty’ demonstrating that the parties intended the contract to rise or fall on the literal truth of an insured’s general certification of good health, Texas has not allowed an insurer to change that result by contracting to make the truthful application answers a condition precedent to coverage.”
In other words, provisions in insurance policies that turn on the truth or falsity of answers in an insurance application are treated as representations. Alternatively, a “good health provision” that “expressly provides that coverage does not take effect unless the applicant is in good health” operates as a condition precedent.
Texas law strongly disfavors warranties and conditions precedent and in fact, Texas statute are dedicate to this proposition as evidenced by Texas Insurance Code, Sections 705.004 and 705.104.
The provision at issue in this case contained aspects of both a good health condition precedent and an incorporation of a mere representation made by the insured. The provision in this case purported to do exactly what the Texas Insurance Code and case law prohibits.
The court said that is it true that Chen’s health was not “as stated” at the time of the delivery of the policy. However, under Texas law, an insurer must plead the elements of misrepresentation in order to avoid coverage. The policy is not automatically void, as it would be if the clause were an unambiguous good health provision. Here, Fidelity could have argued that Chen’s failure to correct his answers in the application constituted a misrepresentation. They did not and therefore the policy must stand.
If this is not confusing to the average policy holder, I do not know what is. Just yet another reason an experienced Insurance Law Attorney needs to look at these cases.