Is It Bad Faith To Cancel A Policy?

Lawyers handling bad faith cases in the Dallas and Fort Worth areas need to recognize a bad faith case when they see it. This is not always easy. An El Paso Court of Appeals case from 1996, is an example. The style of the case is, Columbia Universal Life Insurance Co. v. Miles.
Miles met with his insurance agent to change his heath insurance coverage. The agent filled out the application by asking Miles the questions listed on the application. Miles testified that he provided the agent with a complete medical history. The agent said Miles only talked about the conditions that appeared on the application. It turned out that Miles had an extensive medical history that was not listed on the application including immune deficiency and other chronic illnesses. Miles says he signed the application without signing it.
Shortly after filling out the application, Columbia called Miles to conduct a personal history interview and to confirm the information on the application. Miles told Columbia that the information on the application was true and correct. He did not mention his other medical problems and the policy was issued.
Later, Miles was treated for an illness related to his immune deficiency condition. He filed a claim with Columbia. Columbia requested a statement from Miles. Miles did not forward the statement until after the third request by Columbia. Columbia then requested medical records from Miles’ doctors. Upon receiving the records, Columbia learned for the first time that Miles suffered from the above problems.
Columbia investigated and concluded Miles had intentionally concealed his conditions to induce Columbia to provide coverage. Columbia first requested that Miles agree to voluntarily rescind the policy in exchange for a full refund and when this was refused Columbia filed a declaratory judgment action to determine its rights under the policy and to have the policy rescinded. Miles filed a lawsuit for breach of contract and for bad faith in the business of insurance.
This Court of Appeals ruled in favor of Columbia agreeing with Columbia that there was no evidence of conduct arising to bad faith.
The Texas Supreme Court has held that cancellation of an insurance policy can constitute bad faith. In this case, Columbia based its actions on alleged misrepresentations. Before an insurance company may cancel a policy based on a misrepresentation in the application, the company must show an intent to deceive on the part of the insured. An insurance company must prove
(1) the making of the representation;
(2) the falsity of the representation;
(3) reliance by the insurer on that representation;
(4) the insured’s intent to deceive the insurer with the representation; and
(5) materiality of the representation.
Failure of the insurance company to show intent to deceive makes any cancellation within two years of the policy issuance a breach of the contract as a matter of law.
In this case, Columbia did not just cancel the policy and refund the premiums, it offered Miles an opportunity to agree to the proposed rescission and refund. After this request was refused, Columbia brought a declaratory judgment action to determine its rights. Columbia had ample evidence to satisfy all of the elements of the misrepresentation defense.