Misrepresentation In Application

Fort Worth insurance lawyers have to be able to answer the question – What if there is a misrepresentation in an insurance application. The Dallas Court of Appeals helped give guidance to an answer in a case styled, Medicus Insurance Company v. Frederick Todd, II, M.D. This was an appeal by Medicus in a take nothing declaratory judgment.
Medicus provides medical malpractice insurance for physicians and health care practitioners. The company began selling insurance in September 2006. Its business plan is to keep its costs low by offering insurance at low premiums only to physicians with few claims, generally fewer than five claims.
Dr. Todd handled his malpractice insurance through his insurance broker, Larry Zimmer. When Dr. Todd applied for insurance in October 2006, Medicus did not ask him to fill out its nineteen-page application. Instead, it permitted him to submit only its two-page application and the Texas Standardized Credentialing Application, a form that physicians use to receive credentials to practice in a particular hospital. Dr. Todd sent Medicus a credentialing application he had signed on May 4, 2005. The credentialing application asked if Dr. Todd had “ever been the subject of an investigation by any licensing authority,” and he checked the “No” box. In fact, Dr. Todd had been twice investigated by the Texas Medical Board for having three or more medical malpractice claims in a five-year period. The credentialing application also asked if he had “ever had any malpractice actions within the past 5 years pending, settled, arbitrated, mediated or litigated,” and appellant checked the “Yes” box and attached a description of four lawsuits filed against him between May 2000 and when he signed the application in May 2005. Dr. Todd omitted one lawsuit from the list of claims filed between May 2000 and May 2005. Dr. Todd also failed to disclose another lawsuit filed between his signing the credentialing application and his applying to Medicus.
The underwriter for Medicus reviewing Dr. Todd’s application recommended denying coverage “due to severe claims history.” However, the chief underwriter and Medicus’s president rejected the recommendation, and Medicus issued a one-year policy to Dr. Todd effective November 16, 2006.
In February 2007, Medicus sent Zimmer its official nineteen-page insurance application, prefilled with the information Medicus had about Dr. Todd. In the claims-history section, the application did not limit its information to the preceding five years but asked, “Has any claim or suit for alleged malpractice ever been brought against you, or are you aware of circumstances that might reasonably lead to such a claim or suit?” The application was prefilled by Medicus listing five claims consisting of the four claims included on the credentialing application and a fifth claim for someone Dr. Todd testified was not a patient of his and who had not filed a claim against him. The application did not list the additional eight lawsuits that had been filed against Dr. Todd or the three letters from lawyers threatening suit, and neither Dr. Todd nor Zimmer added them to the application. However, Dr. Todd signed the application, declaring the information was true and correct.
When the policy came up for renewal in November 2007, Medicus sent Zimmer a prefilled application for Dr. Todd stating that the application “needs to be reviewed, modified if need be, and signed, dated and completed on pages 18 and 19 the warranties and fraud-warnings pages requiring Dr. Todd’s signature.” Like the February application, this application requested Dr. Todd’s complete claims history and was prefilled with the same five claims included on the February application. Again, neither Zimmer nor Dr. Todd modified the claims list either to remove the claim that was not against Dr. Todd or to include the eight undisclosed lawsuits filed against Dr. Todd and the three letters threatening suit. Medicus renewed Dr. Todd’s insurance for another year.
Dr. Todd testified he usually signed applications without reading them because he relied on Zimmer to make sure the applications contained the correct information. Zimmer testified he had presumed that Medicus’s applications requested the same five-year claims history as the credentialing application. Zimmer stated he did not notice that Medicus’s applications requested Dr. Todd’s complete claims history.
After the 2007 renewal, Dr. Todd was named as a defendant in two more malpractice suits, and Medicus defended him and paid the policy limits to settle one of the suits. In November 2008, Medicus again renewed Dr. Todd’s insurance but charged a higher premium. Medicus then received a copy of a letter from the plaintiff’s attorney in one of the malpractice suits against Dr. Todd addressed to the attorney provided by Medicus to represent Dr. Todd. In the letter, the plaintiff’s attorney stated that Dr. Todd had been a party to fifteen medical malpractice cases and two investigations by the Texas Medical Board. After investigating and discovering the undisclosed claims and Texas Medical Board investigations, Medicus notified Dr. Todd that Medicus “refuses to be bound by the policy” because of material misrepresentations in the insurance application. Medicus returned the premium to Dr. Todd and declared the policy cancelled.
Medicus argues that an insurer seeking to have an insurance policy declared void due to misrepresentations in the application has two alternative remedies: the common-law remedy, in which the insurer must prove an insured intended to deceive the insurer, and the statutory remedy under section 705.004 of the Texas Insurance Code, which does not expressly require the insurer to prove the insured had the intent to deceive. Medicus asserts it brought suit under the statutory remedy, not the common-law remedy; therefore, it contends, it was not required to prove Dr. Todd intended to deceive it with the misrepresentations in the application concerning his claims history.
Section 705.004(a) of the Texas Insurance Code states an insurance policy cannot provide that false statements in the application for the policy make the policy void or voidable. However, “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.” The statute does not expressly require, and never has required, the insurer to prove the insured’s intent to deceive.
Although the statute does not expressly require the insurer prove the insured’s intent to deceive, the supreme court has imposed that requirement.
The great weight of authority sustains the rule that under the provisions of these statutes a misrepresentation, or breach of warranty, by the insured, to avoid the policy, must be willful, or made fraudulently with intent to deceiveā€¤