Rescission Of An Insurance Policy

Most insurance lawyers know that one way an insurance company tries to get away with refusing to pay on an insurance policy is to rescind the policy.  According to a 1931, Amarillo Court of Appeals opinion styled, Forrester v. Southland Life Ins. Co., the general principle is, prior to a loss an insurance company has the right to rescind the policy procured through mutual mistake or fraud.

As stated by the  Texas Supreme Court in a 1980 opinion styled Mayes v. Massachusetts Mut. Life Ins. Co., an insurance company may rescind a policy based on the insured’s misrepresentation, if the insurance company pleads and proves the following elements:

  1.  the making of the misrepresentation;
  2.  the falsity of the representation;
  3.  reliance thereon by the insurer;
  4.  the intent to deceive on the part of the insured in making the misrepresentation; and
  5. the materiality of the misrepresentation.

In Mayes, the court held that the same rules for avoiding a policy based on misrepresentation in the application would apply when the insured’s answers, although initially true, became false because of a change in the insured’s health before the policy was issued.

As an example, in the 1989, El Paso Court of Appeals opinion styled, Southwestern Life Ins. Co. v. Green, the court upheld the jury finding that the insured did not intend to deceive the insurance company.  In the case, the insured had a history of alcoholism and died from liver disease, with a final diagnosis of chronic alcoholism accompanied by cirrhosis of the liver.  A psychologist testified, as an expert, that the insured was an alcoholic, that a telltale trait of alcoholism is denial, and therefore the insured had no intent to deceive the insurer when he stated on his application that he had no alcohol problem.

It should be noted that the “intent to deceive” element of the material misrepresentation defense creates an inevitable fact issue that will preclude the defense from being determined as a matter of law.  As such, the insurer can obtain a summary judgment on all of the elements of the material representation defense except the “intent to deceive” element.