Intent To Deceive – Can Insurance Company Prove It

As all insurance attorneys should know, intent to deceive is a requirement that has to be proved for an insurance company to deny a claim based on a misrepresentation.  Even when faced with irrefutable evidence of a misrepresentation, intent to deceive still has to be proved.  Due to the inherent difficulty in assessing the subjective mental state of an insured, insurance companies have a difficult time establishing this element of the misrepresentation defense.  Insurance companies try to take the position that the intent can be proved as a matter of law and rely on two Texas Supreme Court decisions – Odom v Insurance Company of the State of Pennsylvania and Mayes v Massachusetts Life Ins. Co.

Mayes is a declaratory judgment action brought by the insurer based on misrepresentations in the application.  The jury in this case concluded that the intent to deceive was not intended.  The insurer argued that intent was established as a matter of law because the jury found that the misrepresentations were material to the risk and relied upon by the insurer.  The Court agreed with the jury that the misrepresentation was inadvertent.

In Odom, the court made the following statement:

While subjective evidence of the state of mind of the insured when he made application for this insurance is now impossible to obtain it is inconceivable that he did not know the falsity of the answers given by him to the questions shown above.  If he was a normal human being, he could not have failed to remember that he was involved in two accidents and that he had been convicted of seven moving violations within the past thirty six months.  Such answers were, therefore, knowingly false as a matter of law.

Relying on Mayes and Odom, among other cases, insurers have frequently argued that fraudulent intent can be established as a matte of law.  Although this reading of Mayes was supported by the 5th Circuit in Lee v. National Life Assurance Co. of Canada, various Texas Courts of Appeal have held the opposite conclusion, holding that the intent to deceive cannot be established as a matter of law.  For instance, in another case, the Houston Court of Appeals overturned summary judgment that was granted in favor of an insurer on the basis of misrepresentation, concluding that intent to deceive or induce the issuance of an insurance policy can never be proved as a matter of law to establish the defense of misrepresentation.

In 2006, the Southern District case even more doubt on the 5th Circuit’s interpretation of Mays in a case.  In the case, another really big misrepresentation was eventually discovered about the insured’s health conditions.  The Southern District provided an extensive analysis of the intent to deceive requirement and ultimately concluded that fraudulent intent cannot be established as a matter of law.  In so doing, a distinction was made from Odom on the basis that Odom concerned violations of warranties rather than misrepresentations, and involved strong evidence of collusion between the insured and the insurer’s agent.

Ultimately the court held that:

Under Texas law, an insured’s intent to deceive may not be proved by summary judgment evidence of the insured’s knowledge of their actual health condition or of even substantial disparity between the representations made on the insurance application and the insured’s knowledge.

Thus, insurance companies should keep in mind that the argument that fraudulent intent can be established as a matter of law is growing more and more difficult to make.  And insured’s should keep in mind that this fact does not mean the insurance companies will keep trying.