Life Insurance Claim Denial – Knowledge of Misrepresentation

Life insurance lawyers need to be know this 1990, opinion from the Texas Supreme Court.  It is styled, Koral Industries v. Security-Connecticut Life Insurance Co.

It is not uncommon for a beneficiary of a life insurance policy to concede that misrepresentations regarding health were made on an application for life insurance.  What they will contest is that the insurance company should have known of the misrepresentations.

In the Koral case, Koral sought insurance on one of its key employees, Lewis Lindsey.  Lindsey did not disclose on the insurance application his medical history regarding treatment over the previous five years a history which included hospitalization in 1981, 1982, and 1983, and counseling and treatment for depression and excessive use of alcohol.  Further, he had been treated for mental or nervous disorders from 1976-78, and his physician had treated him for anxiety.

Based on false representations in the life insurance application Security issued a policy on Lindsey’s life in the amount of $1,000,000.  Lindsey then died during the two year contestable period of the policy.  An investigation was started than found the previously mentioned misrepresentations.

A jury found in favor of Koral but made findings that Lindsey knowingly made the false misrepresentations to induce Security to issue the policy.  The jury also found that Security was aware of facts that would have caused a prudent person to make an inquiry, and that such inquiry would have uncovered Lindsey’s fraud.

This Court then stated the law:

When one has been induced to enter into a contract by fraudulent representations, the person committing the fraud cannot defeat a claim for damages based upon a plea that the party defrauded might have discovered the truth by the exercise of proper care.  An affirmative answer to the requested special issue based upon what the insurer should have known would not, therefore, have constituted a defense to the alleged fraud.

Failure to use due diligence to suspect or discover someone’s fraud will not act to bar the defense of fraud to the contract.  More law states:

It is not the rule that a person injured by the fraudulent and false representations of another is held to the exercise of diligence to suspect and discover the falsity of such statements.  In the absence of knowledge to the contrary, he would have a right to rely and act upon such statements, and certainly the wrongdoer in such a case cannot be heard to complain that the other should have disbelieved his solemn statements.

Only the insurance company actual knowledge of the misrepresentations will destroy its defense to fraud.  The test for the courts to use is always, “to avoid the defense of fraud as to a material fact upon the score of waiver, the company must know the identical statement as made is untrue.”