Life Insurance Denial Based On A Misrepresentation – Bad Faith?

Is it bad faith for a life insurance company to deny a life insurance claim due to an alleged misrepresentation in the application?  Probably not.
Here is a 1996 opinion from the United State Southern District of Texas.  The opinion is styled, Bates v. Jackson National Life Insurance Company.
Bates’ children sued Jackson National for proceeds of a life insurance policy issued to Bates.  They asserted causes of action for breach of contract, bad faith, and Insurance Code violations and DTPA violations.
On October 31, 1991 and November 1, 1991, Bates was diagnosed with phlebothrombosis and diabetes.  On November 12, 1991, Bates submitted an application to Jackson National in which he represented he had not consulted or been treated by a physician in the last five years and that he had not submitted to an x-ray or any laboratory studies or tests.  Furthermore, Bates represented din the application that he had not been told he had any disease, abnormality or diabetes.  The policy was issued and the application was attached to and made a part of the policy.
On November 1, 1992, Mr. Bates was murdered by an ex-lover of his girlfriend/common law wife.  Plaintiffs timely filed a claim with Jackson National.  Jackson National denied coverage based on material misrepresentations made by Bates in the application for insurance.
Plaintiffs acknowledged that the application contained false representations and that Jackson National relied on those representations.  Plaintiffs dispute, however, that Bates intended to misrepresent information to Jackson National or that the misrepresentations were material.
A material misrepresentation in an insurance application does not defeat recovery if the misrepresentation was made innocently and in good faith.  An insured’s mere knowledge of his or her health condition is insufficient to prove intent to deceive as a matter of law.  Accordingly, a fact issue exists as to whether or not Bates intended to deceive Jackson National.
As to the bad faith assertion, Jackson National owed the beneficiaries of the policy no duty of good faith and fair dealing as they are merely third-party parties claiming under the policy, not an insured of Jackson National.  Even if Jackson National owed the beneficiaries a duty of good faith and fair dealing, the evidence demonstrates a reasonable basis for questioning their claim.  Therefore, Jackson National did not breach the duty of good faith and fair dealing.
Accordingly, summary judgment is granted for Jackson National on the bad faith claim.
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