Life Insurance Denial – Incontestability

Life Insurance Lawyers have many potential clients where in the basis for denial of the claim is that insured made a misrepresentation in the policy application within two years of making the application.  This two years is called the contestability period.  After two years the policy is supposed to be incontestible.  The Southern District of Texas, Houston Division, issued an opinion in September 2021, wherein one of the issues dealt with the incontestability period.  The style of the opinion is, Pruco Life Insurance Company v. Blanca Monica Villarreal and Transamerica LIfe Insurance Company v. Blanca Monica Villarreal.

In this case, the insured had purchased two very large life insurance policies from the Pruco and Transamerica.  The details of the case can be read in the opinion as can the other issues presented.  Discussed here is the issue of Incontestability.

Villarreal moved for partial summary judgment on this issue that the policies are incontestable on that basis that under Texas law, insurance policies cannot be contested after remaining in effect for two years during the insured’s life.  Villarreal argues that even if Texas law permits insurers to raise a material and intentional misrepresentation defense after the two years, that challenge would not apply here because the life insurance policies did not contain the language reserving the right to raise the challenge.  Additionally, Villarreal argues that the defense would apply only if the insured (Rosendi) was residing in Texas “during the term of his life insurance policies.”  The insurers oppose on the basis that an exception to incontestability exists when an insurer can prove material and intentional misrepresentations and that the exception applies to Rosendi’s life insurance policies because he was “in” Texas when he contracted for the policies
and when the policies were delivered to him.

The issue is statutory interpretation.  A court must use definitions prescribed by the Legislature and any technical or particular meaning the words have acquired.  A court must not interpret the statute in a manner that renders any part of the statute meaningless or superfluous.  If a general provision irreconcilably conflicts with a special provision, the special or local provision prevails as an exception to the general provision. If the statutory language is susceptible to more than one reasonable interpretation, the court looks beyond its language for clues to the
Legislature’s intended meaning.

The language of the applicable Texas Insurance Code provisions is plain. Section 1101.006, Texas Insurance Code, requires Texas life insurance policies to contain a clause stating that after a life insurance policy has remained “in force for two years from its date of issue during the lifetime of the insured,” it is incontestable, except for nonpayment of premiums.

Section 705.104, Texas Insurance Code, is in a chapter governing “Misrepresentations by Policyholders.”  This is divided into three subchapters: Subchapter A, General Provisions (applicable to all insurance policies); Subchapter B, Special Provisions related to Life, Accident, and Health Insurance Policies; and Subchapter C, Special Provisions Related to Life Insurance Policies. Section 705.104, part of Subchapter C, provides a defense for life insurance beyond the two-year incontestability period, based on material and intentional misrepresentation.

Life insurance policies are generally incontestable after two years from their issuance date unless an insurer can prove that the insured made intentional and material misrepresentations when obtaining the life insurance. If the court interpreted Section 1101.006 to bar a misrepresentation defense after a life insurance policy has been in effect for two years, then Section 705.104—which
provides a defense for life insurance policies based on intentional and material misrepresentations only after two years of a policy’s date issuance—would be meaningless.

Texas law also requires courts to interpret special provisions as exceptions to general provisions when the two irreconcilably conflict.  Even if the court found, which it does not, that the general two-year incontestability bar of Section 1101.006 conflicted with an available defense beyond the two-year period Section 705.104, Texas law requires treating the special provision Section 705.104 as an exception to the general provision Section 1101.006, rather than make the special provision meaningless.

What matters today is that in 2003, the Texas legislature once recodified the Texas Insurance Code, effective in 2005, but this time it modified the structure used.  The Legislature kept the 1909-inspired two-year incontestability requirement, Section 1101.006 in the chapter applicable to life insurance policies.  It also kept some of the general 1903-inspired provisions in Subchapter A of a chapter governing misrepresentations made by policyholders, which is Secions 705.001-705.005.  This time, however, the Texas legislature made clear that the general provisions in Subchapter A did “not apply to a life insurance policy: (1) that contains a provision making the policy incontestable after two years or less; and (2) on which premiums have been duly paid.”  This is found in Section 705.105.  Unlike past recodifications, the Texas legislature provided a new, additional provision in Subchapter C, containing special provisions applying to life insurance policies including Section 705.104—separate and aside from the general 1903-inspired provisions that had been considered superfluous for so long—making available a material and intentional misrepresentation defense for life insurance policies that insurers could raise beyond the incontestability period.

The Texas Supreme Court, however, has made clear that when specific provisions of a nonsubstantive codification and the code as a whole are direct, unambiguous, and cannot be reconciled with prior law, the codification rather than the prior,
repealed statute must be given effect.

The motion was denied.

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