Misrepresentation In Health Insurance Policy Application

Fort Worth insurance lawyers will find the 1995, case, Darby v. Jefferson Life, useful in their insurance law practice. It is from the Houston Court of Appeals [1 Dist.].
On October 5, 1987, Jefferson Life’s agent, Charles Sharp, interviewed Darby in her home after she applied for a major medical insurance policy. Sharp read questions from the application and recorded Darby’s answers on the policy application. In one section of the document, Darby’s recorded answers showed one doctor’s visit and one hospital confinement in the previous 24 months but also showed a denial of past health problems. In another section, Darby’s recorded answers indicated she had a complete checkup during the previous month, a blood clot earlier that year, and was on medication for arthritis. Darby signed the application in two places, affirming that each answer was full, true, and complete, and agreeing that any false statement materially affecting Jefferson Life’s acceptance of the risk would render the policy void.
At trial, Darby testified that she also told Sharp, although the application did not so reflect, that she had a computerized axial tomography (CAT) scan and a magnetic resonance image (MRI) the month before her application; she had been hospitalized for a blood clot and continued to see a physician three times a week; and she had rheumatoid arthritis, which was controlled with medication. She also may have told Sharp she saw a physician once a month.
Sharp did not testify at trial. The record showed that Sharp had underlined “arthritis” on Darby’s form. Roberta Ladner McDonald, Jefferson Life’s president, testified that “underlining” a condition was a positive indication of the condition.
Eleven days after Sharp’s interview of Darby a representative of EMSI, an examination company retained by Jefferson Life, contacted Darby by telephone. McDonald testified that the company hired EMSI to interview Darby and verify her answers on the application.
McDonald admitted that, as a result of Sharp’s initial interview and the EMSI report, the company knew Darby had seen a physician eight to 10 times over the past 24 months and had a history of migraines, blood clots, and arthritis. Jefferson Life’s underwriting rules require that an applicant be refused coverage if the applicant has been to a doctor more than eight times during the two years preceding the application date. Nevertheless, Jefferson Life approved Darby’s insurance application and, on October 23, 1987, issued a health policy containing a rider excluding headaches or migraines and any disease or condition of the cardiovascular system.
Three months later Darby was hospitalized for acute diverticulitis (perforated colon), whereupon Darby filed a claim. The claims adjuster requested medical records from three of Darby’s physicians. The records reflected that Darby had visited doctors approximately 36 times during the previous year. Jefferson denied Darby’s claim and terminated the policy.
Darby received a letter from Jefferson Life indicating the denial of coverage was based on “health conditions not shown on the application.” Darby testified that Jefferson Life’s initial denial of the claim was based on its belief that diverticulitis was an undisclosed preexisting condition for which Darby had sought coverage when she purchased the policy. Jefferson Life wrote Darby a second letter which explained that the denial of her claim and termination of her policy occurred because of certain misrepresentations on her application. Darby also introduced a letter from Jefferson Life’s previous president to its claims manager, written at the time of her claim, directing, “if we have enough info, Dr. Reports, & case history, et cetera, to R and R that would stand up in court and State Board, let’s do it, if not get it.” At trial, McDonald admitted the diverticulitis was not a preexisting condition and took the position that Darby’s misrepresentations were the basis for the denial of coverage.
Jefferson Life is entitled to judgment as a matter of law if it had a reasonable basis to deny Darby’s claim. Jury question three, which tracked a bad faith test, asked:
Did Jefferson Life Insurance engage in any breach of its duty of good faith and fair dealing that was a proximate cause of damage to Bette [Darby]?
In order to find that an insurance company breached its duty of good faith and fair dealing, you must find the following elements: 1. the company denied payment of a claim; 2. the company did not have a reasonable basis for its denial of the claim; and 3. the company knew or should have known that there was no reasonable basis for its denial in payment.
The jury answered affirmatively. It is undisputed that Jefferson Life denied Darby’s claim, thus meeting the first requirement. To refute the second requirement, that it had no reasonable basis for its denial of the claim, Jefferson Life contends it denied the claim because Darby misrepresented her health condition. Before the jury could answer its third question, regarding the test, it had to answer jury question one in the negative. Jury question one asked:
Did Bette [Darby] make a material misrepresentation to Jefferson Life Insurance in connection with the policy in question?
In order to find a “material misrepresentation” you must find each and every one of the following elements[:] 1. The making of a representation by Bette [Darby]; 2. The falsity of the representation; 3. Reliance on the representation by Jefferson Life Insurance in issuing the policy; 4. That Bette [Darby] intended to deceive Jefferson Life Insurance by making the representation; and 5. The representing was material.
The jury answered, “No. “
Darby contends the evidence did not establish all elements of a misrepresentation defense, particularly the requirements of intent and material misrepresentation. According to Darby, Jefferson Life had no reasonable basis for denying her claim. In reviewing the second prong of the Aranda test, this Court had to decide whether Jefferson Life had before it evidence reasonably suggesting that Darby misrepresented her health condition.
An insurer may deny a claim or cancel a policy on the basis of the insured’s misrepresentation if the insurer pleads and proves five elements: (1) the making of the representation; (2) the falsity of the representation; (3) the insurer’s reliance on the representation; (4) the insured’s intent to deceive in making the representation; and (5) the materiality of the representation.
A representation is made if the applicant signs a statement indicating the answers in the application are true and correct when the policy is delivered. The representation is false if the answers were untrue at the time they were made. The representation is material if it actually induces the insurance company to assume the risk.
Intent to deceive may be established as a matter of law when the applicant warrants the representations to be true or when the applicant colludes with the insurance agent. Reliance is established when the insurer does not know the representations are false.
By signing the application, Darby represented that her answers were truthful. Although Darby’s application did not reveal all details of her medical history, Darby did share additional history with Sharpe, the insurance agent, and EMSI, Jefferson Life’s examination company. The application itself contained conflicting information. Under the standard requiring untrue responses, this Court cannot say Darby’s representations were false. There is no evidence of collusion between Darby and her agent, and without evidence of falsity, this Court cannot say that Darby intended to deceive Jefferson Life. In fact, McDonald admitted that Darby did not intend to deceive Jefferson Life. In addition, Jefferson Life knew the application contained misrepresentations and issued the policy in violation of its own underwriting rules. This Court cannot say that any misrepresentations were material or that Jefferson Life relied upon them.
Having issued the policy under these circumstances, it was unreasonable for Jefferson Life to deny Darby’s claim on the basis that she had made misrepresentations on her policy application. When Jefferson Life denied Darby’s claim, it first claimed that diverticulitis was an undisclosed preexisting condition. Later, it claimed the misrepresentation defense. Given this activity, Jefferson Life knew or should have known that it lacked a reasonable basis to deny Darby’s claim.

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