Two recent decisions from the Tennessee Court of Appeals indicate that an insurer will face an uphill battle in attempting to establish the elements of a material misrepresentation defence effective to void coverage. At the very least, the following two decisions should give you pause before denying an insured's claim based on perceived misrepresentations in the application for insurance.
Williams v. Tennessee Farmers Life Reassurance Co., No. M2011-01946- COA-R3-CV (Tenn. Ct. App. July 31, 2012), arose from the denial of death benefits under a term life insurance policy issued by Tennessee Farmers Life Reassurance Company ("Tennessee Farmers") to the decedent, Barbara Williams ("Ms. Williams"). Tony Williams and Angela Williams ("Plaintiffs") were the named beneficiaries under the policy of insurance. The relevant facts in Williams were as follows.
Ms. Williams applied for a term life insurance policy with Tennessee Farmers on May 26, 2005. In August 2005, Tennessee Farmers offered Ms. Williams a term life insurance policy. In May 2006, Ms. Williams died of acute methadone intoxication. When Mr. Williams submitted a claim on the life insurance policy, Tennessee Farmers denied the claim, asserting that Ms. Williams failed to make certain disclosures in her application for insurance pertaining to methadone.
Plaintiffs subsequently filed a complaint seeking to enforce the insurance policy and recover the death benefit. Following a bench trial, the trial court found in Plaintiffs' favor and ordered Tennessee Farmers to pay the death benefit under the policy. Tennessee Farmers appealed, arguing that Ms. Williams made material misrepresentations in her application and that these misrepresentations increased its risk of loss.
In evaluating Tennessee Farmers' arguments, the Court of Appeals noted that, pursuant to Tennessee Code Annotated § 56-7-103, an insurer may deny a claim for benefits if the insurer can demonstrate that a material misrepresentation was made in the application for insurance and that the misrepresentation was intentional or that the misrepresentation increased the insurer's risk of loss.
Tennessee Farmers first argued that Ms. Williams' failure to state that she was taking methadone in response to a question that asked if she was, at that time, taking medication and that Ms. Williams' failure to respond in the affirmative to a question that asked if she had ever been treated for alcohol or drug related problems constituted material misrepresentations that voided the policy. The Court of Appeals disagreed.
Noting that the trial court's findings of fact (i.e., that there was no proof that Ms. Williams was taking methadone at the time she submitted her application for insurance and that there was no proof that Ms. Williams was ever treated for alcohol or drug related problems) were to be reviewed with the presumption that they were correct, unless the preponderance of the evidence was otherwise, the Court of Appeals affirmed the trial court's determination that Ms. Williams' answers to the subject questions were truthful and complete.
Tennessee Farmers next argued that Ms. Williams' failure to list Dr. Vanveen, Dr. Griner, and Dr. Sidberry among her treating physicians constituted a material misrepresentation. Stated briefly, Tennessee Farmers argued that Ms. Williams' failure to disclose these three providers increased its risk of loss because it did not know to review their medical records. Again, the Court of Appeals disagreed.
Specifically, the Court of Appeals determined that Ms. Williams' failure to disclose Dr. Vanveen and Dr. Griner was of no consequence because there was no reference to methadone use in either set of records. The Court of Appeals further concluded that Ms. Williams' failure to disclose Dr. Sidberry did not increase Tennessee Farmers' risk of loss because Ms. Williams' prior use of methadone was detailed, perhaps more thoroughly, in the medical records of two providers Ms. Williams had disclosed and whose records were available to Tennessee Farmers. In light of the foregoing, the Court of Appeals affirmed the trial court's finding that Ms. Williams did not make material misrepresentations in her application for life insurance and, hence, that the policy was enforceable. Meanwhile, on a slightly different note, Rochelle v. Grange Mutual Casualty Co., No. M2011-02697-COA-R3-CV (Tenn. Ct. App. July 31, 2012), arose from Grange Mutual Casualty Company's ("Grange Mutual's") denial of Mr. Rochelle's ("Plaintiff's") claim for a fire loss. The relevant facts in Rochelle were as follows.
In October 2008, Plaintiff contacted his insurance agent, Charles Burnette, for the purpose of obtaining insurance coverage on a modular building which Plaintiff planned to use as a restaurant. On or about October 28, 2008, Mr. Burnette visited the property to perform a walkthrough inspection of the building. After Mr. Burnette's inspection, a complete application with Plaintiff's signature was submitted to Grange Mutual. Among other things, the application stated that no deep fat fryer was used on the premises and that Plaintiff had no prior insurance losses. Grange Mutual subsequently issued a commercial liability insurance policy insuring Plaintiff's restaurant.
On November 29, 2008, a fire damaged Plaintiff's restaurant. Thereafter, Plaintiff made a claim under the insurance policy. Grange Mutual then began its investigation of the loss. The investigation included a request that Plaintiff submit to an examination under oath.
During the examination, Plaintiff admitted this his restaurant did use a deep fat fryer and that he had previously claimed a fire loss on his personal residence. By a letter dated May 15, 2009, Grange Mutual informed Plaintiff that it was rescinding the insurance policy to the date of its inception so as to void the policy completely and, accordingly, that it would not pay his claim.
As the ground for its denial of the claim, Grange Mutual relied upon the "concealment, misrepresentation or fraud" section of the insurance policy, which stated that coverage is void if the insured "intentionally conceal[s] or misrepresent[s] a material fact . . . ." Relying on this provision, Grange Mutual claimed that Plaintiff had made material misrepresentations in the application for insurance and in the post-loss investigation. Specifically, Grange Mutual claimed that Plaintiff failed to disclose his previous fire loss and that his restaurant used a deep fat fryer. Grange Mutual asserted that these material misrepresentations increased its risk of loss.
On July 20, 2009, Plaintiff filed suit against Grange Mutual based upon its denial of coverage following the restaurant's fire loss. The trial court granted Grange Mutual's motion for summary judgment which argued that Plaintiff's application for insurance contained material misrepresentations that increased its risk of loss. Plaintiff appealed. The Court of Appeals noted that in order to void coverage under the "concealment, misrepresentation or fraud" section of the policy, Grange Mutual would be required to prove not only that the answers in the application were false but also that the false answers were given with the intent to deceive it or that the false answers increased its risk of loss. In light of these principles, the Court of Appeals stated that the salient question was whether Plaintiff intentionally misrepresented anything in his application for insurance so as to allow Grange Mutual to void the policy.
In evaluating whether Plaintiff intended to deceive Grange Mutual with his application, the Court of Appeals noted that Plaintiff maintained throughout the proceedings that he either signed a blank application, which was later filled in by Mr. Burnette, or that he signed an application that Mr. Burnette had previously filled out before presenting it to Plaintiff for his signature. Under either factual scenario, the Court of Appeals stated that a question of fact existed as to whether Plaintiff made intentional misrepresentations in his application or whether he may be charged with intent for signing a form that Mr. Burnette completed. Based on its conclusion that a dispute of material fact existed in the case, the Court of Appeals held that the trial court erred in granting Grange Mutual's motion for summary judgment.
The foregoing two decisions reflect the challenge insurers will encounter in attempting to establish a material misrepresentation defense and the need to determine in advance whether a purported misrepresentation in an insurance application is effective to void coverage pursuant to Tennessee law.
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