The intent to deceive requirement in Texas

A common way that a life insurance company tries to avoid paying a claim is to “rescind” the policy, because the insured provided incorrect information on the policy application. The insurance company claims the incorrect information caused it to issue a policy essentially under false pretenses. For decades however, the insurance company had to prove that the insured actually intended to intentionally provide deceptive information.

Now, the “intent to deceive” requirement is subject to fierce debate in Texas. I will go into the specifics of the debate in a later post. Here, I will focus on why the debate is so important.

Under Texas law, an insurer may avoid liability on a life insurance policy because of the misrepresentation of the insured in the policy application. Life insurance companies generally have two years after issuing a policy to rescind it based on the alleged misrepresentation. Section 705.051 of the Texas insurance Code s entitled “Immaterial Misrepresentation in Life, Accident, or Health Insurance Application.” It provides that “[a] misrepresentation in an application for a life, accident, or health insurance policy does not defeat recovery under the policy unless the misrepresentation: (1) is of a material fact; and (2) affects the risks assumed.”

The most common type of alleged misrepresentation involves the applicant’s health, as that directly impacts life expectancy. Other potential important misrepresentation involve an applicant’s age or financial condition.

Although materiality is not defined in the particular insurance code provisions, in the insurance context materiality generally turns on whether the insurer would have accepted the risk if the true facts had been disclosed. The representation is material if it actually induces the insurance company to assume the risk.. When determining materiality, the relevant time is the time at which the policy is issued, not the time at which the loss occurred. In other words, that the insured died in a car accident doesn’t mean the insurance can’t rescind the policy if the insured lied about having cancer.

But a material misrepresentation is not enough for the insurance company to show. Texas courts have also required the insurance company to prove that the insured not only provided inaccurate information, but also intended to deceive the insurance company.

In 1980, the Texas Supreme Court stated:

It is now settled law in this state that these five elements must be pled and proved before the insurer may avoid a policy because of the misrepresentation of the insured: (1) the making of the representation; (2) the falsity of the representation; (3) reliance thereon by the insurer; (4) the intent to deceive on the part of the insured in making same; and (5) the materiality of the representation.

In the insurance context, Texas courts have stated “false statements must have been made willfully and with design to deceive or defraud.” Thus, mere negligence, mistake or ignorance or not sufficient for the insurance company to rescind the policy.

As the Texas Supreme Court stated in a 1947 case:

We find no testimony in this record that conclusively shows that the insured knew that he had heart trouble at the time he signed the application for insurance, or that he made the false answers willfully and with the fraudulent intention of deceiving the insurance company and inducing it to issue the policy.

. . .

The lay witnesses, those for plaintiff as well as those for defendant, all testified that Clark appeared to them to be in good health, that he was able to do manual labor, and that he had a good appetite. They further testified that Clark never complained of any ailment, and said nothing and did nothing that disclosed to them that he knew he was sick, and never informed them of having been treated by a doctor. We cannot hold, as a matter of law, that such evidence is conclusive that the insured knew he was suffering from heart disease and that he answered Question 25 fraudulently. In a defense based on fraudulent answers of the insured, it is not sufficient merely to show that the answers were untrue; but it must also be shown that the insured knew, or should have known, that they were untrue. Clark v. National Life & Acc. Ins. Co

This highlights that the applicant’s intent to deceive is a difficult burden for the life insurance company to prove. It is difficult to prove intent as a matter of law, as it is necessary to “get into the mind” of the applicant. That is why it is very difficult for an insurance company to win such a case on summary judgment. There is even debate whether intent to deceive can ever be found by summary judgment ruling. As one court noted:

While subjective evidence of the state of mind of [the insured] when he made application for this insurance is now impossible to obtain it is inconceivable that he did not know the falsity of the answers given by him to the questions shown above. If he was a normal human being, and there is no evidence that he was not, he could not have failed to remember that he was involved in two accidents and that he had been convicted of seven moving violations within the past thirty six months. Such answers were, therefore, knowingly false as a matter of law.

A case involving an intent to deceive is very likely going to trial. And a jury is likely to look skeptically at a life insurance company that does little underwriting up front and instead only dies a “deep dive” after the insured dies. And the application questions themselves can be confusing. Many roll up several issues into a single question, which alone can lead to confusion.

The bottom line is that the intent to deceive standard makes it more difficult for the insurance company to avoid payment on the policy.. That is why insurance company lawyers have been fighting so hard to convince courts in Texas that the intent to deceive standard no longer applies in Texas, at least during the first two years after the policy is issued.