Denial Of Claim Based On Misrepresentation

Someone in Grand Prairie, Fort Worth, Arlington, Irving, Dallas, Mansfield, or anywhere else in Texas may find themselves in a situation where an insurance company is denying a claim based on the insured making a misrepresentation in an application for insurance coverage. Does that mean the insurance company wins? Here is a case that might help with the answer.
The case is styled Union Bankers Insurance Company v. Thomas D. Shelton and Ann Shelton. It is a Texas Supreme Court case decided in 1994.
The Sheltons sued Union Bankers and its agent Donny Stone after Union Banker cancelled Mr. Shelton’s health insurance policy on the basis of an alleged misrepresentation in his application. The Sheltons alleged Union Banker breached the contract and the duty of good faith and fair dealing dealing with improperly canceling the policy.
In april 1988, Mr. Shelton applied to Union Bankers for a health insurance policy. In response to certain medical history questions, Mr. Shelton indicated that he had never been treated for, and had no indictions of, any disorders of the skeletal or muscular systems and the policy was issued on April 9, 1988.
In November, seven months after the policy issued, Mr. Shelton underwent total hip replacement surgery to correct necrosis in his left hip joint. He filed a claim for benefits that Union Bankers denied based on their contention that the necrosis was an undisclosed pre-existing condition. Union Bankers later, cancelled the policy.
In discussing the case, this court pointed out that the insurance code sets forth minimum standards for provisions that must be contained in each accident and sickness policy delivered in this state. The policy contained one of those provisions –
Time Limit on Certain Defenses: (a) After two years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after expiration of such two-year period.
By statute, a misrepresentation in an application for any type of insurance must be material in order to avoid the policy. This per Texas Insurance Code, Section 705.004. The proposition that an insured’s intent to deceive is likewise required is well established in the laws of Texas. The court said this in it’s holding:
“We hold, therefore, that an intent to deceive must be proved to cancel a health insurance policy within two years of the date of its issuance when the cancellation is based on the insured’s misrepresentation in the application for insurance.
The court then had to decide if the conduct of Union Bankers justified a claim for breach of the duty of good faith and fair dealing.
The court said that a cause of action is stated when the insured alleges that the insurer had no reasonable basis for the denial or delay in payment of a claim and that the insurer knew or should have known of that fact.
The overriding factor for the courts to look at is the parties’ (insurer and insured) unequal bargaining power and the nature of insurance contracts. Without a cause of action for breach of the duty of good faith and fair dealing, unscrupulous insurers would be able to take advantage of their insureds’ misfortunes in bargaining for settlement or in resolving claims by “arbitrarily denying coverage and delaying payment of a claim with no more penalty than interest on the amount owed.”
For this case, the court said these factors equally apply, and perhaps are even more compelling, when the insurer unilaterally cancels the insured’s policy without a reasonable basis. The insured is not merely at the mercy of the insurer to treat him fairly in the processing of a single claim, but must rely on the insurer’s good faith for the continued existence of any coverage. The insurer’s ability to unilaterally cancel an insurance policy and the insured’s inability to prevent cancellation demonstrates a great disparity in bargaining power between the two parties. Furthermore, a failure to extend the duty of good faith and fair dealing to the cancellation of an insurance policy would allow insurers to avoid bad faith liability by canceling the entire policy rather than denying a single claim.
In this case, some evidence of bad faith in connection with the policy cancellation was Union Bankers’ initial correspondence concerning the claim stated that the information omitted from the application was “probably and oversight,” and Union Bankers failed to discuss the application, condition, or claim with Mr. Shelton before making its final determination.
This case was a case where an experienced Insurance Lawyer made a difference. The case also serves as a good example of what the courts look at in cases when making a determination or ruling in a case.