Life Insurance – Misrepresentation As To Net Worth

A trial result regarding the above issue is something a Dallas Fort Worth insurance lawyer wants to know.
An opinion from the Houston Court of Appeals (14th Dist.) deals with this issue. The style of the case Vasquez v. Reliastar Life Insurance Co. Here is the relevant information.
In March 2008, Russell Mackert and Beatrice Ramon submitted an application with ReliaStar for insurance on the life of Ramon, seeking an initial term of ten years for an amount of $2.5 million. The application named the Trust as the proposed beneficiary and owner of the policy and Mackert as trustee. The asserted purpose of the Trust was “Estate Conservation.” Mackert and Ramon also represented in the application that Ramon’s total net worth was $2.4 million, her annual interest and other income was $150,000, and she had never declared bankruptcy. Mackert and Ramon signed the application acknowledging that ReliaStar may seek to rescind coverage due to material misrepresentations.
ReliaStar issued a policy insuring the life of Ramon for $2.5 million. The Policy also contained a contestability provision, allowing ReliaStar to “contest the validity of this Policy based on material misrepresentations made in the initial application for two years from the Issue Date, during which time the Insured was living.”
Ramon died in November 2008. In January 2009, Mackert notified ReliaStar about Ramon’s death. ReliaStar advised Mackert that, because Ramon’s death occurred within the two-year contestability period, ReliaStar would conduct an investigation to determine whether information provided in the application was correct.
The Trust filed suit against ReliaStar. While suit was pending, ReliaStar continued its contestability investigation. ReliaStar determined that neither Ramon nor Mackert made any misrepresentation regarding Ramon’s health or medical history. However, ReliaStar discovered that Ramon misrepresented her financial information because she had previously declared bankruptcy, had no assets, and did not receive any income except social security payments. Moreover, Ramon and Mackert misrepresented the purpose for the life insurance, stating it was for “Estate Conservation” when the actual purpose was to procure “Stranger Owned Life Insurance.” Based on these misrepresentations, ReliaStar rescinded the Policy and returned the premium paid by the Trust.
The sole question presented to the jury in the charge is as follows:
QUESTION NO. 1 Did the Policy application contain misrepresentations that were:
(1) of a material fact and that (2) affected the risk assumed?
…
A misrepresentation of fact is “material” if it induced [ReliaStar] to issue the Policy.
Answer “Yes” or “No”: Answer: Yes
This question tracks the language of section 705.051 of the Insurance Code:
The Trust does not challenge the jury’s finding that Ramon’s financial misrepresentations were material. Instead, the Trust argues there is no evidence that Ramon’s misrepresentations “affected the risk assumed.” Specifically, the Trust argues Ramon’s false statements regarding her worth, income, bankruptcy history, and the purpose of the Trust did not affect the risk of Ramon dying because none of these statements had any bearing on her health or death.
The Trust spent several pages of its brief explaining why section 705.051 is purportedly different than its predecessor statute relative to the materiality and affects- the-risk prongs.
ReliaStar responded that nothing in the plain language of section 705.051 requires that a misrepresentation involve the insured’s health or life expectancy in order for the misrepresentation to affect the risks assumed by the insurer. This Court agreed. Had the Legislature intended to limit the meaning of the “affects the risks assumed” prong in section 705.051, it would have utilized similar language as it used in subsection 705.004(b)(2), which permits the insurer to void a policy pursuant to a misrepresentation provision if, among other results, the insurance applicant’s misrepresentation “contributed to the contingency or event on which the policy became due and payable.”
ReliaStar’s underwriters testified that all information provided by an insurance applicant is considered when determining whether to provide coverage and how much coverage to provide. The underwriters further emphasized that ReliaStar determines “the amount of insurance that would be acceptable” based on the purpose for the insurance, such as whether the insurance is for estate preservation. ReliaStar does not want to provide more life insurance than what the insured and her beneficiary actually need. If ReliaStar issues a high-paying policy to a person with poor finances, there is an increased risk that the person will not be able to afford the premiums. Additionally, the underwriters explained that ReliaStar does not want to provide “Stranger Owned Life Insurance” policies because the person who is the beneficiary of the policy has no interest in the continued life of the insured and is hoping the insured will die within the policy term. According to the underwriters, had Ramon been truthful about her financial standing, ReliaStar would not have issued her a $2.5 million policy and probably would not have provided any insurance because she did not need coverage.
In addition to the underwriters’ testimony, ReliaStar’s financial-underwriting guidelines were admitted into evidence. These guidelines include the following statements demonstrating the importance of financial information in a life-insurance application:
“Resolving cases of questionable insurable interest and identifying cases of apparent overselling are often difficult. By keeping in mind the affordability of the premium in relation to the applicant’s financial position, the underwriter should question and even discourage business, if it indicates a potential early lapse or windfall profit to the beneficiary.”
“[Certain financial considerations] become even more important as the amount of insurance increases because of the additional liability assumed by the company.”
“One of the underlying principles of financial underwriting is that the beneficiaries of the policy, regardless of who they are, should not benefit financially on the death of the insured more than they would have, had the insured lived.”
“The bulk of the insurance policies written by the Industry are below $1,000,000…. The number of large multi- million dollar cases is more limited. As a result, the effect of a few early claims for multi-million dollar cases may impact the company’s block of business significantly. Careful evaluation of the financial aspects of multi-million dollar cases is, therefore, critical in the process of underwriting large line risks.”
“Financial underwriting is accomplished with a strategy that allows the approval of cases to ultimately meet the company’s profit and marketing objectives and the rejection of cases that will not.”
• “Individuals who remain in good health and find the premiums burdensome may lapse their policies before the company can recoup expenses.”
In sum, Ramon’s financial misrepresentations affected the amount of coverage provided, and therefore the risk assumed, by ReliaStar. Clearly, Ramon and Mackert understood the correlation between financial information and the obtainable amount of life-insurance coverage because they misrepresented Ramon’s financial information on the insurance application. The court held that the evidence was legally sufficient to support the jury’s affect-the-risk finding and affirmed the jury findings.