Rescission Of Insurance Policy

Texas insurance lawyers need to have an understanding about the reasons an insurance can properly rescind a policy or to put it another way – the reasons an insurance company cannot properly rescind a policy.
As a general principle, prior to a loss an insurance company has the right to rescind a policy procured through mutual mistake or fraud. This was the ruling in a 1931, case from the Amarillo Court of Appeals and is still good law. The case is styled, Forrester v. Southland Life Insurance Company.
The 1980, Texas Supreme Court case styled, Mays v. Massachusetts Mutual Life Insurance Company has stated that an insurance company may rescind a policy based on the insured’s misrepresentation, if the insurance company pleads and proves the following elements:
1. – the making of the misrepresentation;
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 the misrepresentation; and 5. – the materiality of the representation.
The Texas Supreme Court in deciding the Mays case held that the same rules for avoiding coverage in a policy based on misrepresentation in the application would apply when the insured’s answers, although initially true, became false because of a change in the insured’s health before the policy was issued.
An example of this can be found in a 1989, El Paso Court of Appeals case styled, Southwestern Life Insurance Company v. Green. In the case, Green, the insured, had a history of alcoholism and died from liver disease, with a final diagnosis of chronic alcoholism accompanied by cirrhosis of the liver. A psychologist testified as an expert that Green was an alcoholic, that a telltale trait of an alcoholism is denial, and therefore Green had no intent to deceive the insurance company when he stated on his application that he had no alcohol problem. The trial court upheld the jury finding that Green did not intend to deceive the insurance company.
It is important for life insurance attorneys handling cases, wherein the policy benefits are denied due to misrepresentations in the application, to know that the “intent to deceive” element of the material misrepresentation defense creates an inevitable fact issue that will prevent the insurance company from winning the case by filing a motion for summary judgement. The insurance company may be able to obtain to be successful on all the other elements of a material misrepresentation defense but not on the “intent” element.