INSURED’S MISREPRESENTATIONS IN APPLICATION SUPPORT RECISSION – COURT RENDERS JUDGMENT IN FAVOR OF INSURER

Last Thursday, the U.S. District Court in Amarillo rendered judgment in a lawsuit for life insurance benefits, and issued findings of fact and conclusions of law which supported the insurer’s affirmative defense of misrepresentation under Texas Insurance Code § 705.051. In Guzman v. Allstate Assurance Company, 2023 WL 2064719 (N.D. Tex. February 16, 2023), Mr. Guzman applied for life insurance with Allstate and signed an application indicating he was a not a smoker and had not used nicotine products in the previous twelve months. The Policy contained a two-year contestability clause and Mr. Guzman died less than two years after the Policy was issued. Allstate conducted a contestable claim investigation and found medical and other records indicating that Mr. Guzman was a current smoker and was at the time he signed the application. Allstate subsequently rescinded the Policy and denied his spouse’s claim. Mrs. Guzman filed suit in state court. Allstate removed the case to federal court and filed a Counterclaim for Declaratory Judgment asserting the affirmative defense of misrepresentation.

The court initially granted Allstate’s motion for summary judgment which was reversed on appeal by the Fifth Circuit and remanded for further proceedings. The court then conducted a two-day bench trial and based on the evidence and arguments presented, issued its findings of facts and conclusions of law and granted judgment in Allstate’s favor. In doing so, the court closely examined the evidence and required elements of proof in support of Allstate’s affirmative defense for misrepresentation under Texas Insurance Code § 705.051 which requires that to defeat recovery, the misrepresentation must be: "1) is of material fact; and 2) affects the risks assumed.” And the undisputed elements to support rescission are: 1) making a representation; 2) the falsity of the misrepresentation; 3) reliance thereon by the insurer; and 4) materiality of the representation. The court also noted a possible fifth element of “intent to deceive” which is disputed by the parties and currently before the Texas Supreme Court. So, the court made a factual determination on that element as well.

The court carefully examined the evidence and applied it to the required elements of the misrepresentation defense, finding that Mr. Guzman was a tobacco user within twelve months of the application and his representations to the contrary were false, that Allstate would not have offered the Policy at a Standard Risk, nonsmoker premium rate had Guzman disclosed his smoking history and that the misrepresentations were material. Further, that Allstate relied on Mr. Guzman’s misrepresentations when it issued the Policy. Addressing the disputed element of intent, the Court determined that regardless of whether it is required, the court concluded that “Mr. Guzman intentionally misrepresented his status as a smoker.” Accordingly, the Court found that Allstate was entitled to judgment on its claim for declaratory relief under Texas Insurance Code § 705.051 and, its defense to Mrs. Guzman’s breach of contract, Texas Deceptive Trade Practices Act and Texas Insurance Code claims. Accordingly, the court rendered judgment in favor of Allstate.