Insurance is a business of utmost good faith requiring both the insured and the insurer to treat each other fairly and in good faith and to do nothing to hurt the right of the other to the benefits of the contract. When a person lies on an application for insurance that person is not acting in good faith but is, rather, trying to deceive the insurer into entering into the contract of insurance. If the deception is material to the decision of the insurer to issue the policy most states, including the state of Texas, will allow the insurer to rescind the policy after it returns the premium so that both parties are in the same position they were in before the policy was issued.
In Vasquez v. ReliaStar Life Insurance Co., Tex: Court of Appeals, 14th Dist., http://scholar.google.com/scholar_case?case=9433629629153926375&q=GIOVANNY+VASQUEZ&hl=en&as_sdt=2006, (2014), 2014 Tex. App. LEXIS 3287, [enhanced version available to lexis.com subscribers], Giovanny Vasquez, Substitute Trustee of the Beatrice Ramon 2007 Irrevocable Trust (“the Trust”) appealed from a trial court finding a life insurance policy rescinded from its inception. Vasquez contends the evidence is legally insufficient to support the jury’s finding that certain material misrepresentations affected the risk assumed by ReliaStar Life Insurance Co.
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, verifying that the information provided was true and correct to the best of their knowledge and acknowledging that ReliaStar may seek to rescind coverage due to material misrepresentations.
Shortly thereafter, ReliaStar issued a policy insuring the life of Ramon for $2.5 million and naming the Trust as the owner of the policy (“the Policy”). The Policy had an initial term of ten years, during which time the annual premium was $26,125. After the initial ten-year period, the annual premium greatly increased. 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. Additionally, at some point, Mackert resigned as trustee of the Trust and appointed Giovanny Vasquez as substitute trustee. Vasquez purchased the Trust for $500,000 as an investment on behalf of investors he represented.
In June 2009, 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.
In April 2012, the trial court conducted a jury trial on the Trust’s suit. The jury charge contained a single question asking whether the insurance application contained material misrepresentations that affected the risk assumed by ReliaStar. The jury answered in the affirmative, and the trial court rendered a take nothing judgment against the Trust.
The sole question presented to the jury in the charge is as follows: “Did the Policy application contain misrepresentations that were:(1) of a material factand that(2) affected the risk assumed? A misrepresentation of fact is “material” if it induced [ReliaStar] to issue the Policy.” The jury answered “Yes”.
The Trust did 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 argued 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.
Nothing in the plain language of Texas statutes require that a misrepresentation involve the insured’s health or life expectancy in order for the misrepresentation to affect the risks assumed by the insurer. If the meaning of the statutory language is unambiguous the court will always adopt the interpretation supported by the plain meaning of the provision’s words.
The purpose of a life insurance company is to secure risks on sound lives. It is interested in knowing that the applicant for insurance is not affected with infirmities that will hasten the event against which it insures. However, this is a risk to the insurer only because it triggers the insurer’s obligation to pay benefits. Hence, the risk assumed by ReliaStar was that it would have to pay $2.5 million if Ramon died. The amount of money contingently owed by the insurer is undeniably part of the risk of providing coverage.
At trial, 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.
The underwriters also explained to the jury 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.
One of the underlying principles of financial underwriting is that the beneficiaries of the policy should not benefit financially on the death of the insured more than they would have had the insured lived. The number of large multi-million dollar life insurance policies is limited. As a result, the effect of a few early claims on multi-million dollar life insurance policies may impact the company’s block of business significantly.
The Texas Court of Appeal concluded that 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 appellate court, therefore, held that the evidence is legally sufficient to support the jury’s affect-the-risk finding.
An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant that it needs to make a reasoned decision. The insurer has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.
In this case Mr. Mackert and Ms. Ramon deceived ReliaStar who issued a policy based upon false information. They hoped Ramon would live past the two year contestability period so that payment would not be questioned. The fraud was defeated because she died shortly after the policy was issued and the investigation conducted by the insurer revealed the lies. Mackert, recognizing that the fraud was found out sold his rights – slim as they were – to Vasquez who filed suit. Mackert made $500,000; Vasquez lost his investment and the cost of the suit, and the insurer lost the cost of defending. The fraud perpetrator who obtained the policy for a single payment of premium was the only person who profited. Perhaps, after reading this decision the Texas Department of Insurance will investigate whether a crime was committed.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2014, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or email@example.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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