Texas Supreme Court Holds Insurers Must Show “Intent to Deceive” to Void Policy Based on a Misrepresentation Under the Texas Insurance Code
On April 28, the Texas Supreme Court held that an insurer seeking to void an insurance policy via a Texas Insurance Code statutory misrepresentation defense must, just like under a common-law misrepresentation defense, prove an insured the insured had “intent to deceive” when it made a misrepresentation in a life, accident, or health insurance application.
In making this ruling, the Court rejected an insurer’s argument that Texas Insurance Code Section 705.051 did not require intent to deceive just because the statute was silent on whether intent to deceive was required.
The Texas Supreme Court began its analysis by walking through the 2003 recodification of the Texas Insurance Code. At the appellate court, the insurer unsuccessfully argued that the recodification removed the “intent to deceive” requirement due to substantive changes to Texas Insurance Code Section 705.051.
Before the Texas Supreme Court, however, the insurer changed its position and argued that Section 705.051’s plain language provided a misrepresentation defense with no additional limitations. The Texas Supreme Court noted Section 705.051 had remained the same since 1909 with no substantive amendment to the language in 2003.
It further noted that over twenty years before the 2003 recodification, the Texas Supreme Court had established a five-part common-law test, which required intent to deceive in order to void a policy based on an insured’s misrepresentation. Thus, the Arce Court reasoned the Legislature was presumptively aware of the Texas Supreme Court’s interpretation of the statute as requiring an “intent to deceive” element when they amended the statute. Accordingly, the lack of substantive alteration demonstrated the Legislature’s intent not to eliminate the common law requirement.
The Court then moved onto the plain text of the statute. Section 705.051 states that: “[a] misrepresentation in an application for a life, accident, or health insurance policy does not defeat recovery under the policy unless the misrepresentation:
(1) is of a material fact; and
(2) affects the risks assumed.”
The insurer argued that this language encompassed every element of the common-law test except intent to deceive, thus indicating that the statute did not require intent to deceive.
The Court rejected this argument, finding that Section 705.051 states conditions that are only necessary, but not sufficient, to defeat recovery on a policy based on misrepresentation. Based on its interpretation of the statute’s language, the Court found Section 705.051 sets a “floor” that cannot be removed by contract or common law.
The Court’s interpretation was a grammatical one, focusing on the statute’s use of the word “unless,” which implies the two enumerated elements are merely necessary. In rejecting the insurer’s arguments, the Court found the insurer’s interpretation would require rewriting the statute to read: “[a] misrepresentation in an application for a life, accident, or health insurance policy [does defeat] recovery under the policy [if] the misrepresentation:
(1) is of a material fact; and
(2) affects the risks assumed.”
Moreover, the Court found Section 705.051 did not give insurers a recission defense at all, much less set the exclusive terms for a recission defense.
The insurer next argued that, because the Legislature included the word “intent” in other provisions of the Texas Insurance Code, the absence of such a phrase in Section 705.0051 indicated the Legislature’s intent not to require intent.
Indeed, the word “intent” only appears twice in Section 705, both times in Section 705.104, which states: “A defense based on a misrepresentation in the application for, or in obtaining, a life insurance policy . . . in a suit brought on a policy on or after the second anniversary of the date of issuance of the policy . . . is not valid or enforceable . . . unless:
(1) the insurer has notified the insured of the insurer’s intention to rescind the policy because of the misrepresentation; or,
(2) it is shown at trial that the misrepresentation was:
(A) material to the risk; and,
(B) intentionally made.”
Based on the Legislature’s use of the word “intent,” the insurer further argued Section 705.104 imposed an “intent” requirement for suits brought on a policy more than two years after policy issuance, but if a suit was brought less than two years after the policy was issued, Section 705.051 would apply, and the insurer would no longer have to prove intent.
The Texas Supreme Court, however, once again found the insurer’s arguments unpersuasive. Rather, the Court reasoned that Section 705.104 simply set a different statutory “floor” for a materially different situation and was not therefore inconsistent with a common-law “intent to deceive” requirement. Section 705.104 prevents a misrepresentation defense when the insurer raises the defense on a policy issued more than two years earlier. In such a case, the policy is “incontestable” except for nonpayment of the policy premium.
The Court reasoned it was not for the Legislature to, on the one hand, only specifically require “intent” to void policies more than two years after issuance and, on the other, to allow application of the common law’s “intent requirement” to void policies less than two years after issuance. The Court held the common law’s longstanding “intent” requirement was not repugnant to, nor displaced by, Section 705.051, noting that stare decisis has its “greatest force” when the Legislature could have, but did not, change the common law rule (which was the case here). In other words, the Legislature could have drafted the Texas Insurance Code to explicitly eliminate the common-law “intent to deceive” test, but it did not.
Instead, the Legislature enacted a statute that is silent on intent, which allows courts to overlay a common-law “intent to deceive” requirement. Accordingly, the Texas Supreme Court held that “insurers must plead and prove intent to deceive to avoid contractual liability based on a misrepresentation in an application for life insurance, whether the policy is contestable or not.”
Potential Impact Beyond the Life, Accident, and Health Insurance Realm
Although the Texas Supreme Court’s holding was limited to misrepresentations in applications for life, accident, and health insurance, the Court’s decision will likely impact other parts of the Texas Insurance Code which relate to misrepresentations in other types of policies.
Section 705.051 is limited to life, accident or health policies. Section 705.004, which is not so limited, and applies to insurance policies generally, similarly allows insurers to void policies if the insured makes a misrepresentation in their application as follows: “[a]n insurance policy provision that states that false statements made in the application for the policy or in the policy make the policy void or voidable:
(1) has no effect; and
(2) is not a defense in a suit brought on the policy.”
However, the above will not apply if “it is shown at trial that the matter misrepresented:
(1) was material to the risk; or
(2) contributed to the contingency or event on which the policy became due and payable.”
Like Section 705.051, Section 705.004 does not include the word “intent” or the phrase “intent to deceive.” However, the Dallas Court of Appeals held “intent to deceive” was also a requirement under Section 705.004 and applied that “intent” requirement to a medical malpractice insurance policy. There, the insurer argued there were two distinct “misrepresentation” defenses for insurers seeking to void policies due to an insured’s misrepresentation in the application for the policy: a statutory defense under Section 705.004, and a common-law defense under Mayes. The insurer argued the statutory defense did not require an “intent” element, while the common-law defense did.
The Medicus court acknowledged that the statute did not expressly require, and has never required, the insurer to prove the insured’s “intent to deceive.”
Regardless, the Medicus court rejected the notion that the common-law and statutory misrepresentation defenses were different. Instead, the court held the Mayes test was applicable, thus holding that intent to deceive is an element the insurer must prove to void a policy due to misrepresentations under either the common law or Section 705.004.
The Medicus decision appears consistent with the Texas Supreme Court’s decision in Arce. The Arce Court did not hold there were two different defenses under the statute versus the common law; rather, it held that there was only one misrepresentation defense, the elements of which are governed by the common-law Mayes test, with the Texas Insurance Code simply setting forth the statutory minimum requirements. Thus, the Texas Supreme Court’s holding in Arce indicates that, in whatever instance an insurer seeks to void a policy because of misrepresentation, the common-law test applies, subject to the applicable “floor” set by the Texas Insurance Code.
Absent from Section 705.004, however, is the word “unless,” which was critical to the Texas Supreme Court’s decision in Arce. However, much of the Court’s reasoning remains applicable to Section 705.004 too. Based on the Court’s decision in Arce, the plain text of Section 705.004 is not facially inconsistent with the common law. Section 705.004 arguably sets “necessary,” but not sufficient, requirements to void an insurance policy due to misrepresentation. In other words, policy provisions that make a policy void or voidable based on false statements in the application have no effect and are no defense unless both the insurer satisfies the requirements of Section 705.004 and the common-law Mayes test.
Further, the Medicus court cited several previous decisions from the Texas Supreme Court which applied the “intent to deceive” requirement to various other types of insurance policies, such as homeowner’s insurance, credit disability insurance, motorcycle insurance, aircraft insurance, and disability insurance. Particularly, in Union Bankers Insurance Company v. Shelton the Texas Supreme Court found an insurer must show an insured’s intent to deceive “for any type of insurance.” Given the Court’s broad language in Shelton, and that other Texas courts have followed the Medicus rule that the Mayes test applies to Section 705.004, it appears likely that the Court’s decision in Arce would require “intent to deceive” under Section 705.004.
The Takeaway
The Texas Supreme Court reaffirmed over a hundred years of precedent in its holding that insurers must plead and prove intent to deceive to avoid contractual liability based on a misrepresentation in an application for life insurance. In doing so, the Court reaffirmed the Mayes common-law test. The Texas Supreme Court, and various Texas appellate courts, have applied the common-law test to various types of insurance well beyond the life insurance context. Although not decided, considering stare decisis and the lack of inconsistent statutory language, it is likely Texas courts will apply the Mayes common-law “intent to deceive” requirement to statutory misrepresentation cases outside the life, accident, and health insurance realm.
The practical effect of the Court’s holding is that insurers will be unlikely to obtain summary judgment on a misrepresentation defense, as proof of intent depends on a mental state, which is a fact-intensive question for the jury to decide.
Please contact William de los Santos or any member of the Phelps Insurance team if you have questions or need advice or guidance.
