Texas Supreme Court To Decide Whether “Intent to Deceive” Is Required To Void Policy For Insured’s Misrepresentation
On Nov. 18, 2022, the Texas Supreme Court announced it will review the Seventh Court of Appeals’ decision in Arce v. Am. Nat'l Ins. Co., a 2017 case and subsequent appeal involving a first-party coverage dispute under a life insurance policy. In that case, the court held insurance carriers seeking to rescind or void a policy based on an insured’s misrepresentation in its application for a life, accident, or health insurance policy must prove the insured’s intent to deceive, even though the applicable statute is silent on whether intent to deceive is required.
While the case is limited to life, accident, and health policies, it could have far-reaching consequences for other types of policies, as a similar section of the Texas Insurance Code (which applies to misrepresentations in applications for insurance policies generally) is also silent on whether “intent to deceive” is required.
Common-Law History of the ‘Intent to Deceive’ Requirement
Nearly forty years ago, in Mayes v. Mass Mut. Life Ins. Co., the Texas Supreme Court established five elements an insurer must plead and prove under a common-law misrepresentation cause of action or defense to void a policy due to an insured’s misrepresentation. As relevant here, the test requires the insurer to prove the insured had an “intent to deceive” when making the misrepresentation before the insurer can void the policy. In creating this test, the Court relied on longstanding precedent from Texas which also required intent to deceive. However, when the Texas Legislature recodified the Texas Insurance Code on April 1, 2005, it did not include any requirement that the insurer prove the insured’s “intent to deceive” in the section related to misrepresentations, in spite of this long-standing common-law requirement.
In Arce v. Am. Nat'l Ins. Co., the Seventh Court of Appeals rejected an insurer’s argument that the Texas legislature’s omission of an intent requirement in Texas Insurance Code Section 705.051 eliminated the “intent to deceive” requirement. The court adopted the insured’s argument that the five-part common-law Mayes test remained applicable after the Texas Legislature’s recodification of the Code. The court reasoned that other Texas cases continued to apply Mayes’ common-law test even after the recodification, and the Code expressly “did not change substantive law.” Even prior to recodification, the Code did not have an “intent to deceive” requirement, which was purely a product of the common law. Thus, the court determined the Mayes test’s “intent to deceive” requirement remained applicable.
In its briefing to the Texas Supreme Court, American National argued that the Seventh Court of Appeals had erred, asserting “intent to deceive” is not an element it had to prove because the word “intent” is nowhere in the text of the statute. American National argued the word “intent” only appears twice in Section 705, both times in Section 705.104. Texas Insurance Code Section 705.104 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.” (emphasis added). Based on the legislature’s use of the word “intent,” American National 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.
In making its argument, American National also relied on Colonial Penn. Life Ins. Co. v. Parker, a recent federal case, which the Seventh Court of Appeals had previously declined to follow, categorizing it as an “undisputed outlier” because it could not be reconciled with other Texas authorities. In that federal case, the Southern District of Texas held an insurer did not have to prove an insured’s “intent to deceive,” because the recodified Texas Insurance Code Section 705.051 does not contain an intent requirement, and the Texas Legislature was “clearly aware of the Mayes [common-law] test yet opted not to include an intent requirement.” The Southern District of Texas noted there were no cases, as of January 2019 (when it issued its opinion), that clearly reconciled the inconsistency between the Mayes common-law test’s intent requirement and the lack of an explicit intent requirement in the updated Insurance Code.
Just like the Seventh Court of Appeals’ recent Arce decision, the majority of Texas state and federal courts before it have required an “intent to deceive” under Section 705.051. In Bertha Arce’s appellate briefing in Arce, Bertha Arce cited seven post-recodification federal district court cases which imposed the “intent” requirement. Further to this point, the Texas Supreme Court has had the opportunity to review two Texas appellate decisions that held an insurer must prove “intent to deceive,” but denied certiorari in both.
The Texas Supreme Court has granted American National’s petition for review and set the case for oral argument, which the Court will hear on Jan. 12, 2023.
Potential Impact Beyond the Life, Accident, and Health Insurance Realm
Although the question before the Texas Supreme Court is limited whether “intent to deceive” is an element of Texas Insurance Code Section 705.051, the Court’s decision will likely impact Texas Insurance Code Section 705.004 as well.
Section 705.051 is limited to life, accident or health policies. Section 705.004, which is not limited to life, accident, or health policies, and applies to insurance policies generally, similarly allows insurers to void policies where the insured makes a misrepresentation in their application. That section provides 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” unless “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, in Medicus Ins. Co. v. Todd, 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 does not require an “intent” element, while the common-law defense does. 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 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.
In support of its decision, the Medicus court cited to the Texas Supreme Court’s decision in Union Bankers Ins. Co. v. Shelton and noted several Texas cases applying the “intent” requirement to various types of insurance policies, such as homeowner’s insurance, credit disability insurance, motorcycle insurance, aircraft insurance and disability insurance. Moreover, in Shelton, the Texas Supreme Court found an insurer must show an insured’s intent to deceive “for any type of insurance.” Some of these cases to which the Medicus court cited applied the common-law Mayes test without reference to the statute at all. While the Texas Supreme Court has not specifically addressed whether the Mayes test applies to Section 705.004, other Texas courts have followed the Medicus interpretation that it does. Further, the cases referred to in Shelton indicate Texas common law has universally applied an “intent” requirement regardless of the type of insurance policy at issue.
Because the Texas Supreme Court will address whether the “intent to deceive” requirement of Mayes applies to Section 705.051, this may indirectly impact whether Texas courts continue to apply Mayes to Section 705.004. Should the Texas Supreme Court no longer require “intent” for Section 705.051, it stands to reason that the Court would not be inclined to overlay an “intent” requirement on other provisions of the Insurance Code that are similarly missing this language.
Potentially Far-Reaching Consequences
While the present question for the Texas Supreme Court is focused on life, accident, and health insurance policies, the Court’s holding may well apply to statutory misrepresentation claims under myriad other types of policies where the insurer must prove the “intent to deceive.” Up to this point, insureds have argued in defense of such misrepresentation claims that an insurer may not obtain summary judgment as to the “intent to deceive” because proof of intent depends on a mental state that is a fact-intensive question for the jury to decide. Should the Texas Supreme Court confirm that the Texas Insurance Code requires strict proof as to “intent to deceive,” such a decision may severely limit an insurer’s ability to win these cases at the summary judgment stage. On the other hand, should the Court follow the insurer’s plain textual argument, insurers pursuing statutory misrepresentation claims will be more likely to succeed on summary judgment, as the fact-intensive question of intent will no longer be in play.
Please contact William de los Santos or any member of the Phelps Insurance team if you have questions or need advice or guidance.
