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Misrepresentation and Life Insurance: When Can Incorrect Information on an Application Result in a Denied Claim?

Under Tennessee law, a life insurance company can deny a claim for benefits if the insured individual was less than honest in his or her insurance application. Specifically, Tennessee Code Annotated § 56–7–103 provides that a misrepresentation in an application for an insurance policy can void the policy if the misrepresentation “increases the risk of loss.”

So what exactly does that mean?

Let’s take an easy example: If the applicant fails to disclose a known heart condition on his or her application, and then dies of a heart attack, the life insurance company likely will be able to deny any claim for the proceeds.

What happens, however, if the applicant dies of a heart attack after failing to disclose a DUI conviction? The Tennessee Court of Appeals dealt with these same facts in Smith v. Tenn. Farmers Life Reassurance Co. (2006) and held that the insurance company’s refusal to pay benefits under the policy was allowed under Tennessee law.  As the court noted, the misrepresentation in that case did not need to involve a “hazard that actually produced the loss in question.” Rather, the issue was whether the misrepresentation would have increased the risk of loss.  In Smith, the court determined that the insured’s misrepresentation influenced the insurance company’s decision to issue the policy and, therefore, increased its risk of loss.

It may seem like, based on the ruling in Smith, that it is fairly easy for life insurance companies to use a supposed misrepresentation on an application as a reason to deny benefits.  Another Tennessee Court of Appeals decision, however, indicates that life insurance companies will have to support their misrepresentation claims with direct evidence, and cannot simply ask the court to infer that the applicant was less than forthcoming on his or her application.

In Williams v. Tennessee Farmers Life Reassurance Co. (2012), the defendant-insurance company denied benefits to the beneficiary, claiming that the decedent, Barbara Williams, made several misrepresentations on her life insurance policy.  The defendant placed particular emphasis on Ms. Williams’ failure to state affirmatively that she had taken methadone in response to a question on whether she had ever been “arrested and/or treated for any alcohol or drug related problems.” This alleged misrepresentation was critical because Ms. Williams died after overdosing on methadone.

In support of its misrepresentation defense, the insurance company pointed to a reference to Ms. Williams’ “apparent history of narcotic addiction” in an emergency room report after she suffered a car accident. It also pointed to a note from a doctor indicating that he had been informed that Ms. Williams “goes to the methadone clinic.”

The court, however, rejected the defendant’s argument that Ms. Williams made material misrepresentations in answering questions in the application, reasoning as follows:

  • First, the court found it “intriguing” that, even though the defendant claimed that methadone use constituted a serious underwriting risk, it never actually asked Ms. Williams any questions about methadone use in her application.   The court then noted that it can “use the questions an insurance company asks on its application” to determine what the insurance company considers to be relevant to its risk of loss. In essence, what the court was saying was that if an applicant’s potential methadone use was so important, the insurance company should have asked about it in its application.
  • Second, the court noted that the defendant’s evidence that Ms. Williams used methadone as a treatment for a drug problem was “circumstantial.” Here, it appears the court wanted medical records showing Ms. Williams was prescribed methadone as treatment for a drug problem.
  • Third, the court noted that Ms. Williams may have used methadone, not to treat a drug problem, but to help deal with the serious, chronic pain issues that she did disclose. Therefore, even if she did use methadone, she was not required to disclose that fact in a question about whether she had been treated for drug use.

Life insurance policy cases involving misrepresentation claims are complex and fact-specific. If there is a takeaway from the Williams case, however, it is that, even if it appears likely that an applicant made a misrepresentation on his or her application for insurance, a court will not necessarily make that inference. Rather, a court may require direct evidence of an actual misrepresentation that increased the defendant’s risk of loss.