Many people who are entitled to benefits under a life insurance policy are denied the benefits by the insurance company on the basis that the insured (the person whose life was covered) made a misrepresentation. In life insurance cases where the insurance company denies payment on the basis of misrepresentation, a statute that is weighted in favor of life insurance companies will apply. That statute is T.C.A. §56-7-103.
In a nutshell, that statute provides that a life insurance company may deny the payment of benefits under a life insurance policy if it can prove either of two things: (1) that the insured made a misrepresentation with “actual intent to deceive”; or (2) that the misrepresentation increased the risk of loss to the life insurance company.
The statute is unfair for a couple of reasons. First, it permits the life insurance company to deny benefits if the misrepresentation increased its risk of loss at all — it does not require that it materially increased its risk of loss. Second, it allows a life insurance company to deny benefits if its risk of loss was increased even where the misrepresentation had nothing to do with the insured’s cause of death. For example, if the insured stated on his application that he had no history of heart disease, but did, and died later of skin cancer, nevertheless, the life insurance company can avoid paying if it can prove that the failure to identify a history of heart disease increased its risk of loss (which it will almost certainly be able to do).
A case that illustrates how the statute works in real life insurance litigation is Smith v. Tennessee Farmers (Tenn. Ct. App. 2006). Here is how I would summarize the procedural history of that case: The trial court reached a fair result, but to do so, pretty much had to ignore T.C.A. §56-7-103, and the Court of Appeals of Tennessee reversed the decision of the trial court based on the statute. I think the Court of Appeals reached a reasoned and correct decision, which decision was, unfortunately, compelled by an unfair statute.
In the Smith case, the insured stated “no” on his application to a question which asked whether he had never been arrested or treated for any alcohol or drug related problems. He also answered “no” to the question that asked whether his driver’s license had been revoked or suspended in the past two years. Both of the answers were misrepresentations.
The insured died as the result of a heart attack. The life insurance company denied benefits based on the misrepresentations. The trial court found that the misrepresentations did not increase the risk of loss to the life insurance company and found for the widow of the insured for breach of contract for failure to pay the life insurance benefits.
The Court of Appeals reversed the trial court. At trial, Farmers, the company which had issued the life insurance policy, presented evidence, which was un-rebutted, that its risk of loss was increased by the failure of the insured to answer “yes” to the two questions to which he answered “no.” That was enough proof for the Court of Appeals to hold that the misrepresentations had increased the risk of loss for Farmers.
In Smith, the Court of Appeals made a very important point for life insurance cases where the insurance company relies on the risk of loss defense: To prevail on the risk of loss defense, the life insurance company does not have to prove that it would not have issued the life insurance policy if it had known of the misrepresentation. All it has to show is that it was denied information which it sought and deemed necessary.
T.C.A. §56-7-103 can present a substantial hurdle for those involved in life insurance policy cases. Nevertheless, it is absolutely not insurmountable, and a lawyer experienced in life insurance cases may well be able to obtain a recovery in spite of the statute. So, be sure and consult with one before concluding, based on this blog, that you do not have a case.
Lastly, if the insured’s death occurs during the life insurance policy’s incontestability period, which usually starts two years after the policy was issued, the life insurance company will probably not be able to rely on a misrepresentation in the application as a defense.