TEXAS SUPREME COURT UPHOLDS COMMON-LAW INTENT-TO-DECEIVE RULE FOR MISREPRESENTATIONS IN INSURANCE APPLICATIONS

The Supreme Court of Texas recently held that Section 705.051 of the Texas Insurance Code does not displace the common-law intent-to-deceive rule because the statute prescribes necessary, not exclusive or sufficient, conditions for denying recovery under a contestable policy.  In American National Ins. Co. v. Bertha Arce, No. 21-0843, 2023 WL 3134718 (Tex. 2023), American National Insurance Company (“ANIC”) issued a life insurance policy to Sergio Arce. Thirteen days later, Sergio died from injuries sustained in an automobile accident. Sergio’s mother, Bertha, submitted a claim under the policy as his designated beneficiary. However, ANIC denied the claim and refunded the premium because Sergio’s medical records indicated he had incorrectly answered “no” to an application question inquiring about certain prior medical diagnoses.  Consequently, Bertha sued ANIC for policy benefits and other extra-contractual claims.  

The century-old Texas common-law rule regarding misrepresentations in insurance applications is that insurers cannot avoid liability under an insurance policy based on a misrepresentation unless, among other things, the insurer pleads and proves that the insured intended to deceive or induce the insurer to issue the policy. On the other hand, Section 705.051 of the Texas Insurance Code, which dates back to 1909, provides that a misrepresentation in an application does not defeat recovery under the policy unless the misrepresentation (1) is of a material fact, and (2) affects the risks assumed (i.e., the statute does not include the intent-to-deceive requirement).   

On appeal, ANIC argued that the intent-to-deceive requirement was incompatible with section 705.051's plain language, and an insurer could avoid an obligation to pay on an insurance policy based on an innocent, unknowing, or careless misstatement in an insurance application, so long as the misstatement was of a material fact and either induced the policy's issuance or affected the premium charged. Bertha argued that section 705.051's language did not conflict with the common law and the two have coexisted for more than a hundred years without any substantive modification to the statute.

The Supreme Court of Texas began its analysis by noting that it granted ANIC's petition for review “to resolve an incipient conflict between Texas state cases, which consistently apply the common-law rule, and a handful of federal district court cases that have recently departed from it.”  The Court then framed the issue as follows: “the issue here is not whether the common law alters the statutory language but whether the Legislature's enacted language expressly or effectively forecloses the common law.” The Court held that “section 705.051 is not discordant with the common law, either expressly or by necessary implication.”  The Court reasoned that “section 705.051 states conditions that are necessary, not sufficient, to defeat recovery.”
“Section 705.051 does not guarantee that the insurer can ‘defeat recovery under the policy’ if both of the stated conditions are satisfied; it only guarantees that recovery cannot be defeated if one or the other is not.” “The statute does not inherently or necessarily conflict with settled law requiring pleading and proof of intent to deceive in addition to the statutorily mandated conditions.” “In over a hundred years, there has been no indication that the Legislature disagrees with the common-law approach to enforcement of insurance contracts. Adhering to our precedent, we therefore hold 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. Proof of a material inaccuracy is not enough.”