Insurer Able to Rescind Policy for Material Misrepresentations in the Application, Per Oregon Court

Last week, the Oregon federal district court issued an opinion in Settlemyer v Farmers New World Life Ins. Co., Case No. 14-cv-00356-AA, 2014 WL 5591013 (D.Or. Nov. 3, 2014), addressing whether an insurance company was entitled to rescind a life insurance policy based on misrepresentations in the policy application.  In February 2011, the insured applied for a life insurance policy.  In the policy application, the insured represented that he had no past history of drug or alcohol abuse, and the only health condition he had been treated for in the preceding seven years was high blood pressure.  The insured expressly acknowledged that the application would become part of the policy if issued by the life insurance company, and that the statements and answers in the application were true and complete to the best of his knowledge.  Later in February 2011, the insurance company issued the life insurance policy based on the information provided by the insured in the application.

The insurance company received notice in November 2012 that the insured died.  The beneficiary’s claim under the policy was subject to investigation because the insured died within the two year contestability period contained in the policy.  The following month, in December 2012, the insurance company received the insured’s medical records which revealed that the insured engaged in significant illegal drug use within the seven years prior to completing the application.  The records also revealed that, at the time of his death, the insured was taking several prescription medications and was being treated for a heart murmur and anxiety.  In January 2013, the insurance company received the insured’s death certificate which listed the official cause of death as accidental positional asphyxia due to mixed drug toxicity relating to use of alcohol and oxycodone.

After receiving the insured’s medical information, the insurance company contacted the agent to determine whether the insured revealed this information during the application process.  The agent confirmed that she had no prior knowledge of the medical issues.  The agent also reiterated that she had asked all of the questions contained in the application and confirmed that the insured provided the information in the application.

Based on the results of the information obtained during the investigation, in April 2013, the insurance company determined that the life insurance policy should be rescinded due to the insured’s material misrepresentations.  In March 2014, the beneficiary of the policy filed suit against the life insurance company asserting Oregon state law claims for negligence per se, breach of contract, and breach of the implied covenant of good faith and fair dealing.  The insurance company moved for summary judgment on each of the beneficiary’s claims.

The court began its analysis by citing ORS 742.013, which permits a life insurance company to rescind a policy if it is able to establish that it issued the policy in reliance on an insured’s false representations, which were material to the insurer’s decision to accept the risk.  Under Oregon law, in order to establish the necessary reliance to rescind the policy, the insurance company must establish (1) reliance in fact, (2) justifiable reliance under the circumstances, and (3) the insurer’s right to rely on the representations.  After considering the evidence detailed above, the district court determined that the insurance company was legally entitled to rescind the policy based on the insured’s material misrepresentations.  In particular, the court found that the insured’s failure to disclose all of his medical conditions constituted concealment of material information and that he misrepresented his history of drug abuse.  For these reasons, the district court granted the insurance company’s motion for summary judgment on the beneficiary’s contractual claims.  In addition, the beneficiary conceded that Oregon law did not support a claim for negligence per se under the circumstances.

The attorneys of Maloney Lauersdorf Reiner have advised clients regarding life insurance issues.  Please feel free to contact us with any questions about this case or any other issue addressed in our Insurance Coverage Blog.

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