Abuse of the Incontestability Clause
Life and disability policies usually contain an incontestability clause that prevents an insurer from voiding a contract of insurance after it has been in effect for more than two years. People insured know of the incontestability clauses and do not make claim until the two years have expired. Often, even people who obtain a policy by fraud, succeed in obtaining benefits from an insurer who could have avoided the policy for misrepresentation or concealment but are prevented by the application of the Incontestability Clause.
The Sixth Circuit Court of Appeal was asked to review a district court’s summary judgment for UnumProvident Corp. and Robert A. Correa in George Kutlenios v. Unumprovident Corp., et al, No. 09-2604 (6th Cir. 04/06/2012) after George Kutlenios (Kutlenios) sued Unum when the company rescinded his disability insurance policy. The district court granted Unum’s motion pursuant to the terms of the insurance contract.
On March 1, 2004, Kutlenios applied for disability income insurance from Unum with the help of his insurance agent Correa, who had sold Kutlenios insurance related to Kutlenios’s business for the past fifteen years. Kutlenios attested on the application that he had read the application and his answers to the questions on the application and that his answers were true, complete and correctly recorded on the application. He also acknowledged that he understood that if his answers were incorrect or untrue that Unum could deny his benefits or rescind his policy. Kutlenios left unanswered the medical information portion of the application, which asked 20 questions about his health.
Unum rejected Kutlenios’s application because the medical information section was incomplete. It returned the application to Correa with instructions to complete the application. Kutlenios’s application was resubmitted to Unum with all of the questions answered “no” with the exception of question nine, which was still unanswered. One of the questions on the application with the answer “no” was, “Have you ever been diagnosed by a member of the medical profession as having or treated for. . . injury, disease or disorder of the spine, neck, back, extremities, including muscles, bones, joints, amputations or any chronic painful condition, neuritis, neuralgia or neuropathy, sciatica, arthritis or gout?”
Subsequently, Unum contacted Kutlenios for a “phone history interview” as part of the application process. The Unum agent asked Kutlenios questions about his health including the unanswered question nine, which read “Have you, in the last five years, seen any doctor or medical practitioner not otherwise listed on this application?” Kutlenios answered “no.”
Based on the information provided on the application, Unum issued Kutlenios a disability policy that was effective on May 20, 2004. Unum tendered the policy to Correa, who gave it to Kutlenios. The policy contained an “incontestability clause” that prevented Unum from denying Kutlenios benefits because of a misstatement or omission on the application two years after the policy’s effective date. The Unum clause, however, contained an exception for fraudulent misstatements or omissions.
On June 15, 2006, just two years and three weeks after the policy’s effective date, Kutlenios filed a claim for disability benefits. He stated he was suffering from “ankylosing spondylitis” (A/S), a type of arthritis that causes vertebrae in the spine to fuse together. The physician statement from Dr. David Schwartz that accompanied the claim revealed that Kutlenios first saw Dr. Schwartz for A/S on April 9, 2003, nearly a year before Kutlenios applied for his policy.
After receiving the claim, Unum sought more information about Kutlenios’s medical history. Unum’s investigation revealed that Kutlenios sought treatment for A/S in 1998. It also discovered a December 5, 2000 x-ray and a May 23, 2001 report that indicated that Kutlenios was suffering from spinal issues consistent with A/S.A June 28, 2001 report noted symptoms “consistent with [Kutlenios’s] history of [A/S],” and a July 3, 2001 medical record contained an x-ray report that confirms Kutlenios was suffering from A/S.
In March 2007, Unum denied Kutlenios’s benefits claim and rescinded his policy based on his misstatements on his application regarding his medical history.
Common law has always permitted the avoidance of a contract procured by means of fraud. Fraud occurs when a someone knowingly makes a materially false representation or recklessly makes a materially false representation without regard to its veracity with the intent that the statement be relied on by another party and that other party suffers an injury.
In Michigan an insured is charged with knowledge of the information in an insurance application. Kutlenios, knowing that he was suffering from A/S, omitted the fact on his application. In fact, Kutlenios had suffered from A/S for several years before he applied for a disability policy.
Unum provided sworn testimony that it would not have issued a policy to Kutlenios if it had known about his A/S. Unum, as a result of the falsehoods presented to it by Kutlenios and his agent, suffered an injury when it relied on the misstated medical history. The misrepresentation, made with knowledge of its falsity, to the detriment of another is, by definition, common law fraud. Since Unum proved the fraud there was no need to consider the incontestability clause.
In a concurring opinion, one Justice noted that it was beyond dispute that the application contained misstatements or omissions concerning Kutlenios’s medical history, and those misstatements are attributable to him. Kutlenios argued that the insurance policy’s incontestability clause protected him from Unum’s attempt to rescind. However, the record demonstrated, beyond any legitimate dispute, that Kutlenios was under physician’s care for his A/S during the period from May 2004 to May 2006 and, therefore, Unum was within its rights to void the policy based on the misstatements in the application (even if innocently made).
Mr. Kutlenios, knowing he was suffering from a serious disease that had, or would soon, make him totally disabled. He also knew, if he told the truth to an insurer they would not issue a policy of disability insurance to him because the disability would have been a certainty. Insurance can only insure against contingent or unknown events. First he tried to get the policy without answering any of the health questions. When that failed he answered all but one of the health questions in the negative. That failed again and when he was called by the insurer he responded in the negative although he was simultaneously treating with his physician for the disease that would have disqualified him for the insurance.
Unum properly rescinded the policy and the court properly affirmed the rescission whether for fraud or innocent misrepresentation.
In Michigan, the Insurance Code Section 500.4503 makes a felony for a person to present, cause to be presented, or prepare with knowledge or belief that it “will be presented to or by an insurer or any agent of an insurer, or any agent of an insurer, reinsurer, or broker any oral or written statement knowing that the statement contains any false information concerning any fact material to an application for the issuance of an insurance policy.” (Emphasis added)
The findings of the Sixth Circuit could be sufficient to conclude that a felony was committed when Mr. Kutlenios told Unum he had not seen a physician and did not disclose that he was suffering from A/S. The Justices should have reported their findings to the local prosecutor.
© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012”; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.
Since publishing this post I was provided with a copy of Plaintiff George Kutelenios’ second amended complaint and motion to allow the filing of the second amended complaint.
The allegations, if proved, will establish that Mr. Kutelenios was caused to make the misrepresentations relied upon by the Sixth Circuit Court of Appeal, by his insurance agent.
The motion to amend the complaint states:
The evidence demonstrates that Defendant Correa knew that Plaintiff suffered from ankylosing spondylitis and that he had purchased a disability policy from Trustmark during 1983 or 1984. Defendant Correa knew that Unum would not have issued a policy based on Plaintiff’s health, or that it would have issued a rider excluding the ankylosing spondylitis. Defendant Correa knew that Plaintiff’s available monthly disability benefit through Unum would have been significantly reduced based upon Plaintiff’s thenexisting Trustmark disability policy. Defendant Correa knew that Unum was not going to require Plaintiff to undergo a medical exam, given the monthly disability benefit that his income allowed, yet, on March 1, 2004 when he and Plaintiff met to prepare the Unum application, Defendant Correa misrepresented to Plaintiff that a medical exam was going to take place. Defendant Correa knew that that representation was false on March 1, 2004; it remained false when Unum returned the application to him in order to secure answers to the missing Part 2 medical questions; and Defendant Correa continued to know that it was false when he took it upon himself to answer the Part 2medical questions instead of contacting Plaintiff to secure appropriate answers.
Defendant Correa knowingly misrepresented to Plaintiff that the Unum policy appropriately met his needs and that a medical exam would be performed with the intent that Plaintiff rely on those assertions, which he did. Plaintiff suffered injury as aresult of Defendant Correa’s misrepresentation, insofar as he believed that he purchased a secure policy, but after realizing what had occurred, e.g., Unum’s denial and learning the true extent of Defendant Correa’s action, Plaintiff has experienced depression, anxiety, frustration, and anger, while Defendant Correa has collected over $10,000.00 in sales commissions.
I don’t know what is true. If the allegations of the second amended complaint are true then the person who lied, contrary to the findings of the Sixth Circuit, was the agent. If he did so he violated his duty of good faith to the insured.
I hope attorney Ilana S. Wilenkin will keep me posted on the results of the case.
My earlier conclusion that the findings of the Sixth Circuit could be sufficient to conclude that a felony was committed when Mr. Kutlenios told Unum he had not seen a physician and did not disclose that he was suffering from A/S. Similarly, if the misrepresentation was not that of Mr. Kutlenios but rather by his agent, a crime was still committed and the court should consider reporting the result of the fraud case — now pending — to the local prosecutor.
Misrepresentation in an application is always wrong. If the person insured told his agent the truth and the agent presented false facts to the insurer to allow the insurer to rescind, then the agent needs to be punished for breaching the duty to act fairly and in good faith.