Clear, Intentional Misrepresentation on Application Found Immaterial
Although every question on an application for insurance is, axiomatically, material to the decision of an insurer to insure or not insure, a U.S. District Court, applying Connecticut law, concluded that a clear, intentional misrepresentation when responding to application questions was still not “material” and rescission failed.
In Principal National Life Insurance Co. v. Emily C. Coassin, Trustee of the Lawrence P. Coassin Irrevocable Trust dated 06/23/1999, Thomas Gibney, J.C. David Hadden, Trustee of the Lawrence P. Coassin Irrevocable Trust dated 06/23/1999, No. 16-2930-cv, United States Court of Appeals For the Second Circuit (March 5, 2018) the Second Circuit was asked to reverse the trial court’s finding that the misrepresentations were immaterial.
In reaching that rescission was not appropriate, the District Court relied on Pinette v. Assurance Co. of America, 52 F.3d 407 (2d Cir. 1995) (“Pinette”) and FDIC v. Great American Insurance Co., 607 F.3d 288 (2d Cir. 2010) (“Great American Insurance Co.”), the Second Circuit’s most recent decisions on when, under Connecticut law, an insurer may rescind a policy because of an insured’s misrepresentation.
On April 9, 2012, Lawrence Coassin submitted an application to Principal National Life Insurance Company (“Principal”) for a $10,000,000 life insurance policy to replace an existing life insurance policy that he had had with another company. The application contained the following language:
“I represent that all statements in this application are true and complete to the best of my knowledge and belief and were correctly recorded before I signed my name below. I understand and agree that the statements in the application, including statements by the Proposed Insured in any medical questionnaire that becomes a part of this application, shall be the basis of any insurance issued. I also understand that misrepresentations can mean denial of an otherwise valid claim and rescission of the policy during the contestable period.”
On April 17, 2012, Principal issued Coassin the requested life insurance policy on the conditions that he complete, among other things, an Amendment to that Application and a Supplemental Statement of Health.
On April 25, 2012, Coassin completed the Amendment and revised his answer to question 18(j) of the original application. In filling out the application and supplement forms, Coassin knowingly made misrepresentations to Principal. On April 17, 2012, Coassin had seen Dr. Ronald Hirokawa, an ear, nose, and throat specialist, to investigate his vertigo. At the visit, Dr. Hirokawa had arranged further tests and future appointments. All this was contrary to what Coassin had represented in the Amendment and the Supplemental Statement. Unaware of these falsehoods, Principal issued the life insurance plan at a standard rate.
Coassin followed up with three scheduled appointments. First, he sat for a standard hearing test, known as a basic audiological evaluation, and performed normally. Second, he underwent an auditory brainstem response evaluation (“ABR”) and the audiologist reported that “[r]etrococlear pathology,” a problem relating more closely to the brain than to the inner ear, “cannot be ruled out.” Third, he received a videonystagmography (“VNG”) and learned that there “is a sign of [a central nervous system] lesion.”
Because the ABR and the VNG produced abnormal results, Dr. Hirokawa recommended a magnetic resonance imaging (“MRI”). Coassin received an MRI . Coassin sent his MRI to Dr. Samuel Potolicchio, a neurologist who happened to be his brother-in-law, and Dr. Potolicchio told him in a conversation on the telephone that “[t]here was no structural lesion in the brain to suggest tumor.” Dr. Potolicchio explained Coassin’s vertigo by noting that he “most likely had benign positional vertigo” and that “[t]here are exercises that [he] could do, there’s specific therapy that can be done, and medications that could be used.” Significantly, he did not recommend further testing or evaluation.
In November 2012, an MRI with contrast revealed that Coassin had, in fact, developed a brain tumor. In July 2013, Coassin died. Later that year, Coassin’s wife, acting as a trustee of the Lawrence P. Coassin Irrevocable Trust dated 06/23/1999, submitted a claim for benefits under the policy.
Principal performed a contestability review “to provide an underwriting opinion as to what we would have done had all the true facts been known.” As part of this review, Principal investigated Coassin’s application and discovered his misrepresentations. After consulting Principal’s written guidelines, Principal concluded that, had it known the truth, it would have denied Coassin’s application.
THE BENCH TRIAL
After a bench trial, the District Court ruled in favor of Coassin. The Court observed, ‘”Under Connecticut law, an insurance policy maybe [sic] voided by the insurer if’ the insurer ‘prove[s] three elements: (1) a misrepresentation (or untrue statement) by the [applicant] which was (2) knowingly made and (3) material to [the insurer’s] decision whether to insure.'” Principal Nat’l Life Ins. Co. v. Coassin, 196 F. Supp. 3d 356 n.2 (D. Conn. 2016) (quoting Pinette, 52 F. 3d at 409) (second alteration added).
To determine materiality, the District Court further explained, “[A]n answer to a question on an insurance application is presumptively material . . . , and an inquiry into whether the insurer would have issued the policy had the applicant been truthful on the application is therefore appropriate.”
The District Court then found that, contrary to its first statement, concluded that had Principal known the truth, it would have still issued the policy. And, on that basis, it held that the misrepresentations were not material.
According to the District Court, Principal follows written guidelines to determine whether or not to issue a policy. Those guidelines provide that Principal will issue a life insurance policy, even if a person has vertigo and the cause is unknown, if the vertigo has been fully investigated and the symptoms have continued for more than six months. Under Principal’s interpretation of those guidelines, “fully investigated” requires that “there’s no ongoing referrals, recommendations to see additional physicians, [and] there’s a definitive diagnosis.”
On this basis, the District Court concluded that, after Dr. Potolicchio had reviewed Coassin’s MRI, had diagnosed the vertigo as benign positional, and had recommended no further referrals, Principal would have issued a policy at the standard rate. Coassin’s vertigo, which had continued for more than six months, had been fully investigated under Principal’s guidelines as Principal interpreted them.
ANALYSIS & CONCLUSIONS
First, the Second Circuit held that the District Court correctly followed the Circuit’s previous interpretations of state law, which — in the absence of a subsequent state court or Second Circuit decision casting them into doubt — are generally to be treated as controlling. Second, the Second Circuit stated that although it might not have reached the same result, it concluded that the District Court did not clearly err in its factual findings and that the District Court applied the correct legal standard.
Under Connecticut law, a misrepresentation is material when, in the judgment of reasonably careful and intelligent persons, it would so increase the degree or character of the risk of the insurance as to substantially influence its issuance, or substantially affect the rate of premium. Furthermore, Connecticut case law strongly suggests that an answer to a question on an insurance application is presumptively material.
Yet, the District Court did not clearly err in finding that Coassin had rebutted the presumption of materiality by showing that Principal would have issued Coassin a policy, even if it had known of the concealed information.
In the absence of Principal’s guidelines, the District Court might well have had to conclude that the misrepresentations were material and that Principal would not have sold the policy at the standard price but for the false statements. But Principal had guidelines indicating when, in circumstances like these, policies should issue nonetheless.
Documentary evidence introduced at trial supports the District Court’s conclusion that, under its guidelines, Principal would issue a policy to a person with vertigo if the vertigo had been “fully investigated” and the symptoms had continued for more than six months.
Coassin’s vertigo had been “fully investigated,” as those terms were defined by Principal itself. On that basis, the District Court concluded that, had Principal known the facts, it would nonetheless have issued a policy at the standard rate.
Since the District Court applied Connecticut law correctly and did not clearly err in its findings of fact,the Second Circuit affirmed the judgment.
The District Court contradicted itself by finding the lie on the application presumptively material and then concluded that it was not material because the insurer’s guidelines convinced the trial court that it, contrary to the conclusion of the insurer, would have issued the policy had it been told the truth. First the court concludes there was a material misrepresentation and then ignores its own conclusion and finds the misrepresentation was not material. The decision makes no sense.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/
The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.