Agent Insured May Not Avoid Fraud Defense

Agent, as Insured, Claimed Knowledge of Agent/Insured’s Fraud is Imputed to the Insurer

An insurer asserted a fraud defense to claims for death benefits under life insurance policies.

With what the Court of Appeal called “some unusual twists” Security National Life Insurance Company (Security) issued two life insurance policies to its own insurance agent, Destiney Kashia Xiong (Destiney), insuring the life of Wang Y. Xiong (Wang), a man Destiney claimed was her father. When Wang died, Security denied Destiney’s claims and attempted to rescind the policies, but it did not then allege that Destiney had committed any fraud. In Destiney Kashia Xiong v. Security National Life Insurance Company, No. 2019AP2320, Court of Appeals of Wisconsin, District III (February 22, 2022) the Court of Appeal resolved the issues raised and allowed the case to go to trial with the insurer asserting a fraud defense.


Destiney sued for breach of contract and various torts. Security attempted to plead a fraud defense based on circumstances it claims to have learned of after Wang’s death-including that Wang was not Destiney’s father and that he was unaware the policies were even issued.

The circuit court granted partial summary judgment to Destiney on her breach of contract claim because it determined that Security did not comply with statutory notice requirements before attempting to rescind the policies. See Wis. Stat. § 631.11(1)(b), (4)(b) (stating that an insurer must, within specified time frames, notify the policyholder that the insurer intends to rescind or defend against a claim on the basis of fraud).

In 2016, while Destiney was employed as a Security insurance agent, she applied for and was issued two Security policies, together insuring Wang’s life for $35,000. The policies are materially identical except as to their benefit amounts.

For each policy, Destiney is the policyholder and beneficiary. The applications (incorporated into the policies) state that Destiney is Wang’s child; that they share an address in Eau Claire, Wisconsin; and that Wang does not have any of the medical conditions listed on the applications.

Wang died of a heart attack in February 2017, less than a year after he policies were issued.  Security denied the claim and attempted – improperly – to rescind the policy. Destiney sued asserting a breach of contract claim for $35,000. In its answer Security raised several affirmative defenses, including that Destiney had “engaged in fraudulent conduct to procure the issuance of the policies.”

Referencing various discovery materials and Wang’s death certificate (listing his residence in the State of Arkansas), Security argued that there were disputed material facts as to whether Wang was in fact Destiney’s father; whether Wang lived in Wisconsin with Destiney; whether Wang was physically present with Destiney in Eau Claire when the applications were completed and submitted; and whether Wang had an undisclosed heart condition. According to Security, Destiney may have unilaterally acted as agent, policyholder, and beneficiary to secure policies insuring a man who was not her father and who lacked any knowledge of the policies.

Security further represented that, over the course of its investigation, it had learned that Destiney had entered into a consent order in Minnesota revoking her Minnesota agent’s license. That order was based on allegations that, while an agent, Destiney “sold a life insurance policy, which was delivered, signed, dated and finalized on the date the insured passed away” and that she had entered into an agreement with her client-the surviving spouse of the insured-to split the death benefit proceeds. That evidence is evidence of a willingness on the part of Destiney to defraud a life insurer.

The circuit court agreed with Destiney’s position and determined that Security was statutorily barred from raising fraud as an affirmative defense.


Summary Judgment Was Inappropriate on Destiney’s Contract Claim.

The circuit court granted summary judgment on Destiney’s breach of contract claim based on Security’s failure to comply with the notice requirements of Wis.Stat. § 631.11(4)(b).

For purposes of the appeal the Court of Appeal assumed that the December 2017 letter was an improper attempt to rescind the policies.  However, Security’s sending the December 2017 letter does not affect its ability to raise a fraud defense based on “suspicious circumstances” it claims to have learned about after it sent the letter.

Destiney may or may not have a specific cause of action stemming from Security’s sending the December 2017 letter, but she has failed to show why Security’s subsequently asserted fraud defense is barred. Accordingly, the Court of Appeal concluded that Security’s attempted rescission has no bearing on its ability to assert a fraud defense.

Destiney also failed to establish sufficient facts as to when Security learned of the fraud, so as to entitle her to summary judgment on the grounds that Security failed to comply with the sixty-day notice requirement of Wis.Stat. § 631.11(4)(b).

Because Security raises a viable defense to Destiney’s contract claim, the circuit court erred in granting her summary judgment on that claim and Security can assert her fraud as a defense.

Security Did Not Have Constructive Knowledge Of Any Alleged Misrepresentations That Destiney Made To Procure The Policies.

Destiney argued that Security cannot assert a fraud defense because Security had constructive knowledge of any misrepresentations she made to procure the policies. She claimed that she was Security’s agent it must act as if her knowledge was knowledge attributed to Security. Essentially, as an agent, she claimed she had the right to defraud the insurer with impunity.

Wisconsin Stat. § 631.11(4)(a) protects a policyholder whose misrepresentation might ordinarily provide grounds for rescission or avoidance, where the insurer knew or should have known of the misrepresentation when it issued the policy. This paragraph provides that a misrepresentation cannot “constitute[] grounds for rescission of, or affect[] an insurer’s obligations under, an insurance policy if at the time the policy is issued the insurer has either constructive knowledge of those facts under [Wis. Stat. § 631.09(1)] or actual knowledge.”

The Court of Appeal concluded that Wis.Stat. § 631.09(1) should not operate to permit an agent and policyholder together to misrepresent some material fact otherwise unknown to the insurer. Therefore, § 631.09(4) provides that subsec. (1) does “not apply if the agent and the policyholder or insured acted in collusion to deceive or defraud the insurer.” The plain purpose of subsec. (4) is to protect the insurer from its agent’s malfeasance. That purpose can only be carried out by construing subsec. (4) to extend to the unusual circumstances before the court, concerning allegations that an agent fraudulently obtained a policy for herself as both policyholder and beneficiary.

Thus, where an individual acts in a dual capacity as both agent and policyholder to allegedly defraud the insurer, the “agent” may be considered to have “colluded” with the “policyholder.”


Wisconsin Stat. § 631.11(4)(b) does not preclude Security from asserting a fraud defense to Destiney’s claims, even given that Security’s earlier attempt at rescission may have been improper. In addition, Destiney’s knowledge of any fraud is not imputed to Security under Wis.Stat. § 631.09(4), which the Court of Appeal construed to prohibit the imputation of knowledge to an insurer where a dual agent/policyholder essentially “colludes” with herself.


Destiney’s claims are pure “chutzpah” – unmitigated gall – where she asserts a right to defraud an insurer she serves as an agent. Fortunately the Wisconsin Legislature understood the danger of such a claim and placed in the statute a provision where an insurer has the right to assert fraud as a defense when the agent/policyholder “colludes” with herself to defraud the insurer. The trial, if it goes forward, will be very interesting. In addition the court should have reported Destiney to the local authorities for attempting to use the courts to perpetrate a fraud. Of course, the problem would have been resolved if the insurer had completed a thorough investigation before denying the claim.

© 2022 – Barry Zalma

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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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