Earlier this year, the Fourth Circuit upheld a decision of the U.S. District Court for the Eastern District of Virginia, Banner Life Ins. Co. v. Noel, No. 12-1329, 2013 WL 221650 (4th Cir. Jan. 22, 2013), holding that a material misrepresentation made in a life insurance application was a sufficient basis for rescission of a temporary insurance application and agreement (TIAA).
The Banner decision is significant because it highlights the importance of a carefully drafted life insurance application and TIAA, defined in Black’s Law Dictionary as an “independent binder of insurance” that provides temporary coverage while the insurer processes the policy.
In Banner, the insured decedent, Gary Noel (Noel), completed a life insurance application for $1million in coverage pursuant to a 30-year level term life insurance policy (the Policy) with Banner Life Insurance Company (BLI). As part of the application paperwork, Noel completed three individual forms: Part 1, Part 2 and the TIAA. Part 2 of the application requested Noel’s medical history. In contravention of Part 2 of the application, Noel failed to accurately reflect a prior history of elevated liver function, an abnormal abdominal liver ultrasound and a referral by his primary-care physician to see a gastroenterologist.
While Noel misstated his medical history in Part 2 of the application, he responded truthfully to the questions presented on the TIAA – an optional application and agreement for temporary coverage. During the underwriting process, BLI’s consultant learned of Noel’s misstatements in Part 2 of the application and declined to recommend approval pending Noel’s follow-up with a gastroenterologist. Three days after deciding to postpone the application but prior to notifying Noel of its decision to postpone approval, Noel died. After denying a claim by Noel’s widow for benefits under the TIAA, BLI filed a declaratory judgment action seeking rescission of the TIAA or, alternatively, declaring it was only obligated to return the premium.
The question before the court was whether the TIAA, which offered temporary coverage apart from the Policy, was subject to rescission based on material misrepresentations made in Part 2 of Noel’s application for coverage. The court focused on the carefully constructed language of the TIAA, and relied on contract interpretation to arrive at the conclusion that a material misrepresentation made in Part 2 of the application affected BLI’s decision to issue the Policy, allowing for rescission of the TIAA. Noel’s wife argued that the TIAA was a separate policy and misrepresentations in Part 2 of the application did not affect the TIAA.
The court rejected this argument based on the language contained in the TIAA, which stated that BLI was “limited to a return of the Amount Remitted if … any part of the life insurance application or this TIAA contains a misrepresentation (emphasis added). The court held that the phrase “’life insurance application’ … refer[red] to the application as a whole …” and not the application portion of the TIAA. In effect, the court held that a misrepresentation made in the TIAA was unnecessary “given the presence of the disjunctive ‘or’ in the phrase [life insurance application or this TIAA]. …” Therefore, according to the court, BLI “ha[d] the better part of [the] argument” and could “rely on Noel’s responses in Part 2 in order to prove Noel made knowing misrepresentations material to [BLI’s] risk.”
After resolving the issue of whether or not the misrepresentations in Part 2 of the Policy application affected the TIAA, the court moved on to address whether the misrepresentations made were in fact material. Holding that the misrepresentations were material to BLI’s risk, the court stated that the falsities in Part 2 “warranted postponement of issuance of the policy, and that any policy issued would have been on different terms.”
In conclusion, according to the court, the enforceability of a TIAA as part of an application for a life insurance policy may be subject to and conditioned on the information provided in other aspects of the application so long as the material misrepresentation provision unambiguously allows for rescission. Thus, insurers would benefit from including language in the conditional receipt or TIAA that incorporates reference information that the applicant provides in the separate application for life insurance.
Steven Frangoulis provided research assistance for this alert.