Union Bankers Ins. Co. v. Shelton

• Decision Date: 22 November 1994
• Docket Number: No. D-3930,D-3930
• Citation: 889 S.W.2d 278
• Parties: 38 Tex. Sup. Ct. J. 95 UNION BANKERS INSURANCE COMPANY, Petitioner, v. Thomas D. SHELTON and Ann Shelton, Respondents.
• Court: Texas Supreme Court

Page 278

889 S.W.2d 278

38 Tex. Sup. Ct. J. 95

UNION BANKERS INSURANCE COMPANY, Petitioner, v. Thomas D. SHELTON and Ann Shelton, Respondents.

No. D-3930.

Supreme Court of Texas.

Argued Dec. 15, 1993.

Decided June 22, 1994.

Rehearing Overruled Sept. 15, 1994.

Concurring Opinion of Chief Justice

Phillips Nov. 22, 1994.

Joe R. Greenhill, Bob E. Shannon, Patrick O. Keel, Austin, for petitioner.

Edward L. Merritt, Gregory P. Grajczyk, David O. Nobles, Longview, for respondents.

HIGHTOWER, Justice, delivered the opinion of the Court, in which DOGGETT, GAMMAGE and SPECTOR, Justices, join.

This case requires that we determine (1) whether an insured's intent to deceive must be proved in order for an insurance company to successfully raise a defense of misrepresentation to a breach of contract action in connection with the cancellation of an individual health insurance policy within two years of the date of its issuance when the cancellation is based upon the insured's misrepresentation in the application for insurance; and (2) whether a cause of action for breach of the duty of good faith and fair dealing exists when an insurer cancels an insurance policy without a reasonable basis. We conclude that (1) an insured's intent to deceive is required for an insurer to cancel an individual health insurance policy within two years of the date of its issuance on the grounds of a misrepresentation in the application and (2) the duty of good faith and fair dealing extends to an insurer's cancellation of a policy.

Thomas and Ann Shelton sued Union Bankers Insurance Company ("Union Bankers") and its agent Donny Stone ("Stone") after Union Bankers cancelled Mr. Shelton's health insurance policy on the basis of an alleged misrepresentation in his application. Among other things, the Sheltons alleged that Union Bankers breached the contract and the duty of good faith and fair dealing by improperly cancelling the policy. The trial court rendered a take-nothing judgment in favor of Union Bankers and Stone. The court of appeals reversed and remanded the case to the trial court for a new trial concerning the duty of good faith and fair dealing. 853 S.W.2d 589. For the reasons explained herein, we affirm the judgment of the court of appeals.

I.

In April 1988, Mr. Shelton applied to Union Bankers for a health insurance policy. Mr. Shelton completed the application form with Stone's assistance. In response to certain medical history questions, Mr. Shelton indicated that he had never been treated for, and had no indications of, any disorders of the skeletal or muscular systems. Union Bankers issued a health policy to Mr. Shelton on April 9, 1988.

In November 1988, seven months after the policy was issued, Mr. Shelton underwent total hip replacement surgery to correct necrosis in his left hip joint. Shortly thereafter, the Sheltons filed a claim for benefits under the Union Bankers policy. Union Bankers concluded that the necrosis was an undisclosed pre-existing condition, notified Mr. Shelton that it was denying the claim, and requested that Mr. Shelton execute a rider specifically excluding hip disorders. When he refused to sign the rider, Union Bankers refunded all premiums and cancelled the policy on the ground that the failure to disclose the hip condition was a material misrepresentation in the application for insurance.

The Sheltons sued Union Bankers and Stone, alleging breach of contract, violations of the Deceptive Trade Practices Act and Texas Insurance Code, and breach of the duty of good faith and fair dealing. The jury answered all questions against the Sheltons, except that the jury failed to find that Mr. Shelton intended to deceive Union Bankers when he made the misrepresentation. Based on the jury's verdict, the trial court rendered a take-nothing judgment in favor of Union Bankers and Stone. The court of appeals reversed, holding that because the jury failed to find that Mr. Shelton intended to deceive Union Bankers by misrepresenting his condition, Union Bankers breached the contract as a matter of law when it cancelled the insurance policy. The court of appeals remanded the case to the trial court for a new trial concerning whether Union Bankers breached the duty of good faith and fair dealing in connection with its cancellation of Mr. Shelton's policy. ¹

II.

Union Bankers contends that the jury's failure to find that Mr. Shelton intended to deceive Union Bankers is irrelevant because article 3.70-3(A)(2)(a) of the Texas Insurance Code implies that an insurer may cancel a health insurance policy within two years from the date of its issuance on the basis of an insured's innocent misrepresentation in the application for insurance. We disagree. Article 3.70-3(A) sets forth minimum standards for provisions that must be contained in each accident and sickness policy delivered or issued for delivery to any person in this state. ² See TEX.INS.CODE ANN. art. 3.70-3(A) (Vernon 1981). Among the required provisions contained in the policy issued to Mr. Shelton, is the following clause:

Time Limit on Certain Defenses: (a) After two years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such two-year period.

(The foregoing policy provision shall not be so construed as to affect any legal requirement for avoidance of a policy or denial of a claim during such initial two-year period, nor to limit the application of Section 3(B), (1), (2), (3), (4), and (5) in the event of misstatement with respect to age or occupation or other insurance.)

Id. art. 3.70-3(A)(2)(a). ³

The primary rule in statutory interpretation is that a court must look to the intent of the legislature and must construe the statute so as to give effect to that intent. Monsanto Co. v. Cornerstones Mun. Util. Dist., 865 S.W.2d 937, 939 (Tex.1993); Knight v. International Harvester Credit Corp., 627 S.W.2d 382, 384 (Tex.1982). When determining legislative intent, the courts may look to the language of the statute, legislative history, the nature and object to be obtained, and the consequences that would follow from alternate constructions. Sharp v. House of Lloyd, Inc., 815 S.W.2d 245, 249 (Tex.1991) (considering the nature and object of the act and the consequences of alternate constructions); Irving Fireman's Relief & Retirement Fund v. Sears, 803 S.W.2d 747, 750 (Tex.App.--Dallas 1990, no writ) (considering the language of the statute and the legislative history).

The language of article 3.70-3(A)(2)(a) derives from section 3(A)(2)(a) of The Uniform Individual Accident and Sickness Policy Provision Law ("section 3(A)(2)(a)") which was promulgated by the National Association of Insurance Commissioners ("Commissioners") in June 1950. ⁴ Note, Insurance Law--Accident and Sickness Policy Provisions Law--Time Limit on Certain Defenses, 27 N.Y.U.L.REV. 670, 671 n. 4 (1952) [hereinafter Insurance Defenses ]. Section 3(A)(2)(a) was the first nationwide effort to create a type of incontestability provision for all accident and sickness policies. Id. at 674. ⁵

The phrase "except fraudulent misstatements" represents the "prime feature of compromise in the time limit provisions," functioning to distinguish section 3(A)(2)(a) from the incontestability provisions traditionally contained in life insurance policies, which provide that the policy is not contestable after two years for any reason. Id. at 678-79; Charles L. Levy, Policyholder Misrepresentation and Rescission, The Second Annual Ultimate Insurance Seminar 22 (State Bar of Texas 1993) ("The language relat[ing] to fraud being necessary after the first two years makes sense when one considers that life insurance policies are typically not contestable after two years for any reason."). ⁶

It appears that the Commissioners did not intend for section 3(A)(2)(a) to apply to an insurer's right to void its policy or deny a claim during the initial period. Insurance Defenses, 27 N.Y.U.L.REV. at 679. This intent is expressed in both parts of section 3(A)(2)(a). The first part provides that accident and sickness policies may not be rescinded after three years from issuance, except for fraudulent misstatements. MODEL INSURANCE LAWS REGULATIONS & GUIDELINES, Uniform Individual Accident and Sickness Policy Provision Law, § 3(A)(2)(a) (National Association of Insurance Commissioners 1977). The second part expressly states that the foregoing provision governing rescission after three years does not affect the law of rescission within the initial three year period. Id.; see Taylor v. Metropolitan Life Ins. Co., 106 N.H. 455, 214 A.2d 109, 115 (1965) (recognizing that the New Hampshire statute by its terms applies only to a loss incurred or to disability commencing after the expiration of two years from the date of issuance of the policy); see also Insurance Defenses, 27 N.Y.U.L.REV. at 679-80. We find it significant that the Commissioners considered the matter of such importance that they took the additional step of directing the judiciary not to interpret section 3(A)(2)(a) as affecting the law of rescission within the initial three year period.

We believe that this conclusion equally applies to article 3.70-3(A)(2)(a), which mirrors the language of section 3(A)(2)(a), except that it requires an intent to deceive after two years, not three. Thus, construing article 3.70-3(A)(2)(a) to imply that an insurer may cancel a health insurance policy within two years from the date of its issuance on the basis of an innocent misrepresentation conflicts with the apparent intent of the Commissioners and the Texas legislature as expressed in the additional provision concerning the avoidance of a policy or denial of a claim during the initial two-year period.

We hold that article 3.70-3(A)(2...