Am. Nat'l Ins. Co. v. Arce

• Decision Date: 28 April 2023
• Docket Number: 21-0843
• Parties: American National Insurance Company, Petitioner, v. Bertha Arce, Individually and as Representative of All Others Similarly Situated, Respondent
• Court: Texas Supreme Court

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American National Insurance Company, Petitioner,
v.
Bertha Arce, Individually and as Representative of All Others Similarly Situated, Respondent

No. 21-0843

Supreme Court of Texas

April 28, 2023

Argued January 12, 2023

On Petition for Review from the Court of Appeals for the Seventh District of Texas

OPINION

JOHN P. DEVINE, JUSTICE

For more than a century, Texas courts have applied the settled rule that insurers may not avoid liability under an insurance policy based on a misrepresentation in an insurance application unless, among other things, the insurer pleads and proves the insured intended to deceive or induce the insurer to issue the policy. The primary issue before us is whether the common-law scienter requirement is repugnant to the plain language of section 705.051 of the Texas Insurance Code,

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which provides that "[a] misrepresentation in an application for a life, accident, or health insurance policy does not defeat recovery under the policy unless the misrepresentation: (1) is of a material fact; and (2) affects the risks assumed." Section 705.051, which dates back to 1909, has long functioned side by side with the common law, having been reenacted and recodified without substantive change, most recently in 2003.

We hold that section 705.051 does not displace the common-law rule because the statute prescribes necessary, not exclusive or sufficient, conditions for denying recovery under a contestable policy. Finding no compelling reason to otherwise repudiate clear and longstanding precedent, we affirm the court of appeals' judgment in part and remand the case to the trial court. We also reverse the court's judgment in part and render judgment that, as a matter of law, the insurer was exempt from complying with the ninety-day notice provision in section 705.005.

I

During a chance encounter with an insurance agent at a motorcycle shop, Sergio Arce, Jr. spontaneously applied for a $25,000 life insurance policy with American National Insurance Co. (ANIC). The application process consisted of ANIC's agent reading questions to Arce from an electronic application form and documenting his responses using a computer tablet. Arce disclosed some adverse medical history and provided the name and address of his medical provider, but the agent recorded his answers to all other medical-history questions as "no." At the conclusion of the application interview, Arce electronically signed the application form, affirming that his answers were "full,

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complete and true to the best of [his] knowledge and belief." By signing, Arce also authorized ANIC to secure his medical records.

One month later, ANIC issued a life insurance policy to Arce but, for undisclosed reasons, declined accidental-death coverage and required payment of an additional premium on delivery. As required by statute, the policy would become incontestable two years after issuance, but in a tragic turn of events, Arce died a mere thirteen days later from injuries sustained in an automobile accident.^[1]

Arce's mother, Bertha, submitted a claim under the policy as his designated beneficiary, but ANIC denied the claim and refunded the premium. During the claims-investigation process, ANIC reviewed Arce's medical records and determined that he had incorrectly answered "no" to an application question inquiring about diagnoses, treatment, or medical advice for "any disease or abnormality of the stomach, intestines, rectum, pancreas, or liver, including cirrhosis, hepatitis and colitis." In refusing to pay the claim, ANIC informed Bertha that it would not have issued the policy if the application questions had been answered correctly.

Bertha sued ANIC for policy benefits, statutory penalties, and attorney's fees, alleging breach of contract and related violations of the Texas Insurance Code. ANIC answered and moved for summary judgment on the contract and statutory claims. The following week, Bertha amended her petition to add class claims and a new Insurance

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Code claim. ANIC never amended or supplemented its motion to address the amended petition

In a traditional summary-judgment motion limited to the claims in Bertha's previous filing, ANIC argued that the breach-of-contract and statutory claims were fatally infirm because ANIC was entitled to rescind the policy. Relying principally on Insurance Code section 705.051, ANIC claimed that no benefits were due under the policy because, as a matter of law, (1) Arce's insurance application included material misstatements of fact that affected the risks ANIC assumed in issuing the policy and (2) the Insurance Code does not require insurers seeking rescission of a life insurance policy during the contestability period to prove misstatements were made with intent to deceive or induce the insurer to issue the policy.^[2]

ANIC acknowledged the common-law rule requiring proof of intent to deceive but argued that the scienter requirement was incompatible with section 705.051's plain language following its recodification in 2003. Under ANIC's view of the statute, an insurer could avoid an obligation to pay on an insurance policy based on an innocent, unknowing, or careless misstatement in an insurance application, so long as the misstatement was of a material fact and either induced the policy's issuance or affected the premium charged.

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ANIC did not take the alternative position that intent to deceive was conclusively established. However, it argued that even if proof of intent is required to avoid paying on the policy, Bertha's claims under Insurance Code sections 541.060 and 541.061 would still fail because ANIC denied Bertha's claim based on a "bona fide" and "good faith" dispute about the continued vitality of the common-law rule.

Bertha's summary-judgment response, filed months later, joined issue on the necessity of pleading and proving intent to deceive before an insurer may decline to pay benefits based on a misrepresentation in the insurance application. She argued that section 705.051's language does not conflict with the common law and noted that the two have coexisted for more than a hundred years without any substantive modification to the statute.

Bertha further asserted that ANIC had forfeited any misrepresentation defense by failing to timely notify her about its intent to rescind the policy, as required by section 705.005 of the Insurance Code.^[3] That notice requirement is inapplicable to life insurance policies with a statutorily compliant incontestability clause, like the one in Arce's policy, but only if premiums have been "duly paid."^[4] Bertha argued that ANIC was not exempt from providing notice because the

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summary-judgment evidence did not establish that the additional premium due on delivery had, in fact, been paid. ANIC refuted the assertion, pointing to affidavit testimony confirming the insurer's receipt of all premiums due and payable. Although Bertha had lodged myriad objections to that affidavit, ANIC stated the obvious: if the additional premium had not actually been paid, Bertha's claims would fail due to nonpayment of the initial premium or lapse of the policy.

The trial court granted ANIC's motion and rendered a final take-nothing judgment rescinding Arce's life insurance policy. No grounds were stated. On motion for rehearing, which was denied, the trial court expressly overruled Bertha's objections to ANIC's summary-judgment evidence.

The court of appeals affirmed the trial court's ruling on Bertha's objections, but otherwise reversed and remanded.^[5] After rejecting ANIC's argument that the common-law scienter requirement did not survive section 705.051's recodification, the court held that ANIC could not avoid its contractual obligation without pleading and proving that Arce intended to deceive ANIC.^[6] Measured against that standard, the court held that summary judgment was not proper on the breach-of-contract claim because: (1) intent often involves fact questions; (2) ANIC's evidence did not conclusively establish intent; (3) mere knowledge of a health condition does not conclusively establish intent to deceive; and (4) "[t]he undisputed summary judgment evidence shows [ANIC] asserted rescission well beyond the ninety-day period set

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in section 705.005 of the Code."^[7] The court also reversed summary judgment on the related Insurance Code violations, which alleged wrongful denial of policy benefits.^[8] Finally, the court reversed summary judgment on the class claims because ANIC did not move for summary judgment on those claims or address them in any way.^[9]

II

ANIC's petition for review presents three issues: (1) whether section 705.051 grants insurers a misrepresentation defense without proof of intent, as required under the common law; (2) whether the court of appeals erred in failing to hold section 705.005's notice requirement inapplicable as a matter of law; and (3) whether the court of appeals erred in reversing summary judgment on Arce's Insurance Code and class claims because it had no contractual obligation to pay policy benefits.^[10]

We granted ANIC's petition to resolve an incipient conflict between Texas state cases, which consistently apply the common-law rule, and a handful of federal district court cases that have recently departed from it.^[11] But before beginning our analysis of that issue, we

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address, as a preliminary matter, the effect of the 2003 nonsubstantive recodification of the Insurance Code.

In the courts below, ANIC argued that the 2003 recodification rendered the common-law intent requirement inoperative because the Legislature substantively changed section 705.051. There, as here, ANIC leaned heavily on two cases: (1) Fleming Foods v. Rylander, in which we held that when the language adopted in a recodification substantively changes the meaning of a statute, courts must consider the prior law repealed and apply the current law...