Certified Question, In re

• Court: Michigan Supreme Court
• Writing for the Court: MOODY; COLEMAN
• Citation: Certified Question, In re, 318 N.W.2d 456, 413 Mich. 57 (Mich. 1982)
• Decision Date: 26 April 1982
• Docket Number: No. 66272,No. 11,66272,11
• Parties: . Linda WICKERSHAM, Plaintiff, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant. Calendar Supreme Court of Michigan

Page 456

318 N.W.2d 456

413 Mich. 57

In re Certified Question From the United States District Court for the Eastern District of Michigan Linda WICKERSHAM, Plaintiff, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Defendant.

No. 66272.

Calendar No. 11.

Supreme Court of Michigan.

Argued June 3, 1981.

Decided April 26, 1982.

N. Dwight Teachworth, Farmington Hills, for plaintiff.

Dickinson, Wright, McKean, Cudlip & Moon by John E. S. Scott, Philip M. Frost, Richard M. Bolton, Susan Bieke Neilson, Detroit, for John Hancock Mut. Life Ins. Co.

MOODY, Justice.

Plaintiff asserts a claim for proceeds as beneficiary under a life insurance policy. Defendant responds that the deceased misrepresented a material fact in the application for the policy which bars recovery.

Pursuant to GCR 1963, 797.2, ¹ this Court ordered consideration of the following question certified by the United States District Court, Eastern District of Michigan, Southern Division. 410 Mich. 1108 (1981):

"Should the term 'materiality' in [M.C.L. § 500.2218; M.S.A. § 24.12218] be construed to require only that a misrepresentation affect the insurer's risk, or should it be construed also to require that the subject of the misrepresentation be related to the cause of the insured's death?"

We conclude that a material misrepresentation need not specifically relate to the cause of an insured's death for an insurance company to be entitled to the rescission or avoidance of a life insurance policy.

I

The United States District Court set forth the relevant facts in the certificate prepared in conformity with GCR 1963, 797.2(b):

"Plaintiff, Linda Wickersham, initiated this action to recover Forty-Four Thousand ($44,000.00) Dollars allegedly due on a life insurance policy issued by the defendant. The policy insured the life of the plaintiff's husband who had died in a swimming accident. The plaintiff was named as the insured's beneficiary. Defendant denies liability under the policy, and has offered to rescind it and return the insured's premiums to the plaintiff.

"Defendant argues that the insured misrepresented his medical record at the time he applied for the policy, and that these misrepresentations deceived the defendant into accepting an insurance application which it otherwise would have rejected. Plaintiff concedes these facts, but argues that misrepresentation can only justify recission [sic ] if the insured dies of a cause related to the subject of the misrepresentation. It is stipulated that the insured's death was not related to his undisclosed health problem, paroxysmal tachycardia."

The statute in question, M.C.L. § 500.2218; M.S.A. § 24.12218, provides:

"The falsity of any statement in the application for any disability insurance policy covered by chapter 34 of this code may not bar the right to recovery thereunder unless such false statement materially affected either the acceptance of the risk or the hazard assumed by the insurer.

"(1) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless the misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make the contract.

"(2) A representation is a statement as to past or present fact, made to the insurer by or by the authority of the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.

"(3) In determining the question of materiality, evidence of the practice of the insurer which made the contract with respect to the acceptance or rejection of similar risks shall be admissible.

"(4) A misrepresentation that an applicant for life, accident or health insurance has not had previous medical treatment, consultation or observation, or has not had previous treatment or care in a hospital or other like institution, shall be deemed, for the purpose of determining its materiality, a misrepresentation that the applicant has not had the disease, ailment or other medical impairment for which such treatment or care was given or which was discovered by any licensed medical practitioner as a result of such consultation or observation. If in any action to rescind any contract or to recover thereon, any misrepresentation is proved by the insurer, and the insured or any other person having or claiming a right under the contract, shall prevent full disclosure and proof of the nature of the medical impairment, the misrepresentation shall be presumed to have been material." (Emphasis added.)

The issue presented is whether the above-quoted statute requires that there be a causal relation between a material misrepresentation and the loss insured against before a right to recover under an insurance policy is barred.

II

We begin our analysis with the language of the statute. The opening sentence of the statute does not specifically state or suggest that the material misrepresentation relate to the cause of death. The statute requires that the misrepresentation "materially [affect] either the acceptance of the risk or the hazard assumed by the insurer". ²

Acceptance of the risk and hazard assumed are terms with different meanings. One court has explained the meaning of hazard assumed in this manner:

"A misstatement to be material to the hazard assumed must be shown in some way to have affected it or contributed to the loss, and in a substantial manner." Prudential Ins. Co. of America v. Saxe, 77 U.S.App.D.C. 144, 156, 134 F.2d 16, 28 (1943), cert. den. 319 U.S. 745, 63 S.Ct. 1033, 87 L.Ed. 1701 (1943).

Based upon the limited record in this case and the narrow question presented for review, it is apparent that the misrepresentation of the insured's medical record did not affect or contribute to the hazard assumed in this case--the death of the insured.

Our inquiry must proceed, however, as the words of the statute and the case law reflect a conceptual difference between the terms "hazard assumed" and "acceptance of the risk". The Legislature's use of "either" and "or" leads to a recognition that the two terms have different meanings. Acceptance of the risk refers to the time of making of the contract of insurance and to the insurance concept of risk. Whether an insurer determines to enter into a contract is affected by its assessment of the likelihood of a fact increasing the chances of the loss insured against. See Jefferson Standard Life Ins. Co. v. Clemmer, 79 F.2d 724, 733 (CA 4, 1935).

Thus, the conceptual difference between the two phrases is that "acceptance of the risk" relates to the evaluation made before issuance of an insurance policy which differs from "hazard assumed", which refers to the circumstances of the loss. Jones v. Prudential Ins. Co. of America, 388 A.2d 476, 481 (D.C.App., 1978):

"The risk involved in insuring against a possible loss is distinct from the actual occurrence of the loss. In determining whether the acceptance of the risk was affected, the focus properly must be on the basis for the issuance of the policy, not on the circumstances of the insured's subsequent death."

The portion of the statute including the risk and hazard language was part of 1956 PA 218, the Insurance Code of 1956. This original section restated the earlier law which included similar language. ^{3 3} To construe the statutory language to include and require a causal nexus between the false statement and the loss, the construction sought by plaintiff, would make the term "acceptance of the risk" superfluous. Any statement or fact contributing to the loss or hazard would, it seems, be material to the risk. As demonstrated in this case, however, a fact or statement material to the acceptance of the risk does not necessarily affect the loss. See Robinson v. The Reliable Life Ins. Co., 554 S.W.2d 231, 234 (Tex.Civ.App., 1977), aff'd 569 S.W.2d 28 (Tex., 1978). We cannot presume that the Legislature intended that the clause concerning risk should have no separate meaning or effect from the clause concerning hazard, the actual loss.

In prior litigation dealing with these concepts, this Court has not previously adopted plaintiff's view that before an insurance policy may be rescinded or avoided there must be a causal relation between the misrepresentation and the loss. In Western & Southern Life Ins. Co. v. Ogrodnik, 290 Mich. 254, 287 N.W. 454 (1939), we granted relief to the insurance company although the insured died of pneumonia and not heart disease, which he had denied having on the application for insurance. The false representations had induced the issuance of the policy. Id. 257, 287 N.W.2d 454. Ogrodnik was cited with approval in Bendford v. National Life & Accident Ins. Co., 356 Mich. 52, 63, 96 N.W.2d 113 (1959). Bendford also indicated that there is no requirement of a causal relation in Michigan law. See also Continental Assurance Co. v. Shaffer, 157 F.Supp. 829, 834 (W.D.Mich., 1957) (no causal relation required).

A review of all the subsections under this statute fails to support the claim of plaintiff that a causal relation between the false statement and loss is required. In 1957, the Legislature amended M.C.L. § 500.2218; M.S.A. § 24.12218 by adding the four numbered paragraphs to this section. 1957 PA 91. The added paragraphs, in part, define misrepresentation and materiality. These additional provisions further indicate a legislative intent to determine materiality at the time the insured signs the application and the insurer decides whether to issue a policy to the applicant.

Subsection (1) sets forth a test of materiality which focuses upon the time frame prior to issuance of the policy: Whether "knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to...