Prudential Ins. Co. of America v. Anaya

• Decision Date: 05 June 1967
• Docket Number: No. 8223,8223
• Citation: 428 P.2d 640,1967 NMSC 132,78 N.M. 101
• Parties: The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. Virginia C. ANAYA, Rueben G. Anaya, Yolanda C. Anaya and Debra C. Anaya, Defendants-Appellants.
• Court: New Mexico Supreme Court

Page 640

428 P.2d 640

78 N.M. 101

The PRUDENTIAL INSURANCE COMPANY OF AMERICA Plaintiff-Appellee, v. Virginia C. ANAYA, Rueben G. Anaya, Yolanda C. Anaya and Debra C. Anaya, Defendants-Appellants.

No. 8223.

Supreme Court of New Mexico.

June 5, 1967.

Frazier, Cusack & Schnedar, Roswell, for appellants

Atwood & Malone, Bob F. Turner, Russell D. Mann, Roswell, for appellee.

OPINION

WOOD Judge, Court of Appeals.

Questions are presented concerning (1) rescission of an insurance policy and (2) court costs.

Husband applied to plaintiff for a policy of medical expense insurance to cover himself, his wife and two minor daughters. By this application husband would have been the insured. Plaintiff experienced difficulty in obtaining medical information concerning the husband. Because of this delay, it prepared a policy naming the wife as the insured and coverning the children. After husband and wife signed an endorsement authorizing an amendment to the application for insurance, the policy was delivered to defendants. Subsequently, the husband was added to the policy by endorsement.

In the application, husband made false answers to specific questions concerning a previous mental or nervos disorder of the wife for which she had been hospitalized. Plaintiff discovered the answers were false while processing a claim of the wife made under the policy. It brought this information to the attention of wife and husband and tendered to them all premiums that had been paid, together with accrued interest on the amount of the premiums. The tender was rejected. Plaintiff sued to have the policy declared null and void. The trial court found that the false answers had been made knowingly, fraudulently, wilfully and intentionally and that plaintiff had issued its policy in reliance on the truth of the contents of the application. It found that the wife's previous condition was material to the risk involved, that this condition materially affected the acceptance of the risk and the hazard assumed, that if plaintiff had known of this prior condition it would not have issued the policy. The judgment declared the policy to be null and void and directed that the premiums and accrued interest be paid to defendants.

The following five points answer defendants' contentions attacking rescission of the policy.

1) Defendants assert that plaintiff is not entitled to rescission after loss has been sustained by an insured and a claim has been made.

Defendants requested the trial court to find that the wife filed a claim under the policy and requested the trial court to conclude that plaintiff failed to pay policy benefits to the wife as required by § 58--11--4(2)(B), N.M.S.A.1953. This section provides that no claim shall be reduced or denied

'* * * on the ground that a disease or physical condition not excluded from coverage * * * on the date of loss had existed prior to the effective date of coverage of this policy.'

We do not decide whether an insurance policy may be rescinded after a claim has been made for a loss but before a lawsuit has been filed. See Annotations at 73 A.L.R. 1529 and 111 A.L.R. 1275, on the question of whether there may be a rescission after a lawsuit has been filed on the claim.

Neither the requests (which were denied) nor the reference to the statute brought this contention to the trial court's attention. The requests concerned plaintiff's failure to pay a claim. The requests do not assert that a claim bars rescission nor can such be inferred from them. The contention not having been presented to the trial court, it cannot be raised on appeal for the first time. Marquez v. Marquez, 74 N.M. 795, 399 P.2d 282 (1965); § 21--2--1(20), N.M.S.A.1953.

(2) Defendants assert that rescission should not have been allowed because the evidence was not clear, competent and satisfactory.

As a general proposition, rescission is allowed where there has been a misrepresentation of a material fact, the misrepresentation was made to be relied on, and has in fact been relied on. Again generally speaking, the good faith with which the misrepresentation is made is immaterial. Ham v. Hart, 58 N.M. 550, 273, P.2d 748 (1954); Jones v. Friedman, 57 N.M. 361, 258 P.2d 1131 (1953); Bennett v. Finely, 54 N.M. 139, 215 P.2d 1013 (1950). The same rule applies in insurance cases. Tsosie v. Foundation Reserve Ins. Co., Inc., 77 N.M. 671, 427 P.2d 29, opinion issued May 1, 1967. As stated in Modisette v. Foundation Reserve Ins. Co., Inc., 77 N.M. 661, 427 P.2d 21, opinion issued May 1, 1967:

'* * * if misrepresentations be made, or information withheld, and such be material to the contract, then it makes no difference whether the party acted fraudulently, negligently, or innocently.'

Thus, plaintiff was not required to proceed on the ground of fraud. However, it did so, and fraud was found. The elements of fraud are set forth in Sauter v. St. Michael's College, 70 N.M. 380, 374 P.2d 134 (1962), as follows:

'* * * The essential elements required to sustain an action for fraud, are that a representation was made as a statement of fact which was untrue and known to be untrue by the party making it, or else recklessly made; that it was made with intent to deceive and for the purpose of inducing the other party to act upon it; and that the other party did in fact rely on it and was induced thereby to act to his injury or damage. * * *'

Although not required to prove fraud if plaintiff has done so, it has established all of the elements of rescission with the exception of the 'material fact' requirement. Thus, if there was fraud as to a material fact, the ground for rescission is established.

The evidence of fraud must be clear and convincing, Sauter v. St. Michael's College, supra; Mosely v. National Bankers Life Ins. Co., 66 N.M. 330, 347 P.2d 755. Defendants assert that the evidence does not meet this requirement.

The following evidence is not disputed. The husband had an eleventh-grade education. He did not have difficulty with the English language. He knew the importance of the answers given in the application. He gave false answers knowing they were false at the time they were made. He agreed that the application was to be a part of the policy applied for and that the insurance was not to take effect unless the answers were true when the policy was delivered.

There are conflicts in the evidence as to whether the husband told plaintiff's representative about his wife's condition apart from the written application. There is conflicting evidence concerning plaintiff's reliance on the application. The credibility of the witnesses who gave the conflicting evidence was for the trial court.

The trial court found fruad. When a finding of fraud is attacked on appeal, the issue is whether there is substantial evidence to support the finding. Sauter v. St. Michael's College, supra. The above evidence is substantial.

Defendants assert that the fraud did not concern a material fact. They contend the policy only applied to sickness or disease commencing sixteen or more days after a person was covered by the policy and that there was no evidence that the wife's prior condition was likely to reoccur--thus, the fraud as to the prior condition was not material.

To be material, the false statement does not have to actually contribute to a loss under the terms of the policy. Martin v. Metropolitan Life Ins. Co., 192 F.2d 167 (5th Cir.1951); Annot., 131 A.L.R. 617. A misstatement as to prior mental illness may be material even though the misstatement relates to a time several years prior to the application. Pacific Mutual Life Ins. Co. v. Manley, 27 F.2d 915 (N.D.Ga.1928), aff'd, 35 F.2d 337 (5th Cir.1929). A misstatement is material if it takes away the insurer's opportunity to estimate its risk under its contract. Inter-Ocean Ins. Co. v. Harkrader, 193 Va. 96, 67 S.E.2d 894 (1951); Great Northern Life Ins. Co. v. Vince, 118 F.2d 232 (6th Cir.1941).

Here, the false answers concealed the medical history of a prior illness. The test of materiality of these false answers is whether plaintiff, as a reasonably prudent insurer, would have rejected the risk if it had known the true facts concerning the medical history of the wife. See Inter-Ocean Ins. Co. v. Ross, 315 S.W.2d 71 (Tex.Civ.App.1958). As defined in Modisette v. Foundation Reserve Ins. Co., supra:

'A representation or concealment of a fact is material if it operates as an inducement to the insurer to enter into the contract, where, except for such inducement, it would not have done so, * * *.'

The testimony is that if the wife's medical history had been disclosed, the policy would not have been issued because this history did not meet plaintiff's underwriting standards. This evidence supports the finding that the wife's previous condition was material to the risk. The fraud pertained to a material fact.

(3) Defendants assert that the wife's coverage should not have been rescinded because her coverage resulted from plaintiff's counteroffer, and because the policy was issued contrary to § 58--11--3(C), N.M.S.A.1953.

The endorsement signed by the wife was an amendment to the application for insurance. It provided that the policy was issued to the husband, that the husband was not covered and that the wife was the named insured. This endorsement also provided that the amendment was a part of the application and that the endorsement was part of the policy. The policy was issued '* * * in consideration of the application. * * *' The wife signed the endorsement as the proposed insured. The policy was delivered to the wife after she signed the endorsement. This evidence supports the trial court's finding that she accepted the policy with the amended application.

1) Couch on Insurance 2d, § 7:20 states:

'The issuance by an insurance company of a policy which is at variance with the terms of the application is in effect a rejection of the application and a counteroffer which must be accepted...