Shelton v. Union Bankers Ins. Co.
| Decision Date | 09 February 1993 |
| Docket Number | No. 6-91-127-CV,6-91-127-CV |
| Citation | 853 S.W.2d 589 |
| Parties | Thomas D. SHELTON and Wife, Ann Shelton, Appellants, v. UNION BANKERS INSURANCE COMPANY and Donny Stone, Appellees. |
| Court | Texas Court of Appeals |
Gregory P. Grajczyk, Longview, for appellants.
David R. Watson, Longview, Bob E. Shannon, Austin, for appellees.
Before CORNELIUS, C.J., and BLEIL and GRANT, JJ.
Thomas and Ann Shelton appeal from a take-nothing judgment based on a jury verdict in their suit against Union Bankers Insurance Company and independent insurance agent Donny Stone. We affirm the judgment in part, reverse the judgment in part, and remand the case for a new trial of the Sheltons' cause of action for breach of the duty of good faith and fair dealing and for attorney's fees.
Thomas Shelton claimed hospitalization and medical benefits under his health insurance policy, issued by Union Bankers, after he had hip replacement surgery. The surgery was performed about seven months after the policy was issued. Union Bankers denied the claim, contending that his hip necrosis was an undisclosed pre-existing condition not covered by the policy.
Following the surgery and denial of the claim, Union Bankers attempted to reform the policy to eliminate coverage for Shelton's hip condition. When the Sheltons refused to agree to the reformation, Union Bankers cancelled the policy on the ground that Shelton had made a material misrepresentation when applying for the insurance by failing to disclose his condition in response to questions on the application form.
Shelton contended that, while completing the application for the insurance, he told agent Donny Stone about aches in his knee. Stone denied that he was told about the condition and said he would have recorded such information had he been told about it, because the application inquired specifically about bursitis. Shelton also contended that Union Bankers precertified and thus agreed to pay for his surgery before it was performed. Stone concedes that he spoke with the Sheltons shortly before the surgery, but he denies that he precertified payment for the surgery. Rather, he claims that he told the Sheltons only that the type of surgery that Shelton was to have was covered by the policy.
The Sheltons sued for 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 resolved all issues against them, except for finding that Thomas Shelton did not intend to deceive Union Bankers regarding his condition at the time he applied for the insurance.
The Sheltons contend the trial court erred by failing to hold that Union Bankers breached its contract as a matter of law by cancelling the policy. Their argument is based on the jury's finding that Thomas Shelton did not intend to deceive Union Bankers by misrepresenting his condition.
The Sheltons contend that a misrepresentation must be made with intent to deceive before it may be grounds for voiding an insurance policy. See Mayes v. Massachusetts Mut. Life Ins. Co., 608 S.W.2d 612 (Tex.1980); Progressive County Mut. Ins. Co. v. Boman, 780 S.W.2d 436 (Tex.App.--Texarkana 1989, no writ). Since the jury found there was no intent to deceive, the Sheltons argue that Union Bankers breached the contract when it cancelled the policy.
Union Bankers argues that the requirement of an intent to deceive applies only to life insurance policies. It points out that health insurance policies are governed by Article 3.70-3 of the Texas Insurance Code, 1 and argues that the statute allows a health insurance policy to be voided on the basis of an unintentional misrepresentation within two years of the policy's inception. Shelton indisputably made his claim, and Union Bankers discovered what the jury found to be a material misrepresentation, within two years of his purchase of the insurance contract. 2
We conclude that intent to deceive must be proven to void a health insurance policy on the basis of a misrepresentation, even within the policy's first two years. In addition to setting a time limit, Article 3.70-3(A)(2) further provides:
(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....)
(Emphasis added.) This language would appear to defer to a common-law rule that fraud be proven to void a health insurance policy. And such a common-law rule was established before Article 3.70-3 was adopted in 1955.
In General American Life Ins. Co. v. Martinez, 149 S.W.2d 637 (), the court was confronted with jury findings very similar to those in this case. 3 The jury in Martinez found that the plaintiff, who was suing on a disability policy, falsely represented that he had not had any disease or injury nor received medical advice or attention within the previous five years, but also found that Martinez did not make the false answer intentionally to induce the company to issue the insurance. 4 General American Life Ins. Co. v. Martinez, 149 S.W.2d at 639. In affirming the judgment awarding damages to Martinez, the court said, "a material misrepresentation does not defeat recovery if innocently made; that is, without intent to deceive." Id.
The Martinez case was later cited by the Supreme Court when it wrote:
It is also well settled in this State that to avoid a policy of insurance because of misrepresentations, the burden is on the insurer to plead and prove, not only that the answers made by the insured were false or untrue, but that the insured knew, or should have known, that they were untrue, and that he made them willfully and with the intention of inducing the insurer to issue him a policy.
Clark v. National Life & Accident Ins. Co., 145 Tex. 575, 200 S.W.2d 820, 823 (1947). Although Clark involved a life insurance policy, it appears that the court, by citing Martinez, acknowledged that intent to deceive was also required to void a health insurance policy. 5 Since the adoption of Article 3.70-3, the application of the intent to deceive requirement to health insurance policies has been reaffirmed. See Republic Bankers Life Ins. Co. v. Coffey, 490 S.W.2d 231, 233 (Tex.Civ.App.--Amarillo 1973, writ ref'd n.r.e.); 6 United American Ins. Co. v. Harp, 290 S.W.2d 392 (Tex.Civ.App.--Amarillo 1956, no writ), citing Clark v. National Life & Accident Ins. Co., 200 S.W.2d 820.
We find that to void the policy for a misrepresentation Union Bankers was required to prove that Shelton intended to deceive it when he misrepresented his physical condition. As the jury found that Shelton did not intend to deceive, Union Bankers breached the policy as a matter of law when it cancelled the insurance contract on the basis of misrepresentation.
The Sheltons also argue that the trial court erred in overruling their motion for a new trial because certain language in the insurance policy is void and unenforceable. The Sheltons contend that the policy's pre-existing condition provision fails to meet the statutory standards of TEX.INS.CODE ANN. art. 21.16, et seq. (Vernon 1981 & Supp.1993), and is also void as contrary to public policy.
The pre-existing condition provision in the policy provided:
A pre-existing condition is a medical condition not disclosed on the application for which, prior to the Effective Date of coverage:
1. Medical advice or treatment was recommended by, or received from, a Doctor within the 2 year period before the Effective Date of coverage; or
2. Symptoms existed which would cause an ordinarily prudent person to seek diagnosis, care or treatment within the 1 year period before the Effective Date of coverage.
Pre-existing conditions aren't covered unless the loss for such conditions begins more than 2 years after the Effective Date of coverage.
The Sheltons argue that by imposing an ordinarily prudent person's standard to the question of "medical condition not disclosed on the application," the policy does away with the legislatively required elements of materiality, intent to deceive, reliance, and notice. This argument, however, confuses the separate defenses of misrepresentation and pre-existing condition. The defense of misrepresentation is controlled by TEX.INS.CODE ANN. arts. 3.70-3, 21.16, and 21.17, and this defense requires materiality, intent to deceive, reliance, and notice.
On the other hand, the pre-existing condition defense is governed by TEX.INS.CODE ANN. art. 3.70-1(E)(1)(e) (Vernon 1981). Pursuant to the authority granted by the latter article, the State Board of Insurance has issued a definition of pre-existing condition much like the definition in the policy. See 28 TEX.ADMIN.CODE § 3.3018 (West 1988); TEX.INS.CODE ANN. art. 3.70-1(E)(1)(e). The only difference is that the policy here is more lenient than the State Board's standard. Union Bankers' policy excludes coverage of conditions arising within one year prior to the policy's issuance; conditions arising within five years may be excluded under the regulatory standard. The Legislature has weighed policy on this matter and left the elements of the pre-existing condition standard to the discretion of the State Board of Insurance. As the policy involved here falls within the standards set by the Board, its language is not void as against public policy.
The Sheltons further contend that the trial court erred by failing to find as a matter of law that Union Bankers violated its duty of good faith and fair dealing. The jury made no finding on this issue; it was unnecessary, since it found that Union Bankers did not breach the insurance contract. Because we hold that Union Bankers breached the...
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