The carrier sought to void a life insurance policy on the basis of material misrepresentation. The beneficiary brought counterclaims for breach of contract and bad faith, among others.
The court rescinds based on material misrepresentation in the application
The material misrepresentation argument was based on the insured claiming $180,000 in annual income for the family business, when its annual income was actually less than $2,000.
“Under New Jersey law, an insurer may rescind a policy for equitable fraud when false statements were made in the application which ‘materially affected either the acceptance of the risk or the hazard assumed by the insurer.’ N.J.S.A. § 17B:24-3(d). Equitable fraud does not require scienter for objective questions; the only inquiry is whether the misrepresentation is material. A misrepresentation is material if it ‘naturally and reasonably influenced the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.’”
“In reviewing alleged misrepresentations on life insurance applications, courts distinguish between objective and subjective questions.” Objective questions are based on the applicant’s actual knowledge. “If the question is objective, even an innocent misrepresentation warrants rescission.”
“In contrast, subjective questions inquire into the applicant’s state of mind. They are concerned with more ambiguous issues, such as what is the state of the applicant’s health.” (Internal quotation marks omitted). Courts show greater leniency on the subjective question inquiry, and “consider whether the answer accurately reflects the applicant’s state of mind even if otherwise inaccurate.” “Therefore, if a question is subjective, then the insurer must additionally establish the insured knew the answer was false.”
In this case, the question involved annual income, which constitutes an objective question. While the insurer’s agent did ask for an estimate, and the insured could not provide a fixed number, this did provide an excuse for the insured’s material misrepresentation to the carrier’s agent. She could have estimated annual income at $0-2,000, rather than the $200-1000 per day estimate provided to the insurer’s agent.
Thus, the court entered summary judgment rescinding the policy.
No bad faith where coverage position is fairly debatable
The court dismissed the beneficiary’s various counterclaims. As to the bad faith claim, the insured had to prove “the absence of a reasonable basis for denying benefits of the policy and the insurer’s ‘knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.’” A “fairly debatable” claim defeats bad faith allegations. “Here, the Court has already determined the policy was void, which itself establishes the coverage was debatable.” The facts further showed that the insured was not insurable under the carrier’s underwriting guidelines.
Date of Decision: June 3, 2021
Allstate Assurance Company v. Tawil, U.S. District Court District of New Jersey No. CV 18-8843, 2021 WL 2253544 (D.N.J. June 3, 2021) (Arleo, J.)