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Kentucky Appeals Court Affirms Rescission of Insurance Policy That Was Based on Misrepresentations

Annuities, Blogs

The Kentucky appellate court recently affirmed a trial court’s decision to award summary judgment to Auto-Owners Life Insurance Company, which was being sued by Thomas Sergent for breach of an insurance policy. The court’s decision in Sergent v. Auto-Owners Life Ins. Co., No. 2009-CA-001430-MR, 2010 WL 4137448 (Ky. Ct. App. Oct. 22, 2010), described the following. Sergent realized that he and his wife would not qualify for a new auto and home insurance policy, and so he decided to apply to Auto-Owners for life insurance for his adult daughter – for a particular policy that did not require a health examination. The insurance agent asked Sergent questions about his daughter’s health, and Sergent says he said she had a muscular disorder that prevented her from using her hands and legs. The agent concluded that this would not affect her eligibility for coverage, and the policy was issued. Sergent, however, “either failed to mention or, as he contends, did not know that his daughter had been diagnosed since childhood with peripheral neuropathy,” the appeals court said. The daughter died less than a year after the policy was issued, and Sergent sought to collect on the policy. Auto-Owners discovered from the daughter’s medical records that she had a long history of being diagnosed with peripheral neuropathy, denied the claim, and returned Sergent’s premium payment, saying that had it known about the diagnoses, it would not have accepted the application and would not have issued the policy. Sergent sued for breach, and both he and Auto-Owners moved for summary judgment. The trial court ruled for Auto-Owners, which had argued that, because of the alleged misrepresentations in the application for the policy, a valid policy did not exist.

The appeals court noted that, under Kentucky law, when an insured misrepresents materials facts on the application, “the insurer is justified in denying coverage and rescinding the policy.” The court also pointed out that Kentucky Revised Statute 304.14-110 provides that misrepresentations by the insured in an application for an insurance policy or annuity contract do not prevent recovery under the policy or contract, unless they are fraudulent, or material to the acceptance of the risk by the insurer, or that the insurer would not have issued the policy or contact “if the true facts had been known to the insurer . . . .” Thus, the appellate court continued, “[t]he law is that if an insured obtained a policy of insurance through a material misrepresentation, the policy is void.” Additionally, a false answer is material – and intent in making the misrepresentation is not relevant, if the insurer would have not issued the policy but for the false answer.

Because Auto-Owners, under the undisputed facts of the case, would not have issued the life insurance policy on the daughter if it had known of an accurate diagnosis. The misrepresentation, therefore, was material, and the appellate court affirmed the trial court’s decision to grant summary judgment to Auto-Owners.