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Tennessee Law Regarding an Insurance Company’s Right to Deny Benefits for Misrepresentation

In a recent Tennessee case, the beneficiary of a life insurance policy prevailed over the insurance company which denied coverage under the policy at issue based on alleged misrepresentations by the insured in the application for the policy. The case discusses some basic law that is applicable in Tennessee when an insurance company denies coverage because of an alleged misrepresentation on an insurance policy application. Although the case involved a term life insurance policy, many of the rules discussed by the Court of Appeals of Tennessee in the opinion are applicable to other types of insurance policies, e.g., whole life insurance policies, disability insurance policies, health insurance policies, and even liability policies.

The case involved a woman (the “Insured”) who purchased a twenty-year term life insurance policy from Tennessee Farmers. The life insurance policy was issued, but only after the Insured had completed and signed an application. In her application, the Insured identified a number of health and medical problems including a nervous disorder, sleep disorder, arthritis, and a partial disability resulting from a car accident. The Insured disclosed that she smoked half a pack a day of cigarettes, and that she was taking Percocet for pain and Xanax for sleep assistance. As part of the application process, Tennessee Farmers did a drug screen of the Insured which was negative.

Because of the numerous health issues of the Insured, Tennessee Farmers charged a premium which was 50% more than the basic policy premium. Following the issuance of the life insurance policy, the Insured died from acute methadone intoxication. Her death occurred before the contestability period in the policy, which was two years, expired. (Many life insurance and disability policies have non-contestability provisions which, generally, prevent an insurance company from denying coverage for any statement made in the application after a certain period of time—typically around two years after the issuance of the policy).

In denying coverage, Tennessee Farmer’s relied on the Insured’s answer of “no” to a question in the application as to whether the Insured had ever been treated for a drug problem. Because the Insured had taken methadone, argued Tennessee Farmers, she must have been treated for drug related problems. Therefore, its argument continued, she must have made a misrepresentation when she stated, in the application, that she had never received treatment for a drug problem.

The trial court, the Chancery Court for Giles County, Tennessee, found that there was evidence that the methadone had been prescribed to the Insured for pain management, a common use for methadone, and that there was no evidence that the Insured was taking methadone for treatment for addiction to narcotics, another common use for methadone. The Court of Appeals of Tennessee affirmed the trial court in all respects.

In reaching its decisions, both the trial court and the court of appeals looked to T.C.A. ยง56-7-103 which sets forth the law in Tennessee regarding misrepresentations in insurance policy applications. Under that statute, an insurance company cannot deny coverage under a life insurance policy, disability policy or any other type of policy for a misrepresentation in an insurance policy application unless the misrepresentation was “made with actual intent to deceive” or “increased the risk of loss” to the insurance company.

Of importance to the Court of Appeals of Tennessee was the fact that, although Tennessee Farmers argued that it would never have issued the life insurance policy if it had known that the Insured used methadone because of the increased risk of loss, it never asked in the application if the Insured had ever used methadone. The court of appeals also dismissed the numerous “nit picky” arguments Tennessee Farmers made about information not disclosed in the policy.

This case shows that you should not give up just because an insurance company denies coverage. For many insurance companies, selling policies and then denying coverage is reflexive. An insurance policy is a contract, and, if you believe that an insurance company’s denial of payment to you is not justified, you should contact a skilled breach of contract lawyer who has experience with insurance litigation.