Union Bankers Insurance Co. v. Shelton
889 SW 2d 278, 1994 WL 278131 (1994)
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Rule of Law:
An insurer must prove an insured's intent to deceive to cancel a health insurance policy within two years of issuance for a misrepresentation in the application. A cause of action for breach of the duty of good faith and fair dealing exists if the insurer cancels the policy without a reasonable basis.
Facts:
- In April 1988, Thomas Shelton applied for a health insurance policy with Union Bankers Insurance Company.
- On the application form, assisted by agent Donny Stone, Shelton indicated that he had never been treated for, and had no indications of, any skeletal or muscular system disorders.
- Union Bankers issued the health policy to Shelton on April 9, 1988.
- In November 1988, seven months after the policy was issued, Shelton underwent total hip replacement surgery for necrosis in his left hip joint.
- The Sheltons filed a claim for benefits under the policy for the surgery.
- Union Bankers determined the necrosis was an undisclosed pre-existing condition, denied the claim, and requested Shelton sign a rider excluding coverage for hip disorders.
- Shelton refused to sign the rider.
- Union Bankers then refunded all of Shelton's premiums and cancelled the policy, asserting that Shelton's failure to disclose the hip condition constituted a material misrepresentation in the application.
Procedural Posture:
- Thomas and Ann Shelton sued Union Bankers Insurance Company and its agent in a Texas trial court for breach of contract and breach of the duty of good faith and fair dealing, among other claims.
- A jury rendered a verdict against the Sheltons on most claims but failed to find that Mr. Shelton had an intent to deceive Union Bankers when he made the misrepresentation.
- The trial court entered a take-nothing judgment in favor of Union Bankers.
- The Sheltons, as appellants, appealed to the Texas Court of Appeals.
- The Court of Appeals reversed the trial court's judgment, holding that Union Bankers breached the contract as a matter of law, and remanded the case for a new trial on the issue of bad faith.
- Union Bankers, as appellant, appealed the Court of Appeals' decision to the Supreme Court of Texas.
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Issue:
First, does Texas law require an insurer to prove an insured's intent to deceive to cancel a health insurance policy within two years of its issuance based on a misrepresentation in the application? Second, does an insurer's duty of good faith and fair dealing extend to the cancellation of an insurance policy?
Opinions:
Majority - Hightower, Justice
Yes, to both issues. An insured’s intent to deceive is required for an insurer to cancel an individual health insurance policy within two years of its issuance on the grounds of a misrepresentation in the application, and the duty of good faith and fair dealing extends to an insurer’s cancellation of a policy. The court reasoned that Texas common law has a well-established five-part test to avoid a policy for misrepresentation, which includes proving the insured's intent to deceive. The court determined that Texas Insurance Code article 3.70-3(A)(2)(a), which addresses defenses after two years, was not intended to alter this common law requirement for cancellations occurring within the first two years. Furthermore, the duty of good faith and fair dealing, which arises from the special relationship and unequal bargaining power between the insurer and insured, applies to policy cancellations just as it does to claim denials. To hold otherwise would allow insurers to avoid bad faith liability by simply cancelling a policy rather than denying a specific claim.
Concurring-in-part-and-dissenting-in-part - Cornyn, Justice
This opinion concurs that the duty of good faith and fair dealing applies to policy cancellations but dissents from the court's decision to remand the case for a new trial on that issue. The dissent argues there is no evidence of bad faith cancellation in this case. Union Bankers had a reasonable basis to challenge Shelton's claim in court because there was a genuine factual dispute about his intent to deceive. The evidence cited by the majority—such as the insurer's initial correspondence or its failure to discuss the matter with Shelton—does not rise to the level of evidence that Union Bankers lacked a reasonable basis for its actions. Merely losing the contract dispute does not automatically mean the insurer acted in bad faith.
Concurring - Phillips, Chief Justice
This opinion concurs in the court's judgment. The author agrees that an insurer must prove intent to deceive but writes to clarify the interpretation of the insurance statute. The statute is not rendered meaningless by the court's holding, as it still serves to modify the common law regarding breaches of warranty (which do not require intent) after two years. Additionally, the author notes that the language in Shelton's application, stating his answers were true 'to the best of my knowledge and belief,' independently requires the insurer to prove an intent to deceive. The concurrence also agrees that a remand on the bad faith issue is appropriate but notes that on remand, Union Bankers could argue that it did not act in bad faith as a matter of law because it asserted a tenable, though ultimately incorrect, legal position.
Analysis:
This decision solidifies a significant, pro-insured legal standard in Texas by confirming that the high bar of proving 'intent to deceive' applies to health insurance policy cancellations, even within the initial two-year contestability period. It also broadens the scope of insurer liability by extending the tort of bad faith (breach of the duty of good faith and fair dealing) from the context of claim denials to policy cancellations. This prevents an insurer from circumventing potential bad faith liability for wrongfully denying a claim by instead taking the more drastic step of cancelling the entire policy, thus ensuring insurers must have a reasonable basis for either action.
