Failure to Disclose Cancer Brings Rescission of Life Insurance

By Don R. Sampen, published, Chicago Daily Law Bulletin, May 9, 2023

The 7th U.S. Circuit Court of Appeals recently upheld a life insurer’s right to rescind a policy due to a misrepresentation by the insured, even though the basis for the misrepresentation became known to the insured only after he submitted his insurance application.

The case is Meier v. Pacific Life Insurance Co., 2023 U.S. App. Lexis 6865 (7th Cir. March 22). The plaintiff’s life insurance beneficiary, Lorrie Meier, was represented by WilliamsMcCarthy LLP of Rockford. Wilson Elser Moskowitz Edelman & Dicker LLP of Chicago represented the insurer, Pacific Life.

Lorrie Meier’s husband, Ron, submitted medical forms and an application for a Pacific Life insurance policy. The application contained a provision, designated “Declaration 6,” requiring Ron to inform Pacific Life of any changes in his health or other information provided “prior to delivery of the policy.” It also stated, however, that he was obligated to notify the company of the changes “no later than at the time the application is signed.”

The Meiers submitted the application on July 26, 2018, and on July 30 Pacific Life accepted the application and began the underwriting process. On Aug. 6 Ron learned he had stage IV lung cancer and began treatment. The Meiers informed a “representative” assisting in securing coverage — Monarch Solutions, apparently a broker — of Ron’s diagnosis, but not Pacific Life.

On Sept. 6 Pacific Life delivered the policy, and about a year later Ron died. Lorrie submitted a claim for benefits, which the company rejected. It then rescinded the policy and returned the premiums. Lorrie responded by bringing this suit to enforce the policy.

The district court entered summary judgment for Pacific Life, finding that the failure to disclose Ron’s cancer diagnosis amounted to a material representation. Lorrie appealed.

Analysis

In an opinion by Judge Michael Y. Scudder, the 7th Circuit affirmed. He began his analysis by noting that section 154 of the Illinois Insurance Code, 215 ILCS 5/154, permits an insurer to rescind a policy based on a misrepresentation, innocent or not, of a material fact.

Scudder then turned to the language in Declaration 6 requiring Ron to disclose any changes in his health prior to delivery of the policy. He wrote that the cancer diagnosis reflected a significant change in Ron’s health, and Ron violated the plain terms of the policy by failing to inform Pacific Life. The omission, moreover, amounted to a misrepresentation.

Lorrie focused on the language in Declaration 6 stating that Ron’s obligation to update Pacific Life extended to “no later than at the time the application is signed,” and Ron signed the application prior to his cancer diagnosis.

Scudder acknowledged that use of the word “application” may have been “a poor word choice on Pacific Life’s part.” Nonetheless, he observed that another provision in the policy indicated that the application would be attached and made a part of the policy. Scudder concluded that “a reasonable applicant” would understand that the application remained open until the policy was delivered.

Moreover, according to Scudder, Ron’s submission of the application set the “baseline” for the time from which changes in his condition had to be reported. So “it must be the case,” said Scudder, that “changes to health” ran from the submission of the application to delivery of the policy.

Lorrie also argued that disclosure of Ron’s condition to the broker should constitute disclosure to Pacific Life. Scudder, however, relied on Royal Maccabees Life Insurance Co. v. Malachinski, 161 F. Supp. 2d 847 (N.D. Ill. 2001), and other authorities to define whether an intermediary, such as Monarch Solutions, was an agent of Pacific Life for purposes of determining the adequacy of the notice given.

He concluded it was an agent only of the Meiers, not of Pacific Life. Scudder relied primarily on the fact that Monarch Solutions wrote coverage through multiple insurers, and its contract with Pacific Life deemed Monarch Solutions’ sales representative as an “independent contractor” and not an employee. The intermediary’s knowledge therefore could not be imputed to Pacific Life.

Accordingly, the 7th Circuit affirmed in favor of Pacific Life.

Key Points

• Depending on specific language used, a policy provision requiring disclosure of changes in information earlier provided to the insurer may be construed to require disclosure of all such changes between the time of the application and delivery of the policy to the insured.
  
• An insured’s failure to disclose information in accordance with policy terms may constitute a material misrepresentation giving rise to an insurer’s right to rescind.