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July 17, 2020

NYS Court Dismisses Claims Against Life Insurer, Insurance Agent Based on Insured's Misrepresentation

In general, an insurer may only rescind an insurance policy if the insured made a false statement of fact as an inducement to obtaining the policy, and the insurer would not have issued the policy had it known of the misrepresentation.

Recently, in Vestal v. Pontillo, et al., a NYS appellate court reiterated this principle and rejected a life insurance beneficiary’s attempts at challenging the insurer’s denial of benefits and rescission of the policy based upon the policyholder’s material misrepresentations in response to several questions on a medical examination questionnaire.

In Vestal, the plaintiff’s late husband obtained a life insurance policy with the assistance of an insurance salesman. The decedent completed a medical history questionnaire as part of his application for insurance, and the insurer, ReliaStar Life Insurance Company of New York, issued a $5 million policy. Prior to the expiration of the two-year incontestability period, the decedent was found dead in a hotel room due to complications from excessive alcohol consumption. Approximately two years later, the plaintiff submitted a claim for life insurance benefits, which was denied by ReliaStar, citing numerous material misrepresentations made by the decedent on his medical questionnaire related to his history of alcohol and drug abuse.

The plaintiff sued Reliastar, seeking coverage under the policy, and also asserted a claim against the insurance agency arising from the salesman’s alleged knowledge that the decedent’s medical history would not satisfy Reliastar’s underwriting guidelines. The trial court granted both defendants’ motions for summary judgment dismissing the complaint.

On appeal, the plaintiff did not contest ReliaStar’s proof regarding the multiple misrepresentations made by the decedent. Rather, the plaintiff argued the knowledge possessed by the insurance salesman, as an alleged agent of ReliaStar, was imputed to ReliaStar and precluded the insurer from relying on those misrepresentations to deny benefits and rescind the policy. The appellate court disagreed and affirmed the decision of the trial court, reasoning the plaintiff failed to plead this theory of recovery and none of the evidence supporting this theory necessarily flowed from those allegations included in the complaint.

The court further rejected the plaintiff’s contention that the salesman and agency breached their duty of care to her as beneficiary of the life insurance policy by failing to inform her that, due to the decedent’s known history of alcohol and drug abuse, he would not be able to meet the underwriting guidelines and obtain the desired life insurance policy. The court held the insurance agent did not owe a duty of care to a non-client, such as the plaintiff, absent a bond that resembles contractual privity—and there was no evidence of such a bond.

The holding in Vestal reinforces the general rule that insurance agents do not owe a duty of care to third parties, provided, of course, that they do not engage in communications and contacts approaching privity. In addition, this decision underscores the importance of providing complete and accurate information in an application for insurance, or else an insurer may have grounds to rescind the policy based upon a material misrepresentation.

If you have any questions regarding the content of this alert, please contact Tony Piazza, Insurance Coverage & Regulation Practice Area chair, at apiazza@barclaydamon.com; Jessica Tariq, associate, at jtariq@barclaydamon.com;  or another member of the firm’s Insurance Coverage & Regulation Practice Area.

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