May 22, 2000 Cite this Page: 13 N.C.L.W. 0257
Widow Gets More Than Face Value Of Life Insurance Policy
A Yadkin County widow has recovered $560,000 because an agent allegedly told her husband to lie about his smoking and back problems on a life insurance application.
When the carrier discovered the misstatements, it refused to pay the $400,000 face value of the policy.
The widow sued the agent and his agency for unfair and deceptive trade practices, breach of fiduciary duty and negligent misrepresentation. The parties settled shortly before trial.
“The significance of this case is not the $560,000 that was recovered, but that the recovery exceeded the underlying policy,” said the plaintiff’s attorney, George Francisco of Mount Airy.
He attributed that to the potential for treble damages and attorneys’ fees if the plaintiff’s deceptive trade practices claim had gone to a jury.
“The settlement certainly reflects recognition of the possibility of an award in excess of the policy amount,” said Francisco. “They were risking a seven-figure verdict.”
The case is Reba Spillman Mullis and Lillie Renee Mullis v. Mendenhall et al (Yadkin County Superior Court;98 CvS 390).
Tobacco usage. According to Francisco, the insurance agent in Mullis instructed the deceased, a smoker, to state in the application that he did not use tobacco products.
The agent allegedly told the man that this statement would not affect payment of the policy — except that the death benefit would be reduced by the amount of increased premiums he should have paid as a smoker.
In fact, under the terms of the policy, the $400,000 death benefit would be reduced to $215,000 if the insured was discovered to be a smoker.
The agent minimized the importance of the tobacco questions on the application, according to Francisco, calling them just another way of “sticking it to smokers.”
That explanation sat well with the deceased.
“He was not only a smoker, but he was also a tobacco farmer in a rural county in tobacco country,” said Francisco.
Back problems. The plaintiff also alleged that the agent misled her husband into misrepresenting the status of his back problems on the application.
According to Francisco, the agent told the deceased that he only needed to write down the date of his most recent back surgery, and then sign medical release authorizations. The carrier would obtain his complete medical records later.
In fact, the carrier didn’t obtain any of the husband’s medical records until after his death.
Francisco said the agent admitted he knew the husband had seen doctors more often than the application form indicated.
“The agent admitted that was a material misrepresentation of the terms of the policy to be issued,” said Francisco.
After the husband’s death, the carrier denied payment of the policy, stating the insured was a smoker and had visited doctors numerous times in the five-year period before the application.
The insurer claimed that the policy would not have been issued had those facts been known at the time of the application.
The widow sued, alleging the agent committed an unfair and deceptive trade practice under G.S. Sect. 58-63-15 by misrepresenting the terms of the policy.
She also claimed that the insurer violated G.S. Sect. 58-63-15 by post-claim underwriting that is, the insurer failed to perform any medical underwriting until after claims were made by the deceased’s estate.
“When an insured makes an application for insurance, medical questions are always part of the application,” said Francisco. “The standard practice is to investigate the insured’s answers to those questions.
“But in some cases, there’s no investigation made by the underwriter regarding those representations until a claim is made,” he said. “Then if there’s any type of failure to disclose something, the insurer will frequently claim that a material misrepresentation has been made, and void the policy. A material misrepresentation will do that as a matter of law in North Carolina.”
The defendant agent/agency raised several defenses, including the doctrine of unclean hands, contributory negligence and lack of proximate cause.
The parties reached a mediated settlement.