• California Supreme Court Holds That an Independent Agent's Knowledge of Material Facts Can Affect an Insurer's Ability to Rescind.
  • July 26, 2005 | Author: Yvette L. Espinoza
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • On July 7, 2005, the California Supreme Court issued its opinion in O'Riordan v. Federal Kemper Life Assurance, no. S115495, ___ Cal. 4th ___ (2005), in which it held that an independent agent has a duty to disclose to an insurer any material information he or she has pertaining to a life insurance applicant and that an insurer is deemed to have knowledge of any such facts. In addition, the Court ignored the insurer's expressed intent and provided its own interpretation of two application questions regarding the applicant's smoking history because it believed the questions lacked specificity.

    The pertinent facts of the O'Riordan case are as follows: In 1996 plaintiff Patrick O'Riordan ("Plaintiff") and his spouse, Amy, met with Robert Hoyme ("Hoyme"), an independent life insurance agent, in order to replace their existing life insurance policies with term life insurance. Hoyme suggested a policy issued by defendant Federal Kemper Life Assurance Company ("Kemper"). The application asked two questions regarding tobacco use: 1) "Have you smoked cigarettes in the past 36 months?" and 2) "Have you used tobacco in any other form in the past 36 months?" Amy told Hoyme that her previous life insurance policy was a "smokers' policy" because she used to smoke but quit in 1991 (five years before the Kemper application). She also told Hoyme that she "might have had a couple of cigarettes in the last couple of years." Hoyme replied, "That's not really what they're looking for. They're looking for smokers." It is not clear from the record whether it was Amy or Hoyme who checked "no" in response to the two questions at issue. Plaintiff and his spouse were also required to submit blood and urine for testing to determine, among other things, whether their blood contained any evidence of smoking. The tests showed no traces of nicotine.

    In May 1996, Plaintiff and his spouse submitted their applications to Kemper for approval. At the same time, Hoyme submitted a request to be appointed as a Kemper agent. Hoyme's request to be appointed as a Kemper agent was approved two days after he met with Plaintiff and his spouse. On June 28, 1996, Kemper issued a term life insurance policy to Amy at the preferred nonsmoker rate and listed Plaintiff as the beneficiary. In November 1997, Amy was diagnosed with metastatic breast cancer. She died on June 26, 1998, two days before the policy's two-year contestability period expired.

    Plaintiff submitted a claim for life insurance benefits under the policy issued to Amy. Kemper conducted an investigation which revealed that in July 1995 (less than a year before applying for the Kemper policy), Amy had requested and received from her physician a nicotine patch. Based primarily on this information, Kemper rescinded the policy issued to Amy and denied Plaintiff's claim.

    Plaintiff then filed suit against Kemper, Hoyme, and the insurance marketing corporation for which Hoyme worked. Plaintiff's causes of action included breach of contract, breach of the covenant of good faith and fair dealing, negligence, fraud, negligent misrepresentation, and "emotional distress."

    Kemper successfully moved for summary judgment on the ground that the facts were undisputed that Amy falsely answered the application's questions about smoking.

    The Court of Appeal affirmed the judgment in favor of Kemper, concluding in part that even if Amy had smoked only two cigarettes in the 36 months preceding her application, she concealed the extent of her cigarette usage because she answered "no" to the two questions at issue.

    The California Supreme Court reversed the judgment of the Court of Appeal. The Court interpreted the first application question ("Have you smoked cigarettes in the past 36 months?") as an attempt to determine Amy's habitual use of cigarettes. The Court reasoned that if Kemper had intended to determine whether she had smoked a single cigarette, it would have asked about the smoking of "any" cigarette. Regarding the second question ("Have you used tobacco in any other form in the past 36 months?"), the Court read this question in conjunction with the prior question, instead of independently, and determined that if Amy had smoked only a couple of cigarettes but had not used tobacco in any other form, then she had not concealed her cigarette usage by answering "no" to this question.

    The Court further opined that even if those two questions required the disclosure of the smoking of a single cigarette, Amy did not conceal this information, because she mentioned it to Hoyme. The Court reasoned that once Hoyme became Kemper's agent, he had a duty to disclose to Kemper any material information he had concerning Amy's life insurance application and Kemper was deemed to have knowledge of such facts. The Court found that it did not matter that Hoyme found out about Amy's cigarette use before he became Kemper's agent, because "the principal is charged with knowledge which his agent acquires before the commencement of the relationship when that knowledge can reasonably be said to be present in the mind of the agent while acting for the principal." Columbia Pictures Corp. v. DeToth, 87 Cal. App. 2d 620, 631 (1948). Based on the foregoing, the Court found that the extent of Amy's cigarette use and the scope of Hoyme's knowledge of her cigarette use were disputed material facts.

    This decision broadens the potential liability for insurance companies because the knowledge of material facts by an independent agent about an applicant, not disclosed in his or her application, was imputed to the insurer. Furthermore, the opinion illustrates how the intent of an insurer through its application question can be disregarded if a court believes the question can be interpreted otherwise. This emphasizes the importance of making certain that the application includes all information that has been obtained by the agent in response to any of the questions in the application.