Can insurance companies rescind policies based on innocent misstatements? Derbidge v. Mutual Protective Insurance Company Explained

The Utah Court of Appeals answered a fundamental question about insurance rescission in Derbridge v. Mutual Protective Insurance Company, holding that innocent misstatements by insurance applicants do not constitute “misrepresentations” sufficient to justify policy rescission under Utah law.

Background and Facts

Esma Seymour applied for long-term care insurance through MPIC in 1989, answering “no” to questions about organic mental disease and recent hospitalizations. After Seymour filed a claim for Alzheimer’s-related care, MPIC investigated and discovered medical records from 1985-1988 showing memory impairment diagnoses and hospitalizations. MPIC rescinded the policy, arguing Seymour’s application responses constituted material misrepresentations. Seymour contended she was unaware of her doctor’s diagnoses and made the statements innocently. Her physician confirmed he had not discussed Alzheimer’s disease with her prior to the application.

Key Legal Issues

The court addressed whether an applicant’s innocent misstatement constitutes a “misrepresentation” under Utah Code Ann. 31A-21-105(2), which permits rescission when misrepresentations are material and relied upon, made with intent to deceive, or contribute to the loss. The statute does not define “misrepresentation,” creating ambiguity about whether knowledge or awareness is required.

Court’s Analysis and Holding

The Court of Appeals found the statute ambiguous and applied principles of statutory interpretation favoring insureds. Examining case law from other states with similar statutes, the court noted most jurisdictions require more than innocent misstatements for rescission. The court distinguished between “knowing misrepresentation” and “intent to deceive,” finding these are separate concepts rather than redundant provisions. Policy considerations strongly favored requiring applicant knowledge, as innocent misstatements could result in widespread rescissions for undiagnosed conditions.

Practice Implications

This decision provides significant protection for Utah insurance consumers while establishing clear guidance for practitioners. Insurance companies cannot rescind policies based solely on factually incorrect application responses if the applicant lacked knowledge of the true facts. Defense attorneys should carefully develop evidence regarding applicants’ actual knowledge and awareness. Insurers retain options to conduct medical examinations or review records before issuing policies to avoid claims involving unknown pre-existing conditions.