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Disability Insurer Must Prove Over-Insurance Before Rescission

By Casey C. Sullivan, Esq. on December 04, 2015 | Last updated on March 21, 2019

In 2009, Dr. Douglas Weiher, a Wisconsin dentist, started to look for a new insurance disability policy. He found it in Northwestern Mutual, but the company made him promise to cancel one of his two previous insurance policies when he signed up. A few years later, Weiher became fully disabled and sought to collect on his policies.

But, it turns out, he had never canceled the earlier policy as promised. That caused Northwestern to rescind his disability insurance, arguing that Weiher's broken promise to cancel an earlier policy was a misrepresentation. Not so, the Eighth Circuit ruled on Tuesday, finding that Northwestern hadn't shown that Weiher's over-insurance increase its risk at the time of the loss.

Yes, You Can Have Too Much Disability Insurance

Dr. Weiher was a well-insured man. Before he was covered by Northwestern Mutual, he had two disability insurance policies. One plan, through UNUM, would pay $5,000 a month if Weiher became totally disabled. The other, through Great-West Life, would pay $6,000 a month. In 2010, Weiher signed up for a third policy with Northwestern, which would provide $8,400 a month. But when Weiher signed up, Northwestern required him to sign an amendment promising to cancel his Great-West policy and warning that Northwestern would rescind his policy if he did not.

He did not. In 2012, Weiher became fully disabled from neurological and autoimmune symptoms and sought to collect on all three policies. UNUM and Great-West paid; Northwestern did not. It rescinded his policy, arguing that it would never have insured him had he not canceled his Great-West plan. Doing so would have left Weiher over-insured, giving him more incentive to make a claim, the insurer explained.

Not Just the Risk, but When the Risk Occurred, Matters

Weiher sued for breach of contract, but the district court granted summary judgement to Northwestern, reasoning that Weiher's failure to cancel his Great-West plan resulted in a misrepresentation, allowing Northwestern to rescind. The Eighth Circuit didn't see it that way, however.

Wisconsin law limits when life and disability insurance can be rescinded. Wisconsin Statutes § 631.11(1)(b) allows rescission in the case of misrepresentation, for example. That's the section the district court relied on. But, the Eighth Circuit pointed out, section 631.11(3) states that a failure of a condition prior to a loss or a breach of a promissory warranty cannot be grounds for rescission unless "it exists at the time of the loss and either increases the risk at the time of the loss or contributes to the loss."

Yes, Weiher's promise to cancel his Great-West policy was a promissory warranty -- a promise that something shall be done after the policy take effect. But, Northwestern had not shown that Weiher's failure to cancel the policy increased its risk at the time of the loss.

Northwestern, the Eighth explained, had failed to show that Weiher was over-insured at the time of the loss. Northwestern will now have to meet that evidentiary burden before it can end the dentist's disability.

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