Sixth Circuit Finds Hartford’s Rescission of Life Insurance Coverage Due to a Material Misrepresentation Was Not Arbitrary and Capricious

In Campbell v. Hartford Life & Accident Ins. Co., No. 21-5651, 2022 WL 620151 (6th Cir. Mar. 3, 2022), the Sixth Circuit considered two questions in this dispute over the payment of life insurance benefits. Does a plan document that was not part of the administrative record, but which conferred discretionary authority to Defendant Hartford Life & Accident Insurance Company, entitle Hartford to arbitrary-and-capricious review of its benefit determination? If so, was Hartford’s decision to rescind life insurance coverage based on a material misrepresentation arbitrary and capricious? The Sixth Circuit determined that Hartford is entitled to arbitrary-and-capricious review and that its recission of coverage was not arbitrary and capricious. The court reversed the district court and remanded with instructions to enter judgment in favor of Hartford.

On the question of the standard of review, the district court found that de novo review applied to Hartford’s decision because the certificate of insurance, which contains a provision stating that Hartford has full discretion and authority to determine eligibility for benefits, was not part of the administrative record. The district court relied on Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609, 616 (6th Cir. 1998) for the rule that a court may not consider new evidence or look beyond the record that was before the plan administrator. The Sixth Circuit explained that this rule does not preclude consideration of plan documents. The certificate was incorporated into the life insurance policy and is a plan document. A district court must enforce a benefit plan’s unambiguous plain language regardless of whether the plan document was made part of the record. Additionally, the certificate of insurance is the only document that contains substantive terms of the plan. Campbell cannot claim entitlement to benefits in reliance on the document while at the same time arguing it is not a plan document for purposes of the standard of review. Hartford’s discretionary authority extends to its decision to rescind coverage based on a material misrepresentation made in the insurance application.

Rather than remand the case to the district court to apply the arbitrary-and-capricious standard, the Sixth Circuit decided the question itself. Here, the insured had to submit evidence of insurability to obtain the maximum amount of supplemental dependent life insurance coverage. The application asked whether, in the past five years, the insured had been diagnosed or treated for drug or alcohol abuse (excluding support groups). The insured checked “no” even though he was prescribed Antabuse (alcoholism medication) to help him stop drinking alcohol and he was referred to a psychiatrist for treatment. His treating doctor had also noted that his hypertension was uncontrolled due to excessive alcohol use and diagnosed him with alcohol dependence. Given the ordinary meaning of “abuse,” which is “improper or excessive use or treatment,” the term “alcohol abuse,” given its plain meaning, would be construed by an ordinary person as the excessive use of alcohol. The court found that the record contained ample evidence that the insured was treated for excessive use of alcohol in the year prior to applying for life insurance. Given these facts, Hartford could rationally conclude that the insured had been diagnosed or treated for alcohol abuse and that the insured’s statement in his application was a material misrepresentation.

Campbell argued that the term “alcohol abuse” in the application should be given its technical meaning as defined in the DSM-IV, and the insured was diagnosed with alcohol dependence, not alcohol abuse. The court rejected Campbell’s argument because, deferring to Hartford’s reasonable interpretation, giving “alcohol abuse” its ordinary meaning was reasonable. Further “drug abuse” is not a condition in the DSM-IV so it would “be odd” to give drug abuse its plain meaning but alcohol abuse its DSM-IV definition. And even if the court read “alcohol abuse” as having its DSM-IV definition, Hartford’s decision withstands arbitrary-and-capricious review because the evidence showed the insured was treated for the severe manifestation of alcohol abuse. Campbell argued that answering “no” was not a material misrepresentation because it was made in good faith. The court noted that the insured’s good faith is irrelevant to the materiality analysis. Hartford rescinded coverage within two years from the effective date of the policy so the incontestability clause did not apply, and Hartford did not need to find that the misrepresentation was fraudulent. The court concluded that Hartford’s decision to rescind supplemental dependent life insurance coverage based on a material misrepresentation was not arbitrary and capricious.