South Carolina Lawyers Weekly
Lorenzo Smallwood fibbed when he filled out an application for life insurance in 2007. He wrote that he’d never been treated for a mental disorder or alcohol dependency, and hadn’t recently used cocaine. In fact, the year before, he expressed concerns to a doctor that he suffered from post-traumatic stress disorder from his time in Iraq and reported that he drank heavily and used cocaine.
None of that would have mattered much if Smallwood hadn’t been shot and killed less than a year later. The insurer, Shenandoah Life Insurance, denied Smallwood’s wife’s claim because he lied on the application. A circuit court judge granted the company a directed verdict, but a divided Court of Appeals has now sent the case back, saying that a jury should decide whether Smallwood made the misrepresentations with a fraudulent intent.
Neither the nurse nor the doctor who examined Smallwood when he showed up at an emergency room in 2006 could remember their conversations, but according to their notes, Smallwood said he had not slept well since returning from the military; had used cocaine and drank 12 beers a day; and believed he had PTSD. The doctor assessed Smallwood as an alcoholic and referred him for a mental health consultation, but Smallwood never followed up.
Apparently, Smallwood’s wife had no inkling of this visit. A few months later, she contacted Shenandoah about a life insurance policy, and Smallwood filled out an application that asked if he had been diagnosed or treated for a mental or nervous disorder, alcoholism or drug dependency in the last 10 years, or used cocaine in the last five. Smallwood answered no to both questions, and he and his wife signed the application. The amount of the policy was small, and Shenandoah granted it without requiring Smallwood to take a medical exam.
In 2008, Smallwood was killed in an unrelated manslaughter. Shenandoah denied the claim on the policy when it learned Smallwood made false statements, and brought an action against his wife, Lakeisha, to void the policy.
High bar to clear
The bar to clear for voiding a life insurance policy for false statements is set high. The insurer must prove by clear and convincing evidence that the applicant made false statements on the application, that he knew they were false, that the insurer relied on the misrepresentations in issuing the policy, that the statements were relevant to the policy’s risk, and that the applicant made the statements with the intent to defraud the insurer.
In Smallwood’s case, there was no question on the first four elements, and a circuit court judge granted Shenandoah summary judgment on each. The only issue left for a jury was whether Smallwood lied with the intent to defraud the company. However, after hearing all the evidence, Judge W. Jeffrey Young granted Shenandoah a directed verdict on this issue too, saying the dispute was among the “rare cases” where the facts could reasonably give rise to just one inference: that Smallwood procured the policy by intentional fraud.
Lakeisha Smallwood appealed, and a divided Court of Appeals returned the case to the circuit court for retrial. Shenandoah faced a double-whammy in its burden of proof that the court said it had not met. To prevail at trial, it needed to prove fraud by the elevated standard of “clear and convincing evidence.” To prevail on a directed verdict motion, it had to show that no reasonable jury could see the facts as anything except such strong evidence of fraud.
The high burden of proof in such cases works against the insurer, Chief Judge John C. Few wrote for the majority, because the direct evidence is “locked up in the heart and consciousness of the applicant.” Typically, fraud is proven by circumstantial evidence, and in this case, the court found there was more than one reasonable inference a jury could draw.
For example, the court said, a jury could reasonably conclude Smallwood wanted to conceal his drug use from his wife, who would have learned about it when signing the application. As for concealing his PTSD, the court noted the same theory and added there was no evidence Smallwood was ever diagnosed with or treated for it—only his statement to the doctor and nurse that he suspected he suffered from it.
Shenandoah objected that Lakeisha had presented no evidence that Lorenzo was trying to conceal his drug use from her. Few said that this reversed the burden of proof, which rested on the insurer.
“In holding that a jury could reasonably conclude Shenandoah failed to meet its burden of proof, we do not rely on the existence of evidence presented by Lakeisha,” Few wrote. “Rather, we hold that the evidence Shenandoah presented is insufficient to support a conclusion that it proved Lorenzo’s fraudulent intent clearly and convincingly as a matter of law. Our discussion of ‘several plausible explanations’ is simply to illustrate that there is more than one inference a jury may reasonably draw from this evidence.”
Further, Shenandoah presented no evidence that Smallwood, 26, associated his alcohol or cocaine use with any increased medical risk. Because neither the doctor nor nurse could recall what led them to make their notes, if a jury were inclined to a draw an inference in Smallwood’s favor, it might conclude that “abuse” referred to isolated cocaine and alcohol use and find that the record contained nothing more than Lorenzo’s suspicion he had PTSD.
The court thus distinguished the case from others in which applicants attested to clean bills of health despite recent numerous hospital stays for ailments that they knew put them at a very high risk of death. Those, it said, were the “rare cases” that justified a directed verdict on the question of intent to defraud.
Judge H. Bruce Williams dissented, however. He argued that Shenandoah had met its burden of proof and that any theories that Smallwood lied about his drug use to conceal it from his wife and aunt “is purely speculative and, further, is irrelevant.”
Eleanor Duffy Cleary of Columbia and D. Reece Williams of Callison Tighe & Robinson in Columbia represented Smallwood. George “Geov” Hanna V of Howser Newman & Besley in Columbia represented Shenandoah.
Cleary said she was anxious to take the case back to a jury.
“[Insurers] have to do more than just show that he signed it and he was wrong. The law requires more than just a signature—there has to be some clear and convincing evidence of intent to defraud,” Cleary said. “If they’re not going to do some sort of investigation into the medical history before the person is dead, they’re going to have a hard time meeting that burden after the person is dead.”
Hanna, not surprisingly, agreed with the dissent that the trial judge had been correct to award a directed verdict. He said a jury might decide the case based on passion and prejudices unrelated to the law.
“The argument I made was that basically all these other reasons they’re trying to state [for the misstatements] are totally based on speculation and are not relevant. You could have not wanted your wife to know and been trying to defraud the insurer at the same time. One doesn’t preclude the other,” Hanna said.
Hanna said that his client was still deciding whether to appeal the decision to the Supreme Court. The cost of fighting the case had probably already exceeded the value of the policy, he said.
The 10-page decision is Shenandoah Life v. Smallwood (Lawyers Weekly No. 011-010-13). The full text of the decision can be found online at sclawyersweekly.com
Follow David Donovan on Twitter @SCLWDonovan
