Chism v. Protective Life Ins. Co. (Supreme Court)

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IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 99,291

KAREN CHISM,
Appellant,

v.

PROTECTIVE LIFE INSURANCE CO. and
QUALITY MOTORS OF INDEPENDENCE, INC.,
Appellees.


SYLLABUS BY THE COURT

1.
In a civil case, when the Kansas Supreme Court grants a petition requesting review
of a Court of Appeals' decision and obtains jurisdiction under K.S.A. 20-3018(b), only
issues presented in the petition, or fairly included therein, will be considered.

2.
Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law. The trial court is required to resolve all facts and inferences which may
reasonably be drawn from the evidence in favor of the party against whom the ruling is
sought. When opposing a motion for summary judgment, an adverse party must come
forward with evidence to establish a dispute as to a material fact. In order to preclude
summary judgment, the facts subject to dispute must be material to the conclusive issues
in the case. On appeal, we apply the same rules and where we find reasonable minds
could differ as to the conclusions drawn from the evidence, summary judgment must be
denied.

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3.
Fraud is never presumed and must be established by clear and convincing
evidence.

4.
The existence of fraud is normally a question of fact.

5.
An insurer has the right to rescind a policy ab initio for fraudulent
misrepresentation in the application process.

6.
To establish fraudulent misrepresentation in an action to rescind an insurance
contract, the following elements must be established: (1) There was an untrue statement
of fact made by the insured or an omission of a material fact, (2) the insured knew the
statement was untrue, (3) the insured made the statement with the intent to deceive or
recklessly with disregard for the truth, (4) the insurer justifiably relied on the statement,
and (5) the false statement actually contributed to the contingency or event on which the
policy is to become due and payable.

7.
An insurer is estopped from setting up a defense of fraud on the part of the insured
in the application process where such fraud was on the part of the insurer's agent. This
rule applies with particular force where false answers are inserted by the agent without
the knowledge of the applicant, regardless of whether such statements be considered
representations or strict warranties. Thus, where an application is prepared without even
consulting or interrogating the insured, and the insured had no knowledge of the making
of such statements, much less their verity, an estoppel arises.

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8.
In cases where the truth of the representations or the facts surrounding the taking
of an insurance application are in dispute, the questions presented are for a jury's
determination.

9.
The general rule is that an insurance applicant has a duty to understand the
contents of a policy application before signing it and to answer all questions fairly and
truthfully. A failure to read the application does not excuse a misrepresentation by an
applicant absent fraud by the insurer's agent, undue influence, or mutual mistake.

10.
An applicant for an insurance policy has no absolute duty to read a policy in
anticipation of fraud or mistake of an insurer's agent.

11.
Signing an application for insurance in good faith without reading it is not such
negligence as would render the applicant responsible for the insurance agent's fraud or
mistake.

12.
Kansas courts have consistently recognized that an insurer may not rescind a
policy on a mere negligent misrepresentation or omission in an application for insurance.

13.
In the absence of an insurer's fraud or undue influence or of a mutual mistake, the
failure to read an insurance application before signing it may be evidence of a reckless
disregard for the truth and may estop the applicant from claiming to be ignorant of the
document's content.
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Review of the judgment of the Court of Appeals in 40 Kan. App. 2d 629, 195 P.3d 776 (2008).
Appeal from Montgomery District Court; FREDERICK WILLIAM CULLINS, judge. Opinion filed June 11,
2010. Judgment of the Court of Appeals affirming the district court is reversed on the issues subject to
review. Judgment of the district court on the issues subject to review is reversed and remanded

William J. Fitzpatrick, of Independence, argued the cause and was on the brief for appellant
Karen Chism.

James P. Rankin, of Foulston Siefkin LLP, of Topeka, argued the cause, and Stephen M. Kerwick,
of the same firm, was with him on the briefs for appellee Protective Life Insurance Company.

W. James Foland, of Foland, Wickens, Eisfelder, Roper & Hofer, P.C., of Kansas City, Missouri,
argued the cause, and Rhonda K. Mason and John M. Brigg, of the same firm, were with him on the brief
for appellee Quality Motors of Independence, Inc.

The opinion of the court was delivered by

LUCKERT, J.: Past decisions of this court have held that an insurance company
may rescind an insurance contract if an insured makes fraudulent material
misrepresentations when applying for an insurance policy. A different rule applies,
however, if the insurance company's agent completed the application and either
knowingly entered false information or failed to ask the applicant for the information.
Under those circumstances, the insurance company is estopped from rescinding the
policy. This is true even if the applicant could have discovered the misrepresentation by
reading the application form.

This appeal raises the question of whether the same estoppel principles apply if an
insurance company's agent does not write a false answer on an insurance application but
makes fraudulent misrepresentations that lead an applicant to sign an application without
knowing that the signature represents there are no disqualifying health conditions. We
conclude these circumstances are comparable to a situation where an insurance agent
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does not ask an applicant for information used to complete an application and an
insurance company could be estopped from rescinding its policy. In this case, however,
the insurance company disputes that the agent made misrepresentations. Because there is
sharply conflicting evidence regarding the facts surrounding the completion of the
application, we hold that the district court erred in granting summary judgment.

FACTS AND PROCEDURAL BACKGROUND

This appeal arises from Karen Chism's claim as the beneficiary on a life insurance
policy issued by Protective Life Insurance Co. (Protective). The life insurance policy
was offered to Karen and her husband Steve Chism during transactions related to the
Chisms' purchase of a new vehicle from Quality Motors of Independence, Inc. (Quality
Motors). As part of the transaction, the dealership's business manager, Dennis Urban
(also referred to as "the agent"), explained that the Protective life insurance policy could
be purchased and the insurance would pay off the remaining debt on the auto loan if
either of them died.

According to Karen's deposition testimony, when Urban first discussed the life
insurance he told them they qualified for the insurance because they were younger than
66 years of age. After the Chisms agreed to purchase the insurance, Urban used his
computer to complete a portion of the insurance application form. Most of the
information was data used in the paperwork relating to the sale and financing of the
vehicle. This included basic biographical information about the Chisms (names, address,
telephone number, age, gender, and Social Security numbers), details about the vehicle,
and information about the loan. In addition, Urban filled in the amount of life insurance
requested and the designated beneficiaries.

Urban printed out the application along with other documents relating to the
purchase and financing of the vehicle. According to Karen, as Urban presented the life
insurance application to the Chisms he "just told us how much the payments were going
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to be, how much the insurance was, and this is the Protective Life policy and sign down
here." She denied that Urban said anything about there being certain health conditions
that disqualified an applicant or that he indicated there was a portion of the application
regarding preexisting health conditions that they needed to review and complete.

Both Karen and Steve signed and dated the document, and Urban signed as the
licensed resident agent for Protective. Karen testified at her deposition that she did not
read the application before signing. In addition, when asked if Steve had read the
application, she stated: "I don't know, but I'm sure he didn't because we were just passing
the deals and we signed them and passed that other one and he signed it. He didn't have
time to read it I'm sure."

Urban's deposition testimony presents a sharply conflicting version of events. He
testified it was not his practice to tell applicants they were qualified for insurance. In
addition, according to Urban, Karen signed the documents at a different time than did
Steve and both applicants had time to read the application before signing. Further, he
testified he told both Karen and Steve they needed to review the application, initial where
appropriate in the self-qualifying portion of the application, and then sign at the bottom.

Nevertheless, according to Karen's deposition testimony, the Chisms were not
aware of the section of the application that related to health qualifications. That section
began with the heading: "WARNING—YOU MUST BE ELIGIBLE TO APPLY FOR
INSURANCE." Below this heading the form stated:

"You are not eligible to apply for any insurance if you have attained age 66 as of the
Effective Date, if you will have attained age 69 as of the Expiration Date of the
insurance; or if you are not the named Debtor or Co-Debtor in the Schedule above."

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A paragraph followed that contained conditions of eligibility for disability
insurance. Then, in a shaded box, another heading stated: "APPLICATION." These
instructions and text followed:

"CIRCLE (item) and INITIAL (line) if any item applies to you. OTHERWISE, DO NOT
MAKE ANY MARKS.
"1. I am not eligible for any insurance if I now have, or during the past 2 years have been
seen, diagnosed or treated for:
(a) A condition, disease or disorder of the brain, heart, lung(s), liver, kidney(s),
nervous system or circulatory system; or
(b) Tumor; Cancer; Uncontrolled High Blood Pressure; Diabetes; Alcoholism;
Drug Abuse; Emotional or Mental Disorder; Acquired Immune Deficiency Syndrome
(AIDS); the Aids Related Complex (ARC); or received test results showing evidence of
antibodies of the AIDS virus (HIV Positive).
_____________ _____________
Debtor Initials Co-Debtor Initials
(initial here only if you have circled any item)

"2. I am not eligible for disability insurance if I now have, or during the past 2 years
have been seen, diagnosed or treated for a condition, disease or disorder of the neck,
back, knee(s) or any joint(s) or for carpal tunnel syndrome.
_____________ _______________
Debtor Initials Co-Debtor Initials
(initial here only if you have circled any item)

"The sales representative is not authorized to waive or change any of the insurability
requirements or any provision of the Certificate.

"By signing below, I state that I have read and understand this Application and represent
that I am eligible and insurable for the coverage as requested in the Schedule. I have read
and understand the above Application and understand that I am not insurable for [] any
coverage if I have circled (any item) and initialed application statement #1 or; disability
coverage if I have circled (any item) and initialed application statement #2. I understand
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this insurance is not required to obtain credit. I understand and agree that I am insured
only if I have signed below and agree to pay the additional cost of the insurance. I have
detached and retained the 'INSURED'S COPY' of this form and Certificate for my
records."

The instructions to circle and initial applicable health conditions were printed in red, as
was the instruction to provide initials at the end of sections one and two if any item was
circled.

The Chisms did not circle any health conditions or place initials in the applicable
blanks, even though Steve suffered from diabetes. He also had a history of high blood
pressure; however, the question related to uncontrolled hypertension and Karen's
deposition testimony was that Steve's hypertension was under control at the time of the
application.

About 7 months after purchasing the vehicle, Steve died. The death certificate
listed the cause of death as sudden death. No underlying cause of death was indicated,
but diabetes mellitus, hypertension, morbid obesity, and peripheral vascular disease were
listed as "significant conditions contributing to death but not resulting in the underlying
cause" of Steve's death. Diabetes and uncontrolled hypertension were conditions that
would render a person ineligible for credit life insurance if disclosed on the Protective
application.

Karen submitted a claim for benefits under the policy. Protective denied the claim
and rescinded the policy based on Steve's failure to disclose disqualifying medical
conditions.

In September 2006, Karen filed suit against Protective for breach of contract and
against Quality Motors for negligent procurement of the policy. Ultimately, the parties
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filed competing motions for summary judgment. The district court granted summary
judgment in favor of Protective and Quality Motors. The court found that Quality Motors
"does not review the medical interrogatories section" with applicants, but the Chisms had
a duty to read the application, which they failed to do, and "unknowingly enrolled
themselves into a credit life insurance program they were not eligible for." Because of
the Chisms' duty to read and Steve's disqualifying health conditions, the court held that
Protective's subsequent denial of coverage did not constitute a breach of the insurance
policy and that Protective had rightfully rescinded the contract. Moreover, because the
application required an eligibility determination—or self-disqualification—by the
applicants, the district court stated Quality Motors was not negligent in its presentation of
the application to the Chisms.

Karen appealed, and the Court of Appeals affirmed in Chism v. Protective Life Ins.
Co., 40 Kan. App. 2d 629, 195 P.3d 776 (2008). Regarding the issue of rescission, the
Court of Appeals concluded the Chisms made material misrepresentations on the
insurance application that barred any recovery under the policy. The Court of Appeals
also concluded the policy language specifically negated Steve's eligibility for coverage
due to his health conditions, and the policy clearly denoted that the agent had no authority
to waive Protective's insurability requirements. Chism, 40 Kan. App. 2d at 634. In
addition, the Court of Appeals noted it was uncontroverted that the Chisms knew about
Steve's health conditions, so even if the failure to disclose those conditions was not, as
described by Karen, "deliberate deceit," Protective had the power to rescind the policy
after misrepresentations were made with "reckless disregard" for the truth. Chism, 40
Kan. App. 2d at 636.

The Court of Appeals also rejected Karen's argument that Protective waived its
right to rescind the insurance policy. The Court of Appeals pointed out, inter alia, that
Karen was bound by the provisions in the application regardless of her failure to read or
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understand its terms, unless her execution of it was the product of fraud, undue influence,
or mutual mistake. The Chisms were, according to the Court of Appeals, not able to
attribute the misrepresentations to the agent because the agent did not complete the
medical portion of the application and the Chisms had "the opportunity and duty to
correctly complete the portion of the application form relating to health issues." Chism,
40 Kan. App. 2d at 635-36. The lack of complicity or fault of the agent, according to the
Court of Appeals, distinguished this case from two Kansas cases and cases from other
jurisdictions cited by Karen. The Court of Appeals concluded that Protective was entitled
to summary judgment. Chism, 40 Kan. App. 2d at 637.

Next, the Court of Appeals addressed Karen's negligent procurement claim in
which she alleged that Quality Motors failed to properly present and record the medical
inquiries on the application. The Court of Appeals upheld the order granting Quality
Motors summary judgment, holding there was no evidence that Urban, an employee of
the dealership, was an agent for the Chisms or owed any legal duty to the Chisms "when
it came to their obligation to read, understand, and accurately respond to the inquiries
made" about their health in the application. Chism, 40 Kan. App. 2d at 639.

Finally, the Court of Appeals concluded the district court did not abuse its
discretion when it quashed subpoenas for depositions of certain witnesses, excused the
defendants from producing certain documents, and struck a witness' affidavit. Chism, 40
Kan. App. 2d at 640-42.

Karen filed a petition for review in which she raised only issues relating to her
breach of contract claim against Protective and its rescission of the insurance contract.
She did not discuss the other issues considered on direct appeal relating to negligent
procurement and discovery orders. We granted the petition, and our jurisdiction arises
from K.S.A. 20-3018(b).

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After Karen's petition for review was granted, she filed a supplemental appellate
brief in which she asserted that she was not "waiving" review on all issues decided by the
Court of Appeals. Nevertheless, under the rules relating to appellate procedure, this
court's consideration of any issue considered by the Court of Appeals in a civil case is
limited to the issues raised in the petition for review or fairly included therein. Supreme
Court Rule 8.03(a)(5)(c) (2009 Kan. Ct. R. Annot. 67); cf. Supreme Court Rule 8.03(c)
(2009 Kan. Ct. R. Annot. 68) (discussing issues raised in responses to petitions for
review). The appeal before this court is limited, therefore, to the issues relating to the
entry of summary judgment on Karen's claim against Protective for breach of contract
and Protective's rescission of the policy. The Court of Appeals' decision to affirm
summary judgment in favor of Quality Motors and its ruling on the discovery issues are
not impacted by our decision.

Regarding her claim that Protective breached its contract, Karen argues in her
petition for review that the Court of Appeals (1) failed to review the record in the light
most favorable to Karen; (2) erred by distinguishing this case from Schneider v.
Washington National Ins. Co., 200 Kan. 380, 437 P.2d 798 (1968), and Cooley v.
National Life & Acc. Ins. Co., 172 Kan. 10, 238 P.2d 526 (1951); and (3) erred by
holding that the failure to read an application for credit life insurance containing self-
disqualifying medical inquiries is sufficient proof of fraudulent misrepresentation
justifying rescission.

STANDARD OF REVIEW/GENERAL PRINCIPLES

The standard for summary judgment is well known:

"'Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law. The trial court is required to resolve all facts and inferences which may
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reasonably be drawn from the evidence in favor of the party against whom the ruling is
sought. When opposing a motion for summary judgment, an adverse party must come
forward with evidence to establish a dispute as to a material fact. In order to preclude
summary judgment, the facts subject to dispute must be material to the conclusive issues
in the case. On appeal, we apply the same rules and where we find reasonable minds
could differ as to the conclusions drawn from the evidence, summary judgment must be
denied.' [Citation omitted.]" Nelson v. Nelson, 288 Kan. 570, 578, 205 P.3d 715 (2009).

Karen's arguments focus on the requirement that facts be considered in the light
most favorable to the party opposing the summary judgment. We will discuss the areas
where Karen argues the Court of Appeals failed to apply the correct standard of review in
the context of our discussion of the Court of Appeals' legal conclusions.

These legal conclusions relate to the parties' competing claims regarding who is
responsible for the failure to disclose Steve's diabetes (and perhaps other disqualifying
health conditions) on the insurance application. The Chisms claim it was Urban's
misrepresentations that caused the error and they never intended to make any
representations regarding health conditions, much less a false representation. On the
other hand, Protective argues Urban had no responsibility for the error and the Chisms
committed fraud.

As we consider these competing arguments, three general principles further define
our standard of review: (1) Fraud is never presumed; (2) fraud must be established by
clear and convincing evidence; and (3) the existence of fraud is normally a question of
fact. Alires v. McGehee, 277 Kan. 398, 403, 85 P.3d 1191 (2004).

Protective's claims are based on the general rule of law that an insurer has the right
to rescind a policy ab initio for fraudulent misrepresentation in the application process.
American States Ins. Co. v. Ehrilich, 237 Kan. 449, 701 P.2d 676 (1985). To establish
fraud in this context, Protective must establish: (1) There was an untrue statement of fact
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made by the insured or an omission of material fact, (2) the insured knew the statement
was untrue, (3) the insured made the statement with the intent to deceive or recklessly
with disregard for the truth, (4) the insurer justifiably relied on the statement, and (5) the
false statement actually contributed to the contingency or event on which the policy is to
become due and payable. See K.S.A. 40-2205(C) (imposing fifth element); Miller v.
Sloan, Listrom, Eisenbarth, Sloan and Glassman, 267 Kan. 245, 260, 978 P.2d 922
(1999) (analyzing claim of fraud by silence); Waxse v. Reserve Life Ins. Co., 248 Kan.
582, 586, 809 P.2d 533 (1991) (stating elements one to three as stated here but stating the
fourth element as "another party justifiably relied on the statement and acted to his injury
and detriment"); Ehrlich, 237 Kan. at 452 (same); Scott v. National Reserve Life Ins. Co.,
143 Kan. 678, 680, 56 P.2d 76, modified on other grounds 144 Kan. 224, 58 P.2d 1131
(1936) (recognizing fraud to be a known misrepresentation or a nondisclosure).

Other than the legislative refinement of the fifth element, these elements parallel
those of a fraud claim generally. See Alires, 277 Kan. at 403 (stating elements of fraud as
"an untrue statement of fact, known to be untrue by the party making it, made with the
intent to deceive or with reckless disregard for the truth, upon which another party
justifiably relies and acts to his or her detriment").

ESTOPPEL

The primary thrust of Karen's petition for review is her argument that Protective is
estopped from rescinding the contract because of its agent's wrongdoing. In response,
Protective does not deny that Urban acted as its agent, but it denies that Urban is in
anyway responsible for the false statement on the application. Protective's view, which
was adopted by the district court and the Court of Appeals, is that Protective can be
estopped only if Urban placed false information on the application. To support this
position, Protective cites Schneider v. Washington National Ins. Co., 200 Kan. 380, 437
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P.2d 798 (1968), and Cooley v. National Life & Acc. Ins. Co., 172 Kan. 10, 238 P.2d 526
(1951), which were both discussed by the district court and the Court of Appeals.

In the earliest of these cases, Cooley, 172 Kan. 10, a father discussed purchasing
life insurance for his three daughters with a life insurance agent and the agent's
supervisor. According to the father, he explained he was not interested in purchasing
policies unless he could do so for the benefit of all of his daughters and he was concerned
that one diabetic daughter would not qualify for coverage. He told the agent that the
diabetic daughter had not seen a doctor for some time and was "getting along all right."
The agent and supervisor asked to see the daughter, so the father sent them to the family
home and indicated the mother could complete the application. Once at the home, the
agent filled out the application, asking the mother questions and completing the
application with her answers. According to the mother, when the agent reached a
question about diabetes, the agent indicated the father had already answered the question.
The mother testified she signed the application but did not read it. The life insurance
agent and his supervisor disputed the father's and mother's testimony by asserting the
mother had answered "no" to the question about diabetes and that they had no knowledge
one of the applicants had that health condition.

This court affirmed the district court's determination that the disputed facts created
a jury question, stating:

"The rule in this state is that an insurance agent in making out an application for
insurance acts as the agent of the company and not of the applicant, and if the applicant
makes truthful answers to the questions propounded, the company cannot generally take
advantage of false answers entered by the agent contrary to the facts as stated by the
applicant. . . . The rule stated represents the great weight of authority. [Citations
omitted.] No reason is suggested, and we know of none, why an applicant for insurance,
who is not asked a question contained in the application, but to which an agent enters a
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false answer, is not entitled to a rule as favorable as that stated." Cooley, 172 Kan. at 15-
16.

Subsequently, this court considered similar facts in Schneider, 200 Kan. 380.
There, two insureds testified that an insurance agent filled in an application without
consulting with or directing questions to the applicants. In sharp conflict with this
testimony, the agent testified he filled out the application with the specific answers given
by the applicants.

The court discussed the holding in Cooley, on which the Schneider court relied,
and provided additional authorities and explanation for the holding by stating:

"The rule adhered to by this court in Cooley is stated in 17 Appleman, Insurance
Law and Practice § 9401:

'An insurer is estopped from setting up a defense of fraud or
negligence on the part of the insured in answering application questions,
where such fraud or negligence was on the part of the insurer's agent.
This rule applies with particular force where the false answers are
inserted by the agent without the knowledge of the applicant, regardless
of whether such statements be considered representations or strict
warranties. Thus, where an application is prepared without even
consulting or interrogating the insured, and the insured had no
knowledge of the making of such statements, much less their verity, an
estoppel is certain to arise.

'Likewise, an insurer waives or is estopped to rely on
representations contained in an application where the agent fills in the
application without propounding any of the questions to the insured.
Where an agent assumes the responsibility for answering the questions
asked in the application, and answers falsely or incorrectly without the
applicant having made any statements in connection therewith or
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knowing the manner in which they were answered, the insurer will be
estopped to claim that the representations were false or incorrect. The
insured cannot be called upon to bear the consequences, where the
application is filled in by the agent from his own knowledge or from
information in his possession.'" Schneider, 200 Kan. at 395.

Under the facts in Schneider, where the applicants testified the agent completed
the application without asking the applicants for the necessary information, this court
held the insurer could be estopped from rescinding the application under these general
rules.

Because there was conflicting testimony regarding whether the agent asked the
questions, this court further held that the district court erred in granting summary
judgment, stating: "In cases where the truth of the representations or the facts
surrounding the taking of the application are in dispute the questions presented are for a
jury's determination." Schneider, 200 Kan. at 393.

Karen argues the same conclusion applies in this case because questions of fact
exist regarding the taking of the application. She complains the district court and the
Court of Appeals ignored the factual questions and resolved the conflicting testimony in
favor of Protective. For example, she points to the Court of Appeals' statement that
Urban "handed the application to the Chisms to complete, review, and sign." Chism, 40
Kan. App. 2d at 630. She suggests the evidence, when viewed in the light most favorable
to her, establishes: (1) Urban completed the form or at least led the Chisms to believe he
had; (2) Urban did not give any indication they should review the information or the
questions; (3) Urban told the Chisms they qualified because of their age, leaving the
impression there were no additional qualifying conditions; and (4) Urban pointed out
where they should sign at the bottom of the form without pointing out the blanks for their
initials in the portion of the form relating to health qualifications.

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In addition, she argues that had the district court and the Court of Appeals
considered the evidence in her favor, neither court would have distinguished either
Cooley or Schneider. To test this assertion, we will examine the basis on which each of
those courts distinguished those cases.

First, the district court found Schneider and Cooley distinguishable in that Urban
did not exert "the kind of control over the application process contemplated in" those two
decisions. The district court noted that in those cases "the agent either knowingly made a
false statement on the application or the insurance company itself failed to ask the
appropriate questions. Neither occurred in the case at bar." Similarly, the Court of
Appeals concluded that Urban filled out only background facts, not facts related to
information about material health conditions—information which was to be supplied by
the Chisms. The Court of Appeals concluded this distinguished the prior cases because,
as the court explained:

"We are not confronted with a situation where the insured gives the procuring agent a
verbal answer to a health question on the application and the agent writes down
something entirely different on the application. Indeed, Karen claims that [the agent]
failed to question them at all about their health conditions." Chism, 40 Kan. App. 2d at
635.

Karen does not dispute the factual component of this analysis, but she does
question the legal conclusion that the agent's alleged misrepresentations cannot estop
Protective. Karen argues that to apply an estoppel rule only if the agent physically writes
on the application insulates an insurer from the consequences of its agent's fraud simply
because of the manner in which the application's health inquiry is phrased. She urges us
to hold that an agent's fraud estops an insurance company from rescinding a contract if
the agent's fraud causes the submission of an inaccurate application, as long as the
applicant acted in good faith.

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We agree with Karen's argument. If the facts are accepted in the light most
favorable to Karen, Urban led the Chisms to believe he had completed the application
and had obtained all of the necessary information. Further, his misrepresentation that the
Chisms qualified for the insurance because of their age suggested there were no health
qualifications. Then, according to Karen, Urban told them to sign on the bottom of the
form without directing their attention to the disqualifying conditions. This is significant
in light of Protective having written the application so that an applicant who signs the
form without circling a disqualifying health condition effectively answers, "No, there are
no disqualifying medical conditions." Under those circumstances, an agent who directs
the applicant to sign the form, knowing the applicant is unaware of and has not answered
potentially disqualifying medical inquiries, has assumed responsibility for answering the
questions and has caused the submission of a false answer. The legal effect of this action
is not different from the effect of an agent not asking qualifying questions of the
applicant and submitting a false answer, which was the situation in Schneider.

Nevertheless, the Court of Appeals also concluded there was no evidence to
establish that the agent knew the Chisms did not read the application. The Court of
Appeals stated: "Urban testified that the Chisms did not immediately sign the document
when he handed it to them. Karen had it before her for an adequate time for her to read it
before signing it. Urban stated, 'She did not do anything to my indication that she did not
read it.'" Chism v. Protective Life Ins. Co., 40 Kan. App. 2d 629, 634, 195 P.3d 776
(2008). However, as Karen points out, when Urban was asked if he saw Karen read the
application, he replied that he could not answer that question. In addition, Karen's
testimony was that the Chisms were passing the various documents between each other
and signing without taking time to read any document. Her description of the transaction
controverts Urban's version and creates an issue of fact regarding whether Urban
accepted responsibility for answering the health qualification questions when he allegedly
directed the Chisms to sign the form without review.

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Even so, the Court of Appeals and the district court concluded the Chisms had a
duty to read the application, which prevented their reliance on the agent's actions. As the
Court of Appeals noted, Kansas has long adhered to the general rule that an insurance
applicant has a duty to understand the contents of a policy application before signing it
and to answer all questions fairly and truthfully. Yet, when this rule is stated it is
generally qualified by the phrase "absent fraud, undue influence, or mutual mistake."
See, e.g., Albers v. Nelson, 248 Kan. 575, 579, 809 P.2d 1194 (1991); Ridgway v. Shelter
Ins. Co., 22 Kan. App. 2d 218, 225, 913 P.2d 1231, rev. denied 260 Kan. 995 (1996).

Karen invokes the exception, arguing Protective cannot be relieved of its agent's
misrepresentations because of her and Steve's failure to read the form. The Schneider
court discussed this point, noting there was a split of authority with some courts imposing
a duty to read a contract even if an insurance agent commits fraud. The Schneider court
opted for what it termed the more "lenient" view, however, stating:

"'An applicant has no absolute duty to read a policy in anticipation of fraud or mistake of
an agent, so that even though the application contains a warranty that all answers to questions
were correct, this has been held only a warranty that the answers actually made by the insured
were correct, and not that the agent had correctly transcribed them. Nor would the fact that the
application recites that the falsity of answers bars recovery require the insured to read his
application to see if the agent correctly wrote his truthful answers therein. The mere fact that an
applicant signs the application in good faith without reading it has been considered not such
negligence as would render him liable for the agent's fraud or mistake in inserting answers false in
character, and would not preclude recovery under this rule. Such failure to read would not,
therefore, necessarily be a bar to recovery.

"'An insured has a right to presume that the policy received by him is in accordance with
his application, and his failure to read it will, under this rule, not relieve the insurer or its agent
from the duty of so writing it. . . .'" Schneider, 200 Kan. at 396 (quoting 17 Appleman, Insurance
Law and Practice, § 9406, pp. 31-32).

20

The Schneider court concluded the insurance company could not base its claim for
rescission on the applicant's failure to read the application and discover that the agent had
incorrectly completed it. Schneider, 200 Kan. at 397. In both Cooley and Schneider, the
applicant or the applicant's authorized agent had the opportunity to review and sign the
application. That ability to review the application did not remove the issue from the
jury's consideration.

Similarly here, if Karen's version of the facts are accepted, the Chisms did not
have a duty to read the application to determine whether Urban misrepresented to them
the qualification criteria for the insurance, causing them to believe there were no
qualifying questions for them to answer. Hence, Karen has created questions of fact and,
if a jury were to accept her version of events, Protective could be estopped. Given this
conclusion under Kansas law, we need not consider the out-of-state authorities cited by
Karen.

RESCISSION

On the other hand, if a jury were to accept Urban's version of the facts, Protective
would not be estopped from asserting the Chisms misrepresented Steve's health condition
and the jury would have to consider whether Protective met its burden of proving by clear
and convincing evidence that the Chisms committed fraud. Karen argues there are
questions of material fact on many of the elements of fraud, including the nature of the
misrepresentation, whether the undisclosed health conditions actually contributed to
Steve's death, and whether the misrepresentation was intentional or made with reckless
disregard for the truth. As Karen notes, the element of their intent is intertwined with the
question of whether Urban misled them and whether they reasonably relied on his
misrepresentations. Because issues of fact exist on this one element, a jury question
exists as to whether there was fraud. The jury must consider each element and determine
if the burden of proof has been satisfied.
21

Nevertheless, the parties' arguments raise legal issues we will address to provide
guidance on remand.

Intent/Duty to Read

The first issue relates to Karen's argument that an intent to deceive cannot be
implied from a mere failure to read an insurance application. In making this argument,
Karen appears to interpret the Court of Appeals' decision as adopting a "simple
negligence" standard for fraud. We do not read the Court of Appeals' decision in this
way. Nevertheless, her arguments raise the question of what level of intent is required to
establish a misrepresentation or omission that would justify the rescission of an insurance
contract.

Several states have adopted the rule that an insurance policy may be rescinded
based on a negligent misrepresentation. See, e.g., John Hancock Mut. Life Ins. Co. v.
Weisman, 27 F.3d 500, 504 (10th Cir. 1994) (New Mexico law); Munroe v. Great
American Ins. Co., 234 Conn. 182, 188 n.4, 661 A.2d 581 (1995); Curtis v. America
Community Mut. Ins. Co., 610 N.E.2d 871, 874 (Ind. App. 1993). Kansas has not
adopted this rule, however. Rather, Kansas courts have consistently recognized that an
insurer may not rescind a policy on a mere negligent misrepresentation or omission,
except where contracting, sophisticated commercial entities agree that standard should
apply. E.g., National Bank of Andover v. Kansas Bankers Surety Co., 290 Kan. ___, ___,
225 P.3d 707 (2010); Scott v. National Reserve Life Ins. Co., 143 Kan. 678, 680, 56 P.2d
76, modified on other grounds 144 Kan. 224, 58 P.2d 1131 (1936).

On the other hand, Kansas has recognized that an insurer may rescind a life
insurance policy after a misrepresentation is made on the insurance application with
reckless disregard for the truth. See Alires v. McGehee, 277 Kan. 398, Syl. ¶ 3, 701 P.2d
676 (1985); Waxse v. Reserve Life Ins. Co., 248 Kan. 582, 586-87, 809 P.2d 533 (1991);
22

Tetuan v. A.H. Robins Co., 241 Kan. 441, 467, 738 P.2d 1210 (1987); Scott, 143 Kan.
678; Sharrer v. Insurance Co., 102 Kan. 650, 652, 171 Pac. 622 (1918); see also St. Amant v.
Thompson, 390 U.S. 727, 731, 20 L. Ed. 2d 262, 88 S. Ct. 1323 (1968) (stating that
reckless disregard for the truth in libel claims requires that defendant "in fact entertained
serious doubts as to the truth" of the statement made); Restatement (Second) of Contracts
§ 164 (1981) (when party induced to enter contract by fraudulent or material
misrepresentation upon which party justified in relying, contract voidable).

In addition, Karen argues the Court of Appeals, whether using a simple negligence
or reckless disregard for the truth standard, erred in holding the standard is met if an
insurance applicant signs an unread application. She argues this holding is contrary to
Schneider and Cooley.

While Schneider and Cooley hold an insurance company cannot rely on the failure
to read as a defense to an agent's fraud, they do not excuse an applicant from reading an
application if there is no fraud, undue influence, or mutual mistake. Indeed, this court
has previously stated the "failure to obtain a reading and explanation of [a contract before
signing] is such gross negligence as will estop him from avoiding it on the ground that he
was ignorant of its contents." Maltby v. Sumner, 169 Kan. 417, Syl. ¶ 5, 219 P.2d 395
(1950). This holding is consistent with cases from other courts establishing that signing a
document without reading it is evidence of a reckless disregard for the truth of statements
contained in the document. See United States v. Thomas, 484 F.2d 909, 912-13 (6th
Cir.), cert. denied 414 U.S. 912 (1979) (suggesting that defendant could be convicted of
knowingly making false statement on firearms registration application, even if he did not
actually read the form he signed and no questions were read to him, if by signing
statement without reading it he acted with reckless disregard of whether the statements
made were true or with conscious purpose to avoid learning the truth); United States v.
Squires, 440 F.2d 859, 864 (2d Cir. 1971) (defendant can be convicted of "'knowingly'"
making false statement by signing form without reading it, if he deliberately avoided
23

reading it and, if he had read it, he would have been "'aware of a high probability'" that he
was prohibited from obtaining firearm).

Hence, if the jury were to accept Urban's version and conclude he did not commit
fraud, the jury could determine the Chisms acted with a reckless disregard for the truth
when they failed to read the application. Again, resolution of the issue requires the
weighing of the conflicting evidence regarding the facts surrounding the taking of the
application. Because of the disputed facts, the district court erred in granting summary
judgment.

Materiality

Finally, we consider whether the Court of Appeals applied the wrong standard to
determine the materiality of the alleged misrepresentations regarding Steve's health. The
Court of Appeals stated:

"The test of the materiality of a false statement in an application for life
insurance is whether the misrepresentation could reasonably be considered to affect the
insurer's decisions regarding the degree or character of the risk it is being asked to
underwrite, whether to issue the policy, or what premium it should charge for the policy.
See Schneider v. Washington National Ins. Co., 200 Kan. 380, 397, 437 P.2d 798 (1968).
The same test applies in considering a false statement in an application for life
insurance." Chism, 40 Kan. App. 2d at 634.

Although this statement accurately reflects the holding in Schneider, the test as
stated in Schneider was derived from a prior version of K.S.A. 40-2205(C), which
provided an "acceptance of the risk" standard for measuring materiality. The current
standard for determining materiality of the representation is stated in two statutes.

First, K.S.A. 40-2205(C) states:

24

"The falsity of any material statement in the application for any policy covered
by this act may not bar the right to recovery thereunder unless the false statement has
actually contributed to the contingency or event on which the policy is to become due
and payable." (Emphasis added.)

Likewise, K.S.A. 40-418, found in the general provisions relating to life insurance
companies, utilizes the "contributed to" language and provides:

"No misrepresentation made in obtaining or securing a policy of insurance on the
life or lives of any person or persons, citizens of this state, shall be deemed material or
render the policy void unless the matter misrepresented shall have actually contributed to
the contingency or event on which the policy is to become due and payable." (Emphasis
added.)

See Andreas, Misrepresentation In Insurance Applications: Kansas Law, 62 J.K.B.A. 22,
24 (May 1993) ("Under Kansas law, an insured may lie or conceal material information
in an application for life or health insurance and still recover benefits, as long as the
matter misrepresented did not contribute to the loss."); 44 C.J.S. Insurance § 498, p. 611
(under statute, "a disease existing at the time of the issuance of the policy must cause or
contribute to the insured's death to excuse the insurer from liability"); 45 C.J.S. Insurance
§ 1064, p. 547 ("Where a statute provides that no misrepresentation will avoid the policy
unless the matter misrepresented actually contributed to the death of the insured, such a
statement is no defense to an action on the policy, even though willfully false.").

Applying K.S.A. 40-2205(C) and K.S.A. 40-418 to the present case, the jury must
determine whether Steve's diabetes (and perhaps other conditions if it is determined those
conditions should have been disclosed) "actually contributed to" his death for which
payment under the policy is sought.

25

Even though the Court of Appeals stated materiality was to be tested by whether
the insurer accepted a risk, we note that the court actually applied the "actually
contributed to" statutory test. In doing so, the Court of Appeals concluded the treating
physician "did not negate the notion that Steve's medical conditions contributed to his
death." Chism, 40 Kan. App. 2d at 633. Karen asserts this conclusion is another example
of the Court of Appeals' and district court's weighing of the evidence. She points to her
testimony that Steve's hypertension was controlled at the time of the application. Further,
she points to testimony of Steve's treating physician, in particular his opinion that the
cause of Steve's sudden death cannot be determined. She submits that this testimony
places into question whether Protective can prove by clear and convincing evidence that
diabetes or hypertension were material to the cause of death. Again, these factual
questions make summary judgment inappropriate.

The Court of Appeals' decision on the issues before this court is reversed. The
decision of the district court on the issues before this court is reversed and remanded.