Supreme Court orders insurance company to pay cocaine addict left disabled

She had taken out a mortgage of €180,000 with the Caja Rural in Algemesí (Valencia province) and signed up for a life insurance covering the loan, which also paid out in the event of disability, with the bank's tied insurer, Rural Vida, S.A.

The proposal form asked whether the policyholder was 'fully fit to work', 'in good health' and 'did not suffer any injury or illness of a cardio-vascular, oncological, infectious, digestive or endocrinological nature – including diabetes – which required, or had required, medical treatment'.

This was in February 2009, when the policyholder truthfully answered all these questions.

But the proposal form did not mention anything about mental health, and the woman had been in treatment for possible psychosis resulting from her cocaine addiction for several years by then.

Around two years later, she was diagnosed with paranoid schizophrenia, and officially declared permanently disabled.

The insurer refused to pay the sum of €171,939.45 in settlement for a permanent disability claim, saying the policyholder had not disclosed her treatment for suspected psychosis, or her drug addiction.

She sued Rural Vida, S.A., saying no feature of the proposal form had invited disclosure about mental health or addiction – only physical illnesses, which she did not suffer.

This week, the Supreme Court (pictured) upheld her claim.

“The insurance company is responsible for the effects of the lack of precision in its own proposal form and the fact that, as a result of this lack of precision, it was unaware of the full extent of the policyholder's health situation at the time of inception,” the Court said.

At the time of signing, she was not considered disabled and believed she had 'full capacity to work'.

To complicate matters, though, the mortgage lender and the insurance company are part of the same firm, and the lenders, Caja Rural, did not exercise its right to the settlement when it was declined – since it should rightfully have gone to the bank to pay off most of the mortgage.

It also refused to allow the policyholder to sue the insurers on the bank's behalf.

“For the bank not to allow a claim on its behalf arising through its own inactivity in seeking recompense from the insurer as legitimate beneficiary meant the policyholder was forced to continue making her mortgage repayments, which the purpose of the insurance policy she was paying a premium for was precisely to protect her against,” said the Court.

“This means if the bank has no interest in receiving settlement from an insurer forming part of the same company, it makes no sense for the policyholder to continue paying her monthly mortgage quotas, given that this is in fact what the insurance policy is there to cover her for.

“To interpret this situation in any other manner would be equivalent to leaving the policyholder, or her family, in an especially difficult scenario – one which she specifically took action to avoid by paying the insurance premium.”

As a result, it appears Rural Vida, S.A. is now obliged to pay the policyholder €173,000 – including court costs and interests – personally, so she can use this sum to wipe out most of her mortgage.