Fourteen Months, One Omitted Diagnosis
Marcus, 58, applied for a $500,000 20-year term policy on March 3, naming his daughter as sole beneficiary. On the application he answered "no" to questions about chest pain, heart disease, and tobacco use in the past five years. The policy was issued April 1 at standard rates, delivered April 9, and the initial premium was paid. Records later showed that he had been diagnosed with coronary artery disease in January and prescribed nitroglycerin, and that he had used smokeless tobacco until February. He died of a myocardial infarction the following June, 14 months after issue. The insurer refunded the premium and denied the claim; the daughter's attorney argues that the company had two years to investigate and the policy is now incontestable.
1. Can the insurer rescind the policy and refuse the death benefit?
Read the worked answer
Yes, on these facts. The incontestability clause bars the insurer from contesting the contract only after it has been in force for two years from the date of issue (or from a reinstatement date, which starts a fresh period). Marcus died at 14 months, inside the window.
Elements the insurer must establish:
- Misrepresentation - the answers on the application were false; the January diagnosis and nitroglycerin prescription predated the March application.
- Materiality - an accurate answer would have changed the underwriting decision: recent coronary disease plus current tobacco use typically produces a decline or a heavily rated offer, not a standard $500,000 term policy.
- Reliance - the insurer issued standard rates because of the answers.
Intent is not required. Even an innocent omission is enough if it is material. The remedy is rescission plus return of premium, which is what the insurer tendered.
The daughter's argument confuses the insurer's investigation duty with the contestable period. The clause gives the insurer two years to discover a misrepresentation, not an obligation to look; the death occurred before the clock ran out.
2. Suppose the insurer had instead issued the policy correctly on the facts, but had recorded Marcus's age as 58 when he was actually 60. How would that be handled?
Read the worked answer
Through the misstatement-of-age provision, not rescission. That provision states that if the insured's age has been misstated, the death benefit is adjusted to whatever amount the premium actually paid would have purchased at the correct age, and the insurer pays that adjusted amount.
Key differences from contestability:
- The policy is not voided and no premium is refunded.
- The provision operates indefinitely; it is not extinguished when the two-year contestable period expires.
- It applies narrowly to age (and, in many forms, sex), not to health history.
Practical result: a two-year understatement of age increases the mortality charge, so the premium paid buys less coverage. The beneficiary receives a reduced face amount, roughly the ratio of the correct-age premium to the premium charged, rather than $500,000. Contrast this with the health misrepresentation above, which goes to whether a contract exists at all.
3. Change the facts: Marcus dies in an automobile accident at 26 months, and in month 15 the insurer had received the same medical records but took no action. What result?
Read the worked answer
The full face amount is payable. At 26 months the policy is beyond the contestable period, so the misrepresentation defense is gone. The insurer's knowledge in month 15 changes nothing; what matters is that it did not rescind while it still could.
The narrow surviving defenses after two years are limited to failures that go to the contract's continuation, principally nonpayment of premium (and, in some forms, certain conditions on coverage for a specific cause). Misrepresentation on the application is not among them.
Accidental death benefit point: if the policy carried an accidental death rider, that rider pays only when death results from accidental bodily injury, independently of the medical history. The claim is base face plus the rider amount.
The lesson is timing discipline: once the insurer has grounds and is inside the contestable window, it must act - rescind, rescind and re-underwrite, or waive the defense - before the window closes.