Contestability, Material Misrepresentation, and a Motorcycle Death
Dylan, 29, purchased a $1 million 10-year term policy 18 months ago. On the application he answered "no" to questions asking whether he had used nicotine in the past 12 months and whether he had been treated for depression or anxiety in the past five years. He died in a single-vehicle motorcycle accident. The insurer's claim investigation found pharmacy records showing a nicotine gum prescription six months before application and a 2022 urgent care visit for anxiety with a prescription for lorazepam. The medical examiner found no alcohol or drugs. Dylan's beneficiary, his sister, submitted the claim. The policy contains a standard two-year incontestability clause and a two-year suicide clause. The insurer is considering rescinding the policy and returning the $1,140 annual premium. Dylan had no dependents and named his sister beneficiary.
1. Can the insurer rescind the policy? Explain materiality and the contestability period.
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The insurer can rescind only if the misrepresentation was material and the contestability period has not expired. The policy was issued 18 months ago, so the two-year contestability clause has not run. The application asked specifically about nicotine use in the past 12 months and treatment for depression or anxiety in the past five years. The pharmacy record showing nicotine gum six months before application and the urgent care visit with lorazepam are both responsive to those questions. Materiality asks whether a reasonable insurer would have charged a higher premium, imposed a rating, or declined coverage based on the truth. Nicotine use and anxiety treatment commonly affect life underwriting, so the insurer has a strong argument that the misstatements were material. The fact that Dylan died in a motorcycle accident rather than from a smoking- or anxiety-related cause does not automatically defeat rescission in most states; materiality is judged at underwriting, not causation. The insurer must still prove the answers were false and that it relied on them. If it meets that burden, it can rescind and return the premium.
2. How would the analysis change if the anxiety visit was a single situational-stress visit and the nicotine gum was used to quit 11 months before application?
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The analysis becomes much closer and may favor the beneficiary. Materiality is fact-specific. A single urgent care visit for situational stress, with a short lorazepam prescription and no follow-up, may not have changed the insurer's underwriting decision if the insurer's guidelines did not rate isolated reactive anxiety. Likewise, nicotine gum used to quit 11 months before application may or may not count as nicotine use under the exact question wording; if the question asked about use in the past 12 months, it is technically responsive, but the insurer must show it would have rated or declined. The insurer bears the burden of proving materiality. If the underwriter would have issued the same policy at the same premium, the misstatement is not material and rescission fails. Some states also require a causal connection between the misrepresentation and the death, which would further weaken the insurer's position in an accident case. The agent or claims analyst should obtain the underwriting guidelines and a statement from the underwriter before conceding rescission.
3. What if the policy had lapsed and been reinstated six months before death?
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Reinstatement changes the contestability analysis. A reinstated policy is generally treated as new for contestability purposes, so the two-year period restarts from the reinstatement date. If Dylan reinstated six months before death, the insurer is still within the contestability period even though the original policy was 18 months old. The insurer can contest statements made on the reinstatement application, and it may also be able to contest the original application if the reinstatement did not waive that right. Reinstatement usually requires evidence of insurability and payment of overdue premiums. If Dylan failed to disclose the anxiety treatment or nicotine use on the reinstatement form, that is a new potential misrepresentation. The beneficiary should not assume that the original 18-month age of the policy protects the claim. The agent should review the reinstatement application, the lapse notice, and the state's reinstatement rules.