Replacement Policy, Oxygen Tank, and the Contestable Death Claim
At age 57, Diane applied for a $750,000 universal life policy to replace a $400,000 whole life contract. On the March 1 application she answered “no” to tobacco use in the past five years and “no” to COPD or oxygen use. The policy was delivered March 15 with a 30-day free look; she paid the $4,800 annual premium and named her daughter as beneficiary. The agent knew Diane used portable oxygen and had seen an oxygen tank in the home, but wrote “no” because Diane said her doctor had not formally diagnosed COPD. Diane died 14 months later of respiratory failure; medical records obtained with the claim show a COPD diagnosis 3 years earlier and a 20-year, one-pack-a-day smoking history. Had the facts been disclosed, the annual premium would have been about $9,600. The insurer rescinds, returns the $4,800 premium, and denies the $750,000 claim. The daughter argues the policy was delivered and the free look expired.
1. Was rescission within the contestable period proper? Analyze materiality, agent knowledge, and remedy.
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The death occurred 14 months after issue, inside the two-year contestability period, so the insurer may investigate and rescind for a material misrepresentation. The omissions are material: COPD, oxygen use, and a 20-year smoking history would have doubled the premium and likely changed underwriting to a rated or declined classification. The application answers were false, and the insurer relied on them in issuing preferred rates. The daughter's free-look argument is irrelevant; free look is a cancellation right, not a limit on contestability. The harder issue is the agent's knowledge. If the agent was the insurer's agent and knew the truth while writing “no,” some jurisdictions may impute that knowledge to the insurer or estop rescission, especially if the insured disclosed the facts and relied on the agent. The insurer must return premiums as a condition of rescission. The result is not automatic; the insurer should evaluate the agent's file and state law beforelitigating.
2. What replacement and suitability duties did the agent owe Diane, and how do they affect the insurer's position?
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Because Diane replaced existing life insurance, the agent owed replacement-specific duties: give the required replacement notice, compare the existing and proposed contracts, disclose premium, surrender charges, and loss of contestability status, and document the client's reasons. The old policy was likely beyond its contestable period; the new policy restarted contestability and was the document the insurer now rescinds. The agent also had a suitability duty not to place a $750,000 universal life policy at a preferred rate when he had seen oxygen equipment and knew the application was inaccurate. Writing false answers is not a harmless shortcut; it undermines underwriting and creates errors-and-omissions and licensing exposure. For the insurer, the agent's knowledge may support estoppel or waiver arguments, and the replacement file may show the insured relied on the agent. The insurer should review the replacement notice, the agent's notes, and the delivery receipt before deciding whether to rescind or negotiate.
3. How would the analysis change if Diane had died at 26 months instead of 14?
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After the two-year contestability period, most life policies bar the insurer from rescinding for misrepresentation in the application. The insurer would generally have to pay the $750,000 death benefit, even if the smoking and COPD omissions were material, unless a narrow exception applies, such as nonpayment of premium or, in some states, fraudulent procurement. The agent's misconduct would still be a regulatory and errors-and-omissions issue, but it would not ordinarily give the insurer a policy defense after incontestability. The insurer could not simply return the premium and deny. The beneficiary's position would be much stronger, and the insurer would need to examine whether the policy lapsed, whether premium was paid, and whether any separate fraud statute applies. This is why replacement is risky for the client: the new policy's contestability period restarted, and Diane died before it expired.