The Omitted Stress Test and the Contestability Period
Daniel applies for a $750,000 20-year term life policy. The application asks: 'In the past five years, have you had or been advised to have any diagnostic test, including stress testing?' Daniel answers no. In fact, after an episode of chest pain, his cardiologist had scheduled a stress test for the following week; Daniel missed the appointment and never rescheduled. The agent submits the application without comment. Northstar Life issues the policy at standard rates, delivers it, and collects the first premium. Daniel dies of a myocardial infarction 18 months after issue. Northstar's underwriting guidelines would have declined any applicant with a recent stress-test referral for chest pain, or at least imposed a substantial rating. The policy contains a two-year incontestability clause. State law requires that a misrepresentation be material to avoid the policy. Northstar discovers the cardiology record during the claim review.
1. Can Northstar rescind the policy and deny the death claim? Analyze the elements of material misrepresentation or concealment.
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Northstar likely can rescind within the two-year contestability period. A representation must be false or misleading; a concealment is the omission of a material fact. Daniel's answer 'no' was false because he had been advised to have a stress test. The fact is material: Northstar's guidelines would have declined or rated the risk heavily, and a reasonable insurer would regard recent chest pain and a stress-test referral as important. Northstar relied on the answer in issuing standard coverage. Intentional fraud is not always required for rescission when the misstatement is material, but Daniel knew the facts. The remedy is rescission: return the premium and deny the claim. This is not a breach of warranty, because the answer is a representation, not a promise that a fact is true.
2. How would your answer change if Daniel died 26 months after issue, assuming he kept paying premiums and the insurer did not discover the omission until after death?
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If Daniel died 26 months after issue, the incontestability clause would generally bar Northstar from rescinding for the misrepresentation. After the contestability period, the insurer cannot contest the policy's validity based on statements in the application; finality protects the beneficiary. Northstar would owe the $750,000 death benefit, assuming premiums were paid and no exclusion applies. The result can differ if the state statute has a fraud exception or if the insurer can show lack of insurable interest, but those facts are not given. The purpose is to shift the risk of stale underwriting disputes to the insurer after two years.
3. Suppose the agent knew about the cardiology referral because Daniel told him, but the agent wrote 'no' on the application. Would that change Northstar's ability to rescind? Explain agency-law reasoning.
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Yes, that could change the result. An agent soliciting the application is usually the insurer's agent for that purpose, and the agent's knowledge is imputed to the insurer. If Daniel told the agent about the referral and the agent wrote 'no,' the insurer may be charged with knowledge of the truth and may be estopped from rescinding, especially if the applicant reasonably relied on the agent to record the answers. Some courts still hold the applicant responsible for reviewing the signed application, so the result depends on state law and whether Daniel signed without reading. If the producer were an independent broker acting only for Daniel, the imputation analysis would differ.