Material Misrepresentation and the Contestability Clock
Daniel, age 45, applies for a $500,000 20-year term policy. On the application he answers 'no' to tobacco use in the past 12 months and 'no' to any diagnosis or treatment for high blood pressure. In fact, he smoked occasional cigars and had been treated for hypertension twice. He pays the first premium with the application and receives a conditional receipt. The insurer issues the policy as applied for. Seventeen months later Daniel dies of a heart attack. The insurer discovers the omitted hypertension treatment and cigar use. It sends a letter rescinding the policy and returns the premium. Daniel's widow submits a claim. The policy contains a two-year incontestability clause and a standard suicide exclusion.
1. Can the insurer rescind and deny the claim? Explain the roles of material misrepresentation, the incontestability clause, and the conditional receipt.
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The insurer can likely rescind within the two-year contestability period, but it must prove material misrepresentation. Hypertension treatment and cigar use are both relevant to mortality risk for a $500,000 term policy; the insurer would likely have underwritten differently or rated the policy. Because Daniel paid the first premium and received a conditional receipt, interim coverage began when the conditions were met (typically application plus premium plus any required medical exam). That interim coverage is still subject to the same misrepresentation defense. The insurer must return the premium and give proper notice. The claim is not payable if rescission is valid.
2. Would the result differ if Daniel had died at 25 months? What exceptions remain after the contestability period?
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At 25 months, the two-year incontestability clause would bar the insurer from rescinding for misrepresentation. The insurer would have to pay the death benefit unless it can show an exception, such as nonpayment of premium or, in some policies, fraud if the state permits. The suicide exclusion also typically ends after two years. The conditional receipt does not extend the contestability period; the policy's incontestability clock runs from issue. So the timing of death is decisive.
3. Does insurable interest affect the claim? Explain.
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Insurable interest is required at inception, not at death. Daniel had an insurable interest in his own life, and his widow's claim does not depend on her insurable interest. If the beneficiary were a business partner or creditor, the insurer would examine whether insurable interest existed when the policy was issued. Here, insurable interest is not a defense; the misrepresentation and contestability analysis controls.