Material misrepresentations in life insurance applications are one of the most prevalent forms of fraud that insurance carriers encounter on a daily basis, and generally, the primary tool to combat application fraud is to rescind the insurance contract.
While some may think rescission is a straightforward process—particularly given that most jurisdictions permit an insurance carrier to rescind an insurance contract based upon a material misrepresentation even when an applicant has acted innocently and in good faith—that viewpoint is often far from the truth.
Indeed, rescissions can quickly become more complicated when an insurer’s own application language alters the otherwise generally applicable standard for innocent material misrepresentations—namely, when the application or statement of good health provides that the responses given are only correct to the best of the applicant’s “knowledge and belief.” Recissions can also become more complicated where there has been a change in an applicant’s health and insurability after completion of the insurance application but before the insurance policy is placed in force.
When appropriate, life insurance carriers should consider complementing their rescissions by adding a “condition precedent” defense to their rescission letters as a back-up plan, which will mitigate against the risk of falling victim to the various complications noted above. In fact, the condition precedent defense is an underutilized tool that, when employed effectively, can provide an insurer with significant advantages over asserting a traditional rescission claim alone.
In particular, most life insurance applications contain language providing that no insurance coverage will take effect unless and until all three of the following conditions are satisfied: (1) the policy is delivered to the owner; (2) the first premium is paid while the insured is still alive; and (3) there has been no change of health and insurability from that described in the application. This is generally known as a contractual condition precedent.
Importantly, this contractual condition precedent is not affected by the applicant’s subjective knowledge or belief regarding his/her health. Nor does it depend upon the existence of a duty for an applicant to inform the insurer of changes to application responses during the underwriting process.
Rather, this contractual condition precedent is analyzed under an objective standard, and all that is relevant is whether the applicant’s health and insurability changed after completing the application and before the policy is delivered and the first premium is paid. See, e.g., John Hancock Variable Life Ins. Co. v. Est. of Fong, 124 F. App’x 523, 524–25 (9th Cir. 2005) (“Mrs. Fong’s subjective assessment of the condition of her health and the materiality of the information the doctors conveyed to her is irrelevant under the language of this [condition precedent] provision.”); Hussey v. Fid. & Guar. Life Ins. Co., 560 F. Supp. 2d 493, 500 (S.D. Miss. 2008) (“[I]t is irrelevant whether the proposed insured knew of an untoward change in health prior to delivery of the policy. Merely the fact that the proposed insureds had been diagnosed with a malady that changed their health from that which was stated in the application was sufficient to prevent the fulfillment of the condition precedent identical to the one at issue here. The court agrees that the language of the Application in this case requires that the change in health be viewed objectively.”); Gustafson v. Southland Life Ins. Co., 885 F. Supp. 854, 860 (E.D. Va. 1995) (“Gustafson’s ‘health and insurability’ does not refer to the literal, objective state of his health about which he was unaware, but instead it applies to Gustafson’s health measured by the responses given to the inquiries contained in the application.”).
In sum, while the condition precedent defense is no cutting-edge legal theory, it is a tried and true defense that is often overlooked and omitted from rescission letters. Because the condition precedent defense is analyzed under an objective standard and is thus immune to many of the issues that plague standard rescissions, insurers should be mindful of this legal theory and include it as a secondary or alternate defense in their next rescission letter when it is discovered that an applicant has failed to disclose a material doctor consultation, diagnostic test, or diagnosis occurring during the pendency of the application process. And as a practical pointer, including the condition precedent defense in a rescission letter will protect against a waiver of this defense should the matter ultimately end up in litigation.
