RESCISSION DEFINED
When can an insurer rescind a policy? A recent court decision clarifies the issue.
During the application process if an insured misstates or conceals material facts, even unintentionally, the insurer is permitted to rescind or revoke the policy. However, if the applicant gives answers to questions which are determined to be of a vague or confusing nature the insurer cannot rescind the policy.
The insurer must also take care that any misrepresentations have been made directly by the applicant and not due to any omission or misstatements by an agent or agents of the insurance company. These omissions or misstatements are not blamed on the insured and the insurer cannot rescind the policy. Additionally, if an agent deceives an insured that further disclosures are not needed, the policy cannot be rescinded.
In O’Riordan v. Federal Kemper Life Assurance, the proposed insured was asked during the application process, “Have you smoked cigarettes in the past 36 months?” The applicant indicated that, yes, she was a former smoker but had quit five years ago and that she “might have smoked a couple of cigarettes in the past couple of years.” The agent taking the application retorted “That’s really not what they’re looking for. They’re looking for smokers.” The question on the application was answered as “No”. Neither the applicant’s blood nor urine samples showed any traces of nicotine. The insured received a preferred nonsmoker rate when issued her term life policy.
Unfortunately, two days before the two-year contestability period expired she was diagnosed with metastatic breast cancer and died. The insurer denied the beneficiary’s claim and rescinded the policy contending that the insured hid her smoking of cigarettes.
A suit was brought before the California Supreme Court by the beneficiary against both the insurer and the agent. The Court determined that the question regarding cigarettes was vague, and that because the applicant had smoked just a couple of cigarettes was able to answer the question “No” The Court explained, that the question could be interpreted as an attempt to determine habitual use, not the smoking of a single cigarette or two during that entire time. Had Kemper wanted disclosure of the latter, it could have asked if “any” cigarettes were smoked during the relevant period.
In the recission claim, the Court also held that it was the agent and not the insured that concealed the information. The Court found it was the agent’s duty to disclose to Kemper any material information gained during the application process. In addition, as an agent of Kemper any information he had regarding the insured was in fact deemed to have been knowledge to the company even if he had not disclosed the facts to them.
The Court’s decision in the O’Riordan clarifies that vague questions and/or an agent’s omissions or misstatements cannot be the basis for rescinding a policy.
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