A manufacturing corporation applies for a $5 million key-person life insurance policy on its Chief Financial Officer (CFO). On the application, the CFO signs a standard declaration stating that all provided answers are true to the best of her knowledge. She genuinely forgets to disclose a visit to an urgent care clinic for a minor ankle sprain two years prior. However, she intentionally answers "no" to a question asking if she has ever been treated for any neurological disorders, deliberately hiding a recent multiple sclerosis diagnosis because she fears the insurer will decline the coverage. One year after the policy is issued, the CFO dies in a commercial aviation accident. During the claim review, the insurer discovers both the undisclosed ankle sprain and the multiple sclerosis diagnosis. Under the legal concepts of representations and concealment, what is the insurer's most legally sound course of action regarding the death benefit?
- AThe insurer must deny the claim because the applicant's signature made all answers express warranties, meaning the omitted ankle sprain alone breached the contract's absolute guarantee of truth.
- BThe insurer must pay the claim because life insurance policies are contracts of adhesion, meaning the unrelated cause of death creates a contractual ambiguity that must be resolved in the insured's favor.
- The insurer may rescind the policy and deny the death benefit because the intentional concealment of the neurological diagnosis was a material fact, even though it was unrelated to the actual cause of death.Answer
- DThe insurer must pay the full death benefit because by issuing the policy and accepting the initial premium, the insurer legally waived its right to contest the validity of the applicant's medical representations.