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Difficulty: HardPolicy Delivery Methods

A small business owner applies for a $1,500,000 key person life insurance policy on himself. He includes a check for the standard premium and receives a conditional receipt from his broker. The underwriting department determines the applicant is a substandard risk due to a recent medical diagnosis and issues the policy with a 25% premium surcharge. The home office mails the policy package to the broker with strict instructions to obtain a signed amendment accepting the new rating and to collect a check for the premium difference before releasing the policy. Two days later, before the broker can meet with the client, the applicant dies in a private aviation accident. Based on policy delivery rules and contract law, which of the following best describes the insurer's legal obligation?

  1. The insurer will only refund the initial premium deposit because the substandard policy constituted a counteroffer that was never legally accepted.Answer
  2. B
    The insurer must pay the full $1,500,000 death benefit because the policy was constructively delivered when the home office mailed it to the broker.
  3. C
    The insurer is liable for the death benefit minus the 25% premium surcharge because the initial consideration was exchanged at the time of application.
  4. D
    The insurer is bound to pay the claim because the broker, acting with implied authority, possessed the physical policy prior to the applicant's death.

Answer

The insurer will only refund the initial premium deposit because the substandard policy constituted a counteroffer that was never legally accepted.
The correct answer identifies that the issuance of a policy with different terms (a premium surcharge) is legally a counteroffer. For a contract to be valid, the applicant must accept the counteroffer by paying the additional premium and signing the required amendment. Because the applicant died before fulfilling these conditions, the contract was never executed, and the insurer must simply refund the initial deposit.

Step-by-Step Solution

1
Analyze the effect of the underwriting decision on the original application.
The insurer declined to issue the policy as applied for and instead issued a rated policy.
This legal action represents a rejection of the applicant's original offer and constitutes a counteroffer by the insurer.
2
Evaluate the status of the conditional receipt.
The conditional receipt did not bind coverage.
Conditional receipts generally only provide interim coverage if the applicant is ultimately found to be insurable as a standard or preferred risk according to the company's rules.
3
Determine if constructive delivery occurred.
Constructive delivery did not occur when the policy was mailed to the broker.
Constructive delivery only applies when the insurer relinquishes control of the policy and requires no further actions from the insured. Here, the insurer required a signature and additional premium.
4
Conclude the final liability of the insurer.
No valid contract was formed prior to the applicant's death.
Because the counteroffer was never accepted, the insurer's only obligation is to return the initial unearned premium.

Key Concept

Counteroffers and Conditional Receipts
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Topics

Policy Delivery Methods

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