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Difficulty: HardEffective Date and Statement of Good Health

A corporate board authorizes the purchase of a $2 million key executive life insurance policy on their Chief Executive Officer (CEO). The application is completed and submitted to the insurer on June 1, but the corporation elects to defer paying the initial premium until the policy is physically delivered. The CEO completes a required medical examination on June 8, and the insurer issues the policy as applied for on June 15. On June 18, the CEO suffers a severe stroke and is admitted to the intensive care unit. On June 20, the insurance producer arrives at the corporate headquarters to deliver the policy and collect the initial premium from the board. Based on standard state insurance regulations regarding effective dates, which of the following accurately describes the legal status of the coverage and the required action by the producer?

  1. A
    The coverage became effective retroactively on June 8 when the medical exam was completed, so the producer must deliver the policy upon collecting the premium.
  2. B
    The coverage will take effect on June 20 the moment the corporation pays the initial premium, as the payment constitutes the final required consideration.
  3. The producer must refuse to deliver the policy or accept the premium because the CEO cannot truthfully sign the required Statement of Good Health, resulting in no coverage being bound.Answer
  4. D
    The producer has the implied authority to deliver the policy and accept the premium provided they attach a signed representation from the board acknowledging the recent stroke.

Answer

The correct answer is that the producer must refuse to deliver the policy because the required Statement of Good Health cannot be validly signed following the CEO's stroke.
In scenarios where the initial premium is not submitted with the application (Collect on Delivery), coverage does not go into effect until three conditions are met: the policy is delivered, the initial premium is paid, and the applicant signs a Statement of Good Health confirming that their medical condition has not changed since the application was completed. Because the CEO suffered a severe stroke prior to delivery, this statement cannot be truthfully signed, preventing the coverage from taking effect and obligating the producer to withhold the policy.

Step-by-Step Solution

1
Identify the premium payment timing from the scenario.
The initial premium was not submitted with the application on June 1.
Premium timing dictates which set of effective date rules apply (Conditional Receipt vs. Collect on Delivery).
2
Determine the specific requirements for a Collect on Delivery (COD) effective date.
The policy requires physical delivery, collection of the first premium, and a signed Statement of Good Health.
Insurers require a Statement of Good Health to ensure the risk has not materially changed during the underwriting process when premium wasn't paid upfront.
3
Evaluate the impact of the intervening health event.
The CEO suffered a severe stroke on June 18, before the delivery occurred on June 20.
The severe stroke constitutes a material adverse change in health.
4
Conclude the legal outcome based on the required conditions.
The Statement of Good Health cannot be truthfully signed, meaning the conditions precedent for the contract to take effect are not met, and the producer must withhold the policy.
Without the Statement of Good Health, the insurer assumes no liability and the contract cannot be bound.

Key Concept

Statement of Good Health Requirement for COD Applications
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Topics

Effective Date and Statement of Good Health

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