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Question

Difficulty: MediumWarranties, Representations, and Concealment

Sarah applies for an individual disability income policy. The application form asks if she has any history of respiratory diseases, and Sarah marks "No." Three years prior, she visited a walk-in clinic for a severe cough. The clinic's medical chart recorded the visit as "acute bronchitis," but the attending nurse simply told Sarah she had a "bad chest cold." Sarah completed the insurance application honestly based on what she was verbally told. Two months after the policy is issued, Sarah suffers a severe spinal injury in a skiing accident and files a claim for disability benefits. During a routine review, the insurer discovers the bronchitis entry in her clinic records. Based on the legal principles governing insurance applications, what is the legal status of Sarah's contract and her pending claim?

  1. A
    The policy is rendered voidable at the insurer's discretion, since answers on an application act as strict warranties and any factual inaccuracy constitutes a breach.
  2. B
    The coverage is invalidated because the producer failed to cross out and correct Sarah's incorrect response prior to submitting the paperwork to the underwriting department.
  3. The contract remains fully enforceable and the benefits are payable, because her answer was a representation made to the best of her knowledge rather than an intentional material misrepresentation.Answer
  4. D
    The insurer is legally estopped from investigating the medical records because they voluntarily waived their right to do so when they issued the policy without a prior medical exam.

Answer

The contract remains fully enforceable and the benefits are payable, because her answer was a representation made to the best of her knowledge rather than an intentional material misrepresentation.
In insurance contract law, statements made by an applicant are considered representations (statements believed to be true to the best of the applicant's knowledge), not warranties (absolute guarantees of truth). Because Sarah honestly answered the question based on what the clinic nurse told her, she made no intentional misrepresentation and did not engage in concealment. An innocent inaccuracy does not invalidate the contract, so the policy remains in force and her claim must be paid.

Step-by-Step Solution

1
Determine the legal classification of statements made by an applicant on an insurance application.
In life and health insurance, statements made by the applicant are legally classified as representations, not warranties.
This is a foundational statutory protection preventing policies from being voided over innocent mistakes.
2
Evaluate Sarah's statement against the legal definition of a representation.
A representation is a statement believed to be true to the best of one's knowledge. Since Sarah was told she had a "chest cold," answering "No" to "respiratory diseases" was true to the best of her knowledge.
To void a policy based on a misrepresentation, the insurer typically must prove the statement was both materially false and, in many jurisdictions, made with the intent to deceive (fraud/concealment).
3
Determine the outcome of the claim based on the validity of the contract.
Because there was no breach of warranty and no intentional material misrepresentation (concealment), the contract remains valid and the claim for the spinal injury must be paid.
An innocent misrepresentation that is not material to the risk does not grant the insurer the right to void the contract or deny an unrelated claim.

Key Concept

Representations vs. Warranties and Concealment
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Topics

Warranties, Representations, and Concealment

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