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Question

Difficulty: Very hardCompleting the Application

Broker Hayes is facilitating a universal life policy for a corporate executive, Sarah. Both Sarah and the corporation's CEO sign the application, and the initial premium is paid in exchange for a conditional receipt. Later that day, Hayes realizes the section regarding Sarah's foreign travel over the next 12 months is completely blank. Hayes telephones Sarah, who verbally confirms she has no international travel planned. Hayes enters "None" on the application and signs his own initials next to the entry before submitting it to the home office. Five days later, before policy issuance or any medical underwriting, Sarah dies in a domestic commercial aviation accident. Upon review during the claims process, the underwriter discovers Hayes's unauthorized alteration. Which of the following accurately describes the insurer's legal obligation regarding the death benefit?

  1. The insurer will deny the claim and refund the premium, because the agent's unilateral alteration without the applicant's initials invalidated the application, meaning a legally completed offer was never made.Answer
  2. B
    The insurer must pay the claim because the agent's alteration was factually accurate and the cause of death was entirely unrelated to foreign travel, making the entry an immaterial representation.
  3. C
    The insurer must pay the claim because the broker, acting with apparent authority on behalf of the insurer, legally accepted the verbal amendment from the applicant to complete the contract.
  4. D
    The insurer will deny the claim because submitting an application with an initially blank section constitutes material concealment by the applicant, voiding the conditional receipt from inception.

Answer

The insurer will deny the claim and refund the premium because the agent's unilateral alteration without the applicant's initials invalidated the application, preventing a legally valid offer from being made.
The correct answer identifies that an insurance application is a legal document that must be completed and modified strictly by the applicant. If a question is left blank, the agent must return to the applicant to have them answer it and initial the addition. By filling in the answer and initialing it himself, the broker engaged in an unauthorized alteration. This invalidates the application as a legitimate legal offer. Because a conditional receipt relies on a valid, completed application being submitted, no temporary coverage was ever activated, regardless of how the insured died or whether the filled-in information was true.

Step-by-Step Solution

1
Analyze the legal status of the application at the time of submission.
The application contained a modification made by the agent without the applicant's physical initials.
Insurance regulations strictly prohibit agents from unilaterally altering an application. All changes must be initialed by the applicant.
2
Evaluate the effect of the unauthorized alteration on contract formation.
The application is deemed incomplete and legally invalid as an offer.
An insurance contract requires a valid offer (a completed, properly signed application) and acceptance. An improperly altered application voids the offer.
3
Determine the status of the conditional receipt.
The conditional receipt provides no coverage.
Conditional receipts require a fully completed, legally valid application and the payment of the initial premium. Since the application was invalidated by the agent's actions, the receipt's conditions were never legally met.
4
Assess the relevance of the cause of death and truthfulness of the statement.
They are irrelevant.
Because no valid contract or conditional coverage ever existed due to the application's invalidation, the cause of death and the accuracy of the verbal statement do not factor into the claims decision.

Key Concept

Agent Authority and Application Changes
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Topics

Completing the Application

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