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Difficulty: Very hardEffective Date and Statement of Good Health

On August 10, David submits an application for a $250,000 life insurance policy but does not pay the initial premium. He completes the required medical examination on August 14. On August 20, David suffers a mild stroke and is hospitalized. On August 22, the insurer, unaware of this health change, issues the policy as a standard risk. On August 25, the producer visits David to deliver the policy. The producer collects the initial premium check but, observing that David appears to be recovering well, intentionally skips having David sign the Statement of Good Health to expedite the transaction. David subsequently dies from a second stroke on August 30.

Based on state insurance regulations, how will the insurer respond to the death claim, and what is the legal justification?

  1. A
    The claim will be paid because the policy legally took effect on August 25 once the physical contract was delivered and the initial premium was collected by the producer.
  2. B
    The claim will be paid because the producer, acting with implied authority, legally bound the insurer by accepting the premium and intentionally waiving the paperwork requirement.
  3. The claim will be denied because the policy never took effect; obtaining a signed Statement of Good Health is a mandatory requirement for coverage to begin when the initial premium is collected at delivery.Answer
  4. D
    The claim will be denied solely because David's silence regarding his stroke constitutes a breach of warranty, automatically voiding an otherwise active contract.

Answer

The claim will be denied because the policy never took effect; obtaining a signed Statement of Good Health is a mandatory requirement for coverage to begin when the initial premium is collected at delivery.
When an application is submitted without the initial premium, the policy does not take effect until it is delivered, the first premium is paid, and the applicant signs a Statement of Good Health affirming no adverse health changes have occurred since the application or medical exam. Because the producer failed to obtain this mandatory signed statement, the conditions for coverage were never fulfilled, meaning the policy never legally commenced and the insurer bears no liability.

Step-by-Step Solution

1
Analyze the premium payment timing.
The initial premium was not paid with the application, establishing a Collect On Delivery (COD) scenario.
Premium timing dictates which rules govern the policy's effective date.
2
Identify the requirements for a COD policy to become effective.
Coverage begins only when the policy is delivered, the premium is collected, AND a Statement of Good Health is signed.
The insurer must verify the applicant's health has not changed between the application/exam date and the delivery date.
3
Evaluate the producer's actions at delivery.
The producer collected the premium and delivered the policy but failed to obtain the required Statement of Good Health.
Producers cannot waive mandatory underwriting conditions on behalf of the insurer.
4
Determine the legal status of the policy and claim.
Because a mandatory condition precedent (Statement of Good Health) was not met, the policy never went into effect, resulting in claim denial.
Without the signed statement affirming continued insurability, the insurer's liability never commenced.

Key Concept

Effective Date and Statement of Good Health rules
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Topics

Effective Date and Statement of Good Health

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