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Question

Difficulty: MediumFraud and False Statements

An individual applying for a life insurance policy intentionally answers "no" to an application question asking if they have been diagnosed with diabetes, despite receiving a positive diagnosis two months prior. The applicant deliberately conceals this fact to avoid a higher premium. If the insurer discovers this deception, which of the following best describes the legal classification of the applicant's action and its effect on the policy?

  1. A
    It is a breach of warranty, because every answer provided on a life insurance application is legally classified as an absolute warranty.
  2. B
    It creates a morale hazard, meaning the insurer is still obligated to pay claims but may increase the premium retroactively.
  3. It is a fraudulent material misrepresentation, which provides the insurer with the legal grounds to void the contract.Answer
  4. D
    It is an application discrepancy that the licensed producer is legally authorized to cross out and correct on the applicant's behalf.

Answer

The action is a fraudulent material misrepresentation, which provides the insurer with the legal grounds to void the insurance contract.
The applicant's deliberate action of lying about a known medical condition to obtain a lower premium constitutes fraud. Because the concealed fact is material to the underwriting decision, the insurer has the legal right to void or rescind the contract upon discovering the intentional deception.

Step-by-Step Solution

1
Analyze the applicant's behavior described in the scenario.
The applicant intentionally lied about a known medical diagnosis to gain a financial advantage.
Identifying the intent behind the false statement is necessary to distinguish between innocent misrepresentation and fraud.
2
Determine the materiality of the concealed information.
A diabetes diagnosis is a material fact because it directly influences the insurer's underwriting decision and premium calculations.
Only material false statements or concealments give the insurer the right to take action against the policy.
3
Identify the legal classification and consequence of the action.
An intentional misstatement of a material fact is classified as fraud, which grants the insurer the right to void the contract.
Contract law dictates that fraud in the inducement makes an insurance contract voidable by the injured party.

Key Concept

Fraud and Material Misrepresentation
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Topics

Fraud and False Statements

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