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Difficulty: Very hardWarranties, Representations, and Concealment

An executive applies for a 2,000,000lifeinsurancepolicy.Ontheapplication,shestatesherannualincomeis2,000,000 life insurance policy. On the application, she states her annual income is 250,000, though it is actually $242,000. Additionally, she intentionally answers "No" to a question asking if she has acted as a private pilot within the last three years, despite flying her own aircraft monthly. Four months after the policy is issued, the executive dies of a sudden, unforeseeable cardiac arrest while sleeping at her home. During the routine death claim investigation, the insurer uncovers both the income discrepancy and the extensive aviation history. Based on the legal principles of representations, warranties, and concealment, which of the following describes the insurer's legal standing regarding the death benefit?

  1. The insurer can void the policy and deny the claim because the concealed aviation history constitutes a material misrepresentation, regardless of the actual cause of death.Answer
  2. B
    The insurer must pay the full death benefit because the concealed aviation activity did not directly cause or contribute to the cardiac arrest.
  3. C
    The insurer can void the policy because the applicant's inaccurate statement regarding her income constitutes a breach of warranty, immediately invalidating the contract.
  4. D
    The insurer must pay a reduced death benefit, proportionally adjusted to reflect the premium that would have been charged had the aviation hazard been disclosed.

Answer

The insurer can void the policy and deny the claim because the concealed aviation history constitutes a material misrepresentation, regardless of the actual cause of death.
In insurance contract law, representations must be material to void a policy. A statement is material if discovering the truth would have caused the insurer to reject the risk or alter the terms/premium. The applicant's active piloting is a classic material risk. Even though the insured died from an unrelated cardiac arrest, the policy was issued based on flawed underwriting data. Because the death occurred four months after issuance (well within the typical two-year contestability period), the insurer has the legal right to void the policy and simply return the premiums paid, denying the death benefit.

Step-by-Step Solution

1
Evaluate the legal nature of the applicant's statements on the life insurance application.
Statements made on life insurance applications are legally considered representations (statements believed to be true to the best of the applicant's knowledge), not absolute warranties.
This establishes the threshold for voiding the contract: to void the policy, a misrepresentation must be proven to be 'material' rather than just strictly false.
2
Determine the materiality of the income discrepancy (250,000vs250,000 vs 242,000).
The income discrepancy is immaterial.
A difference of 8,000atthatincomelevelwouldnothavechangedtheinsurer′sunderwritingdecision,premiumrate,orwillingnesstoissuea8,000 at that income level would not have changed the insurer's underwriting decision, premium rate, or willingness to issue a 2 million policy.
3
Determine the materiality of the concealed aviation history.
The concealed aviation history is highly material.
Acting as a private pilot represents a significant mortality risk. Had the insurer known, they would have either charged a higher premium, attached an aviation exclusion rider, or declined coverage.
4
Assess whether the cause of death affects the insurer's right to void the policy.
The actual cause of death (cardiac arrest) does not need to be linked to the concealed risk (aviation).
Materiality is judged at the time of application underwriting, not at the time of claim. Because the death occurred within the standard two-year contestability period, the insurer retains the right to void the contract based on the material misrepresentation alone.

Key Concept

Material Misrepresentation vs. Warranties and Claim Causation
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Topics

Warranties, Representations, and Concealment

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