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Question

Difficulty: Very hardFraud and False Statements

David applied for a life insurance policy. Unbeknownst to him, he recently suffered a mild heart attack, which his physician vaguely described only as "severe indigestion." However, the physician prescribed a potent cardiac medication. On the insurance application, David answers "No" to the question, "Have you ever been diagnosed with a heart attack?" believing it to be true. However, when asked to list all current prescription medications, David intentionally omits the cardiac drug because he fears it might trigger a premium increase. The insurer issues the policy at a standard rate. Four months later, David dies from a stroke, and the insurer discovers the omitted medication during the death claim investigation. Under the legal concepts governing insurance contracts, which of the following best describes the insurer's legal standing regarding the claim?

  1. A
    The insurer must pay the claim because the applicant's statements were representations, not warranties, and any ambiguity regarding his health knowledge must be construed strictly against the insurer.
  2. B
    The insurer can void the policy strictly on the grounds that the incorrect answer regarding the heart attack constituted a breach of warranty, regardless of the applicant's actual knowledge at the time.
  3. The insurer has grounds to rescind the policy and deny the claim due to the intentional concealment of the medication, as it constitutes a material fact that would have altered the underwriting decision.Answer
  4. D
    The insurer must pay the claim because the omission of the medication is classified as a morale hazard, meaning the insurer would have to prove the omitted drug directly caused the fatal stroke.

Answer

The insurer has grounds to rescind the policy and deny the claim due to the intentional concealment of the medication, as it constitutes a material fact that would have altered the underwriting decision.
The correct answer accurately identifies that the applicant engaged in material concealment. While his answer about the heart attack was an honest representation, deliberately withholding the cardiac medication to avoid a premium increase is a fraudulent omission of a material fact. Because this material concealment was discovered during the standard contestability period (four months after issuance), the insurer has the legal right to rescind the policy.

Step-by-Step Solution

1
Analyze the applicant's statement regarding the heart attack.
The answer 'No' was given honestly, to the best of the applicant's knowledge at the time.
Statements on insurance applications are legally representations, not warranties. Since he did not know about the heart attack, this specific answer was not fraudulent and would not independently void the policy.
2
Analyze the applicant's omission of the prescribed medication.
The applicant intentionally withheld the existence of the cardiac medication to manipulate the premium.
Deliberately withholding known, relevant information on an application constitutes concealment.
3
Evaluate the materiality of the concealed information.
The omitted medication is a material fact.
A fact is material if its disclosure would have influenced the insurer's underwriting decision or premium rate, which clearly applies to a potent cardiac medication.
4
Determine the legal consequence of material concealment during the contestability period.
The insurer has the legal right to rescind the policy and deny the death claim.
Material concealment, when discovered within the contestability period (typically the first two years), provides the insurer with legal grounds to void the insurance contract from its inception.

Key Concept

Fraud, Material Misrepresentation, and Concealment
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Topics

Fraud and False Statements

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