A prospective client applies for a $250,000 life insurance policy, pays the initial premium, and receives a conditional receipt from the producer. The applicant completes the required medical examination three days later. Before the insurer's home office can make an underwriting decision, the applicant suffers a fatal injury.
Upon reviewing the completed medical examination, the underwriters determine that due to an undisclosed health condition, the applicant was uninsurable at the standard rate applied for, and would only have been offered a rated policy as a substandard risk.
Based on the rules governing conditional receipts, which of the following correctly describes the insurer's legal obligation?
- Deny the claim and refund the initial premium, because the applicant was not insurable at the standard rate applied for.Cevap
- BPay the full death benefit, because coverage became retroactively effective the moment the medical examination was completed.
- CPay a prorated death benefit based on the amount of coverage the initial premium would have purchased at the substandard rate.
- DPay the full death benefit, because the producer's acceptance of the initial premium unconditionally bound the insurer to the risk.
Cevap
The insurer must deny the claim and refund the initial premium.
The correct answer accurately states that the claim must be denied and the premium refunded. A conditional receipt provides retroactive coverage only if the applicant is ultimately found to be insurable at the rate applied for (usually standard) as of the date of the application or medical exam. Since the applicant was found to be a substandard risk, the company would have issued a counteroffer with a higher premium. Because the applicant died before this counteroffer could be legally made and accepted, no contract of insurance was ever formed. The insurer's only obligation is to return the initial premium to the applicant's estate or beneficiary.
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Conditional Receipts and Substandard Risks