E&O Claims Scenarios: Improper Completion of Life Application

The Claim of Material Misrepresentation on a Life Insurance Application

 

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Facts

The agent assisted his client with the completion of an application for a $500,000 life insurance policy. The application was completed and submitted and the insurer issued the policy. Four years later, the client died from a heart attack and his child, who was the designated beneficiary on the policy, submitted a claim to the insurer.

During its investigation, the insurer learned that the client had been diagnosed with pulmonary disease two years before the policy was issued and the client had a history of alcohol and cigarette use. Based on this information, the Insurer took the position that the policy was void based on material misrepresentations contained in the application, and refused to pay the death benefit.

The beneficiary commenced litigation against the insurer, challenging its rescission of the policy and its failure to pay the death benefit. The agent was also named a defendant in the action for his alleged failure to assist the client with properly completing the application and for instructing the client that he did not have to admit to alcohol and tobacco use. The agent denied providing such instructions to the client.

The insurer was granted summary judgment on the ground that it was entitled to rely upon the representations contained in the application signed by the client. However, the court held that there were issues of fact, which precluded granting summary judgment in favor of the agent. Due to credibility issues and the risks of an adverse result at trial, the case was settled at mediation against the agent for $150,000.

What the Agent Should Have Done

The agent could have taken steps to avoid the risk of this outcome by employing the following risk management procedures:

1. Include a witness during the completion of the application;
2. Ask the client to sign a separate document stating that he completed the application without any input from the agent.

 

DISCLAIMER:

This material is provided for informational purposes only and should not be construed as legal advice. The information contained herein does not necessarily represent Aspen’s views, and reflects the opinion of the authors in light of market, regulatory and other conditions which may change over time. Aspen does not undertake a duty to update this information.