A Not Uncommon Scenario in Obtaining Life Insurance

A person wants to obtain a life insurance policy and goes to an insurance agent’s office. The person and the insurance agent discuss his needs and complete the application. The application is a computerized form, so the insurance agent types in responses or clicks buttons as they discuss the various questions on the life insurance application. Once they’ve gone through everything, the insurance agents prints off the application and hands it to the potential insured. He either glances over it and doesn’t read it at all and signs his name.

Sometime later, the insured dies. The beneficiary to the policy notifies the life insurance company of the insured’s death and sends a copy of the death certificate, which identifies the cause of death. It turns out the insured died of some chronic health condition (i.e., COPD or a congenital heart defect) he failed to disclose on his application. The life insurance company then refuses to pay out the life insurance proceeds.

What’s the Issue?

The issue that then arises is whether the insured is responsible for the misrepresentations that were made on the application, even though someone else filled it out and the insured may or may not have read it afterward. The answer: probably. And the insurance company is probably within its right to refuse to pay out the proceeds of the policy.

Why Is the Insurance Company Allowed to Refuse to Pay out Proceeds When There’s Been a Misrepresentation Made on the Application?

Alabama law is clear that “a party capable of reading and understanding English given the opportunity to review an insurance application cannot avoid the legal consequences of signing that document, indicating his or her assent to its terms, on the basis that he or she did not read it.” Nance v. Southerland, 19 So.3d 612, 619 (Ala. Civ. App. 2010) (emphasis added); see also Mitchell Nissan, Inc. v. Foster, 775 So.2d 138, 140 (Ala. 2000) (citations omitted.) In Locklear Dodge City, Inc. v. Kimbrell, the Alabama Supreme Court explained the rationale behind this principle:

[I]t is understandable that [the plaintiff] might choose not to read the contract before signing it. She took a risk. However, [the plaintiff] should not be excused from her contractual responsibilities because she took that risk. To hold otherwise would tum the concept of “sanctity of contract” upside down. Allowing parties to avoid their contractual obligations by merely claiming that they did not read a contract would encourage irresponsibility. Those responsible enough to read their contracts would be bound to their terms, while those reckless enough not to read their contracts could avoid their terms; in addition to avoiding the contract terms, the party who did not read the contract could file a legal action against the other party for suppressing something that was stated clearly in the contract. This is too perverse a result to contemplate.

Locklear, 703 So.2d 303, 306 (Ala. 1997). Furthermore, a person who signs an application for insurance acknowledging the truth of the matters asserted in the application cannot avoid the consequences of the answers submitted in the application. See, e.g., Nationwide Mutual Fire Ins. Co. v. Pabon, 903 So. 2d 759 (Ala. 2004); American Heritage Life Ins. Co. v. Blackmon, 7 So.3d 1028 (Ala. Civ. App. 2008); Safeway Ins. Co. of Alabama, Inc. v. Taylor, 758 So.2d 523 (Ala. 1999); Syx v. Midfield Volkswagen, Inc., 518 So.2d 94 (Ala. 1987). Specifically, the Court stated in Nationwide Mutual Fire Ins. Co. v. Pabon, 903 So.2d 759 (Ala. 2004): “Because [the plaintiff] was given the opportunity to review the answers on the insurance application before she signed it, we … conclude that [the plaintiff] is bound by the answers on the insurance application.” Id. at 767 (emphasis added).

What Does the Insurance Company Have to Show in Order to Rescind the Policy?

In order to rescind the policy, the insurance company must show two things: First, the insurance company is attempting to rescind the policy within the two-year contestability period. Under Alabama law, a life insurance policy only becomes incontestable “after it has been in force during the lifetime of the insured for a period of two years from its date of issue.” Ala. Code (1975) § 27-15-4. Where there is no ambiguity as to the date of issue of the policy, the effective date of issue is interpreted to be as described in the policy. See c.f. Travelers Ins. Co. v. Summers, 686 F.2d 1311 (11th Cir. 1983).

Second, the insurance company must show the misrepresentations made by the insured were material to the risk, and the insurance company would not have issued the policy or would have done so with higher premiums if it had known of the risk: “[M]isrepresentations, omissions, or concealment of facts may prevent a recovery under an insurance policy if they are fraudulent, material to the acceptance of the material risk, or the insurer either would not have issued the policy at all, or would have required higher premiums if the true facts had been revealed.” Clark v. Ala. Farm Bureau Mut. Cas. Ins. Co., 465 So.2d 1135, 1138 (Ala. 1984); see also Ala. Code § 27-14-7(a); Liberty Nat’l Life Ins. Co. v. Hale, 230 So.2d 526 (Ala. 1969); National Life & Acc. Ins. Co. v. Mixon, 282 So.2d 308, 312 (Ala. 1973).

In short, if a material misrepresentation is made on an insurance application, even if the applicant didn’t read the application before signing it, the insurance company will likely be within its rights to rescind the policy or refuse to pay out the benefits if it discovers the misrepresentation within the appropriate timeframe.

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Photo by Flazingo Photos.