Insurance companies may rescind an insurance policy that was issued based upon fraud. When a party has been induced by fraud to enter into a contract, the party may rescind the contract and recover restitution or it may affirm the contract and recover damages caused by the fraud.  Situations may arise after a claim for benefits under a policy is filed and the insurer contests the claim because the insured misrepresented material facts in the application for insurance.  In the context of life insurance policies, an insurer may attempt to rescind a policy that was issued based on the failure to disclose, or misrepresentations concerning, material facts regarding the medical history or medical treatment of the proposed insured in the insurance application. 

Life insurance policies may include an incontestability clause which limits the time within which an insurer may rescind a policy based on fraud. Such clauses fix the time within which the insurance company must ascertain the truth or falsity of representations in the application for insurance and contest the validity of the policy.  If the insurance company does not contest the validity of the policy within the time period, the insurer is precluded from later contesting coverage based on a claim of fraud.

In a case of first impression in Connecticut, a Connecticut Superior Court recently ruled that when a life insurance policy with a two-year incontestability clause was renewed after it lapsed due to nonpayment of premium, the incontestability clause in the policy also renewed. As a result, the insurer was permitted to rescind the policy for fraudulent representations concerning the decedent’s medical condition and treatment history in the application for reinstatement. According to the court and a majority of courts throughout the country, the reinstatement of a life insurance policy following a lapse of the policy requires the period in which the insurer may contest the validity of the policy to start at the time the policy is reinstated in order to protect the insurer from fraud in the application for reinstatement. United Central Life Ins. Co. v. Marshall, 2015 WL 6558198 (Conn.Super. Oct. 5, 2015).  You may read the court’s decision here.

The Marshall case should serve as a reminder to policyholders of the importance of accurate and truthful answers in response to questions in an application for insurance. Insurance policies issued based upon material misrepresentations or nondisclosure of material facts are subject to rescission by the insurance company.  Whether the insurance policy may be rescinded in a particular situation, however, depends on the language of the policy, the materiality of claimed misrepresentation, and the law of the particular jurisdiction.  Policyholders and insurers confronted with such a situation should therefore consult with experienced insurance counsel to understand their rights and remedies.