An insured applies for a life insurance policy, answering “no” to all medical and health-related questions. She dies within two years of her application, and the insurer discovers she was in fact diagnosed with cancer two months before she applied. This, unfortunately, is an all-too-common scenario insurers face.

Increasingly, however, insurers are facing another predicament. An insured has a disability insurance policy and makes a claim for benefits alleging she suffered an accident rendering her disabled. During the claim investigation, the insurer discovers the insured made material misrepresentations in her claim presentation. The insurer denies the claim, but is the remainder of the contract still valid?

Unlike the first scenario involving misrepresentations in an application, the law is less clear as to whether an insurer may rescind a policy when faced with material misrepresentations in the presentment of a claim. Below are some considerations.

Fraud and Concealment Provisions

Some life and disability policies contain a provision similar to the following:

“This policy is void if you conceal or misrepresent any material fact or circumstance relating to this insurance.”

Provisions such as this void the policy when the insured makes material misrepresentations at any time during the life of the policy, including in a claim for benefits. If the policy contains a fraud and concealment provision, the insurer is likely able to rescind the policy, though the insurer’s strategy will be dependent on many factors, including the elements it must prove and its burden of proof in the specific state. The insurer might consider whether to affirmatively bring a breach of contract claim, a fraud claim and/or a claim for rescission — or to rescind the policy under this clause and if sued, raise fraud as a defense to the insured’s claim.

No Contractual Provision

The waters are murkier when the policy does not include such a clause, though case law indicates that rescission is still an available remedy for the insurer.

In Hepps v. General American Life Ins., the court addressed this very issue. No. CIV. A. 95-5508, 1998 WL 564497 (E.D. Pa. Sept. 2, 1998). In that case, the plaintiff allegedly committed fraud in filing a claim for disability benefits under his policy, and the insurer alleged fraud as a defense against the plaintiff’s breach of contract claim. While the court ultimately found there were material issues of fact to be decided at trial, the court decided an insurance policy is void for misrepresentation when the insurer can prove three elements: the representation was false; the insured knew it was false or made it in bad faith; and the representation was material.

Similarly, in American General Life and Acc. Ins. Co. v. Findley, the insurer affirmatively brought a claim for fraud and rescission against the insured due to the insured’s fraud in her claim presentation. No. CV 12-01753 MMM PSWX, 2013 WL 1120662 (C.D. Cal. Mar. 15, 2013). The insured had a disability policy and submitted a fraudulent claim for benefits to the insurer. The court found the insurer was entitled to rescind the policy for fraudulent representations made in a claim for insurance policy, relying on California’s insurance statutes.

Conclusion

Fraud and concealment clauses are generally enforceable and enable an insurer to rescind when the insured makes a misrepresentation in the presentment of a claim. In the absence of such a clause, insurers should still consider whether to affirmatively bring a claim against the insured or raise fraud as a defense to terminate the contractual relationship between the parties.