Agents, Brokers and Rescission of Insurance Policies

Generally, an insurer need not investigate statements made in an application for insurance, subject to certain exceptions. Instead, the potential policyholder or applicant must fully disclose all known material information. If a potential insured does not correctly disclose information on an application (even innocently), the insurer may later try to rescind the insurance policy. When an insurer “rescinds” a policy, it renders the contract as if it never existed and frees both parties from their obligations under the contract. Practically, this means that the insurance company is no longer obligated to pay the claims for life insurance, accident insurance, health insurance, long-term care insurance or long-term disability insurance benefits and the policyholder no longer has to pay the policy’s premiums. Insurers often look for ways to rescind insurance policies so they can deny insurance claims.

When can an insurer rescind?
Under California law, an injured party is entitled to rescind an insurance policy where there has been concealment on the application, regardless of intent to deceive, including where a representation is false in a material point. Upon discovery of the material misstatement or nondisclosure on the application, the insurer can promptly rescind the policy. The rescinding insurer must also give notice to the policyholder and return any benefits gained under the contract, such as all premium payments paid to the insurer. For example, if an applicant for life or accidental death and dismemberment insurance failed to disclose a history of smoking on the application, and then later died of cancer, the insurer would likely attempt to rescind the policy. If the insurer successfully rescinds the policy, it must also return the premium payments to the insured, but is no longer obligated to pay the death benefits.

“But I told the insurance agent when I applied for the policy…”
Oftentimes, potential insureds apply for insurance with the help of a licensed insurance agent or broker. Although both an insurance agent and an insurance broker assist a potential policyholder in the application process, the primary distinction between the two is who each represents. An insurance agent represents the insurer; a broker does not. Although this distinction has important legal implications, courts sometimes use “agent” and “broker” interchangeably. This usage confuses terminology that already relies on an unpredictable, independent factual examination of the relationship on a case-by-case basis.

Regardless, in practice, the broker vs. insurance agent distinction becomes particularly important when an insurer attempts to rescind a policy based on a material misrepresentation on the initial application, i.e., a failure to disclose pertinent medical or lifestyle history. Occasionally, a potential insured will make accurate disclosures to the insurance agent or broker as part of the application process, but the agent or broker will tell the potential insured that such disclosure on the application is unnecessary. Depending on whether the insurance agent is treated as an agent of the insurer, knowledge of the misrepresentation, and consequent liability, will be imputed differently.

O’Riordan v. Federal Kemper Life Assurance
In O’Riordan v. Federal Kemper Life Assur., 36 Cal.4th 281 (2005), the California Supreme Court discussed the importance of the distinction between an insurance agent and a broker when it comes to rescission. In O’Riordan, potential policyholder, Amy O’Riordan, applied for life insurance through an independent insurance agent, Robert Hoyme. The application for the life insurance policy asked the following two questions:

“Have you smoked cigarettes in the past 36 months?”

“Have you used tobacco in any other form in the past 36 months?”

Ms. O’Riordan answered “no” to both questions on the application, although she apparently told the insurance agent that she was a former smoker and “might have had a couple of cigarettes in the last couple of years.” In response, the insurance agent assured Ms. O’Riordan “[t]hat’s not really what they’re looking for. They’re looking for smokers.”

Several years later, Ms. O’Riordan died of breast cancer. When her husband attempted to collect the death benefits under the policy, the insurer attempted to rescind. The insurer conducted an investigation and found that Ms. O’Riordan’s physician, a year before she applied for the policy and within the thirty-six-month period, noted her request for a nicotine patch. The physician’s report said that, although she quit smoking years earlier, “recently due to some stressors, she did start to smoke a little bit again, but is not smoking as much as she smoked previously.” On this basis, the insurer rescinded the policy and refused to pay the death benefits to Mr. O’Riordan.

Mr. O’Riordan filed a lawsuit and the case made it all the way to the California Supreme Court. Ultimately, the Court determined that Ms. O’Riordan’s disclosure to the insurance agent raised an issue as to whether the insurer could rescind the policy. If the agent was acting as an agent of the insurer, then the agent’s knowledge of Ms. O’Riordan’s disclosures of a past history of smoking would be imputed to the insurer. In other words, because the agent knew, the insurance company had constructive knowledge of the disclosure. Thus, despite the fact that the agent had not actually communicated Ms. O’Riordan’s history of smoking to the insurer, the court still reversed the lower court opinion and allowed Mr. O’Riordan’s case to proceed since the insurer could not rescind the policy.

Insurers often use rescission of insurance policies to deny insurance claims, especially life, disability and health claims. Most policyholders do not understand their rights and assume insurers can rescind their policies. If you are a victim of an insurer’s attempt to rescind your life, health or disability insurance policy, do not cash the insurer’s check for premium refund until you call McKennon Law Group PC to assess your rights to fight this type of abusive insurance company practice. You may be able to sue your insurer for breach of contract and breach of the implied covenant of good faith and fair dealing (insurance bad faith) for attempting to rescind your valuable insurance policy.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak to a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or complete the free consultation form on the firm’s website.

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