A misrepresentation is a false statement of a material fact made by one party which affects the other party's decision in agreeing to a contract. If the misrepresentation is discovered, the contract can be declared void and, depending on the situation, the adversely impacted party may seek damages. In this type of contract dispute, the party that is accused of making the misrepresentation is the defendant, and the party making the claim is the plaintiff.
Misrepresentation applies only to statements of fact, not to opinions or predictions. Misrepresentation is a basis for contract breach in transactions, no matter the size. A seller of a car in a private transaction could misrepresent the number of miles to a prospective buyer, which could cause the person to purchase the car. If the buyer later finds out that the car had much more wear and tear than represented, they can file a suit against the seller. In higher stakes situations, a misrepresentation can be considered an event of default by a lender, for instance, in a credit agreement. Meanwhile, misrepresentations can be grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply. In some situations, such as where a fiduciary relationship is involved, misrepresentation can occur by omission. That is, misrepresentation may occur where a fiduciary fails to disclose material facts of which they have knowledge. A duty also exists to correct any statements of fact which later become known to be untrue. In this case, the failure to correct a previous false statement would be a misrepresentation. There are three types of misrepresentations. Innocent misrepresentation is a false statement of material fact by the defendant, who was unaware at the time of contract signing that the statement was untrue. The remedy in this situation is usually rescission or cancellation of the contract. The second type is the negligent misrepresentation. This type of misrepresentation is a statement that the defendant did not attempt to verify was true before executing a contract. This is a violation of the concept of "reasonable care" that a party must undertake before entering an agreement. The remedy for negligent misrepresentation is contract rescission and possibly damages. The third type is a fraudulent misrepresentation. A fraudulent misrepresentation is a statement that the defendant made knowing it was false or that the defendant made recklessly to induce the other party to enter a contract. The injured party can seek to void the contract and to recover damages from the defendant.
An incontestability clause in most life insurance policies prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed. A typical incontestability clause specifies that a contract will not be voidable after two or three years due to a misstatement. Incontestability clauses help protect insured people from firms who may try to avoid paying benefits in the event of a claim. While this provision benefits the insured, it cannot protect against outright fraud.
The incontestability clause in life insurance policies is one of the strongest protections for a policyholder or beneficiary. While many other legal rules for insurance favor the insurance companies, this rule is notably and strongly on the side of the consumer. Conventional rules for contracts stipulate that if false or incomplete information was provided by one party when making the contract, then the second party has the right to void, or cancel, the agreement. The incontestability clause forbids insurance companies from doing this.
Errors are easy to make when applying for life insurance. An insurance company will often require a complete medical history before the policy is approved. If an applicant forgets a single detail, the insurance company has potential grounds to deny paying life insurance benefits later on. Reputable insurance companies originally introduced the incontestability clause in the late 1800s to build consumer trust. By promising to pay full benefits after the policy has been in place for two years (even if there were errors in the original application), these insurance companies tried to clean up the industry’s image. The effort was successful, and early in the 20th century, state governments began to pass laws requiring the incontestability clause. Today, the clock immediately begins to run on the contestability period as soon as a life insurance policy is purchased. If, after two years, the insurance company hasn't found an error in the original application, benefits are assured. Even within that period, it’s not easy for the company to rescind a policy. Under most state laws, the insurance company must file suit in court to nullify a contract. Sending a notice to the policyholder is not enough.
It's a consumer protection that prevents insurance companies from ending coverage due to a misstatement by the insured after several years have passed.
Errors are easy to make when applying for life insurance. Conventional rules for contracts stipulate that if false or incomplete information was provided by one party when making the contract, then the second party has the right to void, or cancel, the agreement. An insurance company will often require a complete medical history before the policy is approved. If an applicant forgets a single detail, the insurance company has potential grounds to deny paying life insurance benefits later on. The incontestability clause prevents this from happening.
Misstating age or gender permits the insurance company, in most states, to adjust death benefits to reflect the policyholder’s true status. A life insurance company can refuse to pay benefits if a policyholder was so unwell when they applied for coverage that they died before the contestability period was over. In some states, an insurer can void a policy if deliberate fraud is proven. |
What is the consequence for an applicant who makes an unintentional misrepresentation on a life insurance policy?
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