Post – Claim Underwriting:
A Life And Health Insurer’s Boon Or Bane†
Gary
Schuman
I.
Life and health insurance companies find themselves in an
extremely competitive environment.[1] Industry consolidation, greater
sophistication of the consuming public and easy access to information have
forced insurers to carefully review the manner in which they conduct
business. They must constantly respond
to new products introduced by the competition and look for ways to become more
accessible in order to maintain existing customers and obtain additional
business.
Insurers compete for business in many ways. One method is to simplify the process of
buying and selling insurance by looking for ways to streamline the application
and underwriting processes. [2]
Not all individual insurance products
require the same degree of underwriting.
Some insurance applicants who seek large amounts of life, medical or
disability coverage can be approved only after extensive medical, personal and
financial information has been gathered and carefully evaluated.[3] Other applicants – such as those applying for
low amounts of coverage – may be approved with only the information contained
in the application.[4]
An insurer’s duty to
investigate an applicant’s health and background before issuing coverage must
be balanced with the time and money involved in doing so. It is physically and economically impossible
for an insurer to fully and completely investigate every potential insured to
try and discover the less obvious health defects.[5] In order to make thorough medical and
background examinations of every applicant for insurance, similar to those most
insurers now make when the amount applied for is large, the insurer’s costs
would not only significantly increase the price of insurance but also seriously
inconvenience the individual applying for the coverage.[6]
II.
The
Insurance Application and Underwriting Processes
Regardless of the size or type of insurance sought, the
first formal step in the making of a life or health insurance contract is the
completion and signing of a written application by the person who seeks to
obtain the insurance.[7] The applicant’s health status is critical to
a life or health insurer’s ability to evaluate the risk it is being asked to
insure[8]
and the application for insurance is one of the most important risk assessment
tools provided to the insurer and its underwriters.[9]
The application contains a general identification of the
applicant and a description of the type of insurance coverage desired. In addition, depending on the type of
insurance applied for, it may be very detailed requesting information about the
applicant’s employment, health and insurance history and other information, or
it may be as simple as listing the insured’s name, address and beneficiary.[10]
Insurers usually design applications for lower face value
coverage such as industrial,[11]
supplemental[12]
and credit insurance[13]
to obtain all the necessary underwriting information, so that the underwriter
will have to gather little or no additional information. These applications typically contain fewer
and simpler health questions designed to ensure that the applicant fits the
profile established by the insurer for the coverage. Completed applications are then submitted to
the insurer’s underwriting department for review and evaluation.[14]
Underwriting is intended to ensure that each proposed
insured receives an equitable, consistent evaluation and is charged an
appropriate premium for the coverage offered.[15] One of the basic principles of insurance is
that each individual insured should pay a premium that is proportionate to the
amount of risk the company assumes for that person.[16]
The home office underwriter’s primary responsibility is to
evaluate an individual’s anticipated mortality[17]
or morbidity,[18]
depending on the coverage applied for, in order to determine whether to approve
that person for insurance coverage according to the insurer’s underwriting
manual.[19] An underwriting manual is a detailed listing
of various health and social conditions with information on impairments. It provides a guide to suggested underwriting
action when impairments are present.[20] An insurance company is entitled to determine
what risks it chooses to accept for insurance,[21]
but it also has a responsibility to follow consistent risk selection practices
and following the manual helps ensure that the insurer is acting in a fair
manner.[22]
The agent plays an extremely important role in the
application and underwriting process.
This is especially true for the lower face value policies.[23] Underwriters have traditionally relied on the
agent to gather initial information that can indicate whether a proposed
insured is eligible for the coverage requested.[24] Agents see applicants in person, make an
initial assessment of a proposed insured, and determine whether that person is
likely to be approved for a specific type of coverage by performing field
underwriting.[25] Field underwriting is the process of
gathering initial information about the proposed insured and screening
applicants who have requested coverage.[26] The agent is expected to obtain answers to
every question on the application and to record the information obtained
directly from the proposed insured’s response.[27] Home office underwriting, if any, is
performed at the clerical level because the rate structure for this type of
coverage makes little allowance for detailed assessment by an underwriter.[28]
This field-issued insurance is sold on the assumption that
the applicant is truthfully disclosing to the agent all information requested
on the application. An insurer relies on
the truthfulness of the answers given by an insurance applicant, and the
insured has the corresponding duty to supply complete and accurate information
to the insurer.[29] The insurance company is entitled to the
requested information so that it can assess the significance of the facts
presented in the application.[30]
The insured, however, may not always disclose all
information requested on the application.
If an insurer does not discover the applicant’s misrepresentation and
issues a policy based on the information provided in the application, the false
information may later be discovered during an investigation of a claim
submitted on the policy.[31] Coverage is then rescinded based on the
underwriter’s determination that had the information been truthfully disclosed
the policy would not have been issued.[32] Insurance carriers understandably seek to
avoid liability on policies that they would not have underwritten,[33]
or for which they would have charged more[34]
had the application contained all of the material facts.[35] This action often results in litigation.
III.
Post-Claim
Underwriting
Plaintiffs
and some courts have attacked the above-described practice, referring to it as
post-claim,[36]
or retroactive underwriting.[37] This conduct has been described as an
insurance company asking an applicant for health-related information and
issuing a policy based on the responses without undertaking any independent
investigation of the insured’s medical history.[38] A claim is subsequently submitted, and only
then does the insurer investigate the claimant’s prior medical history by
requesting additional information to see whether the insured actually qualified
for coverage at the time it was purchased.
Then, should it be determined the insured made a material
misrepresentation coverage is rescinded.[39]
Plaintiffs charge that post-claim underwriting is an
unethical practice in the insurance industry.[40] Their contention is that insurers engaging in
that conduct are acting improperly and in bad faith when, instead of looking to
pay the claim, they begin to search for all the things in the application that
will allow the policy to be rescinded.[41] Extra-contractual and even punitive damages
have been sought and occasionally awarded against insurers for this practice.[42]
A.
Plaintiffs’ Challenges
1.
Covenant of Good Faith and Fair Dealing
The first challenge for a plaintiff is premised on the fact
that it has been widely accepted by courts and legislatures for many years that
insurers have a special relationship with their insureds due to the nature of
insurance contracts and the unequal bargaining position between the insured and
the insurance company.[43] The economic dominance and superior ability
of the insurer to protect itself carries special obligations when dealing with
its insureds.[44]
In return for the timely payment of premiums, the insured
relies on the insurer’s promise to provide necessary protection when certain
contingencies occur. When buying
insurance an insured usually does not seek to realize a commercial advantage
but, instead, seeks protection and security from financial loss.[45] The whole purpose of insurance is defeated if
an insurance company can refuse, without justification, to pay a valid claim.[46]
This duty of good faith and fair dealing imposes an
obligation on the insurer not to impair the right of the insured to receive
policy benefits and to give at least as much consideration to the insured’s
interests as it does its own.[47] When an insured under a life insurance policy
dies, an insured under a health policy is hospitalized or requires medical
treatment, or an insured becomes disabled, the insurer must act quickly upon
receiving the claim. Life, health and
disability insurers have contractual obligations under their policies to their
insureds and their beneficiaries to pay stipulated sums of money upon the
happening of contingencies stated in their contracts.[48]
The implied obligation of good faith contemplates at least
that the insurer will diligently investigate the facts to enable it to
determine whether a claim is valid, will fairly evaluate the claim, and will
thereafter act promptly and reasonably in rejecting or settling the claim.[49] When investigating a claim, an insurance
company has a duty to search for evidence that supports its insured’s claim.[50] If the insurer seeks to discover only the
evidence that defeats the claim, it holds its own interest above that of its
insured and breaches the covenant of good faith and fair dealing.[51]
This implied duty arises because the first-party contract
and the nature of the relationship with the insured effectively give the
insurer an almost adjudicatory responsibility.[52] Thus, implicit in the contract and this
relationship is the insurer’s obligations to deal fairly with its insured.[53] The insurer that delays unreasonably or
refuses to honor its obligations violates the implied covenant of good faith
and fair dealing.[54]
Critics contend an insurer has an obligation to its insureds
to perform all necessary underwriting at the time coverage is applied for, and
not thereafter. In other words, good
underwriting practice requires the insurer to investigate an applicant’s
medical history before approving the policy.[55] It is argued that it is unfair for an insured
to purchase an insurance policy, pay all required premiums, and believe they
are protected for covered losses, only to learn after the claim is submitted
that they are not insured.[56]
The duty of the insurer to an insured is especially
important when the insurer rescinds coverage.
In this situation, the insured is not merely at the mercy of the insurer
to be treated fairly in the processing of a single claim, but must rely on the
insurer’s good faith for the continued existence of any coverage.[57] Forfeiture of an insurance policy is strongly
disfavored, especially when the event that gives rise to the insurer’s
liability has already occurred.[58] Not only is the insured prevented from
recovering on the claim at issue, but also, such as when health insurance is
involved, may be precluded from obtaining other coverage.[59] Courts attempt to prevent an insurer from
taking advantage and failing to honor the reasonable expectations of insureds
and intended beneficiaries.
2.
Duty to Investigate
Insurance plaintiffs challenging the practice of post-claim
underwriting in essence take the position that any misrepresentations contained
in the application are excused because the insurer is fully capable of
obtaining whatever facts it needs before it decides to issue coverage. If an insured is not an acceptable risk, the
application should be denied immediately, not after the policy is issued.[60] The burden of investigating and ascertaining
the facts affecting the applicant’s insurability should fall on the
insurer. The insurer should not be
allowed to deny benefits to the insured or beneficiary on the basis of
information which, if it had been more careful to investigate, the insurer
could have obtained before issuing the policy.[61] The insuer that refuses to investigate until
after a claim is filed runs the risk that it has insured someone when it
otherwise would not have.[62]
B. Cases Supporting Plaintiffs’ Position
The leading case challenging the practice of post-claim
underwriting is Lewis v. Equity National Life Insurance Co.[63] On April 12, 1989, Mrs. Florence Lewis
purchased an individual intensive care policy that provided a $200 per day
benefit. Her monthly premium was
$3. Specifically, she answered “no” to
the application question: “Has any person proposed for intensive care or heart
attack insurance ever been diagnosed or treated as a victim of heart attack,
heart condition, heart trouble or any abnormality of the heart?”[64]
She was injured in an automobile accident on March 3, 1990
and spent one night in the ICU of a local hospital. Mrs. Lewis subsequently completed a
claimant’s statement for the insurer.
The claim form contained a statement from one doctor indicating heart
treatment for a coronary occlusion in 1983.
The claim form was submitted to the underwriting department and the
policy was rescinded when it was determined that Mrs. Lewis had a pre-existing
heart condition. The insurer undertook
no further investigation, nor were inquiries made to the agent or any physician
pertaining to the accident, Mrs. Lewis’ injury or her heart condition.
Mrs. Lewis sued alleging that although the agent asked no
questions about her medical history, she told the sales agent that she was
diabetic and had heart problems. She had
also provided the agent with the names of her physicians. Mrs. Lewis signed the application, although
she did not read it. The agent stated,
to the contrary, that he did ask the usual health questions and that Mrs. Lewis
denied having a heart problem.
The insurer sought summary judgment. The trial court granted the motion insofar as
it related to Mrs. Lewis’ claim for punitive damages. A trial was then held and a jury awarded Mrs.
Lewis $200.00 for her one day ICU confinement.
Mrs. Lewis appealed, arguing the punitive damage question
should have been submitted to the jury.
She contended that the insurer did not have a legitimate or arguable
reason to deny her claim in that the sales agent made any misrepresentation on
the policy application. So too, Equity
National did not properly investigate her claim and engaged in the illegal
practice of post-claim underwriting by waiting until the claim had been filed
to obtain information and making underwriting decisions which should have been
made when the application was reviewed, not after the policy was issued. The Mississippi Supreme Court agreed and
reversed the trial court’s partial summary judgment order.
The court, addressing the issue of post-claim underwriting,
reasoned that “an insurer has an obligation to its insureds to do its
underwriting at the time a policy application is made, not after a claim is
filed.”[65] Finding that the insurer "clearly waited
until after Mrs. Lewis filed a claim on her policy before it chose to
underwrite her policy or evaluate the risk involved,"[66]
the court determined that the question of punitive damages should have been
submitted to the jury for consideration.[67] Specifically, the court said:
It
is patently unfair for a claimant to obtain a policy, pay his premiums and
operate under the assumption that he is insured against a specific risk, only
to learn after he submits a claim that he is not insured, and,
therefore, cannot obtain any other policy to cover the loss. The insurer controls when the underwriting
occurs. It therefore should be estopped from determining whether to accept an
insured six months or more after a policy is issued. If the insured is not an
acceptable risk, the application should be denied up front, not after a policy
is issued. This allows the proposed
insured to seek other coverage with another company since no company will insure
an individual who has suffered a serious illness or injury.[68]
The court acknowledged that small policies such as the one
sold to Mrs. Lewis are issued under simplified underwriting guidelines. Still, it determined that in essence, an
insurer may not be able to rely on an insured’s candor in completing an
application and must bear the burden and expense of investigating medical
histories of its insureds prior to issuing policies.[69] This places the risk of the insured’s
dishonesty upon the insurer.[70]
So too, the Alabama Supreme Court in Huff v. United
Insurance Co.,[71]
was extremely critical of the practice of post-claim underwriting. There, an agent for the insurer sold a life
insurance policy to Mr. John Huff. The
policy application contained questions concerning both his and his wife’s
health. No health problems for either
individual were indicated on the completed application. However, Mr. Huff had been treated previously
for heart problems and Mrs. Huff had suffered from diabetes, along with complications
including blindness.
Shortly after the policy was purchased, Mr. Huff died of a
heart attack. United then investigated
and discovered his medical condition.
The insurer refused to pay the death benefit because Mr. Huff had made
misrepresentations about his health on the application. The widow sued and the trial court granted
the insurer partial summary judgment on all claims alleging fraud. The Alabama Supreme Court affirming the trial
court’s decision, also stated:
This
fact situation illustrates an all-too-common situation for Alabamians in life
insurance transactions. United issued
the policy without investigating the applicant’s health. As the law in Alabama currently stands, an
insurance company may issue a life insurance policy with its knowledge of its
applicant’s health coming solely from its agent’s questioning of the applicant
about his or her health history. The
benefits from this type of transaction lie solely in favor of the insurance
company and its agent. The insurance
company receives premiums month after month, while the agent retains a
commission from the sale. But when the
insured dies, the insurance company refuses to pay the benefits provided by the
policy. Its refusal is based upon its
discovery, for the first time, that the insured’s health was poor. When the policy is sold, an agent is not
required to delve thoroughly into the applicant’s background for the details of
his health history. Such a requirement
could prevent situations like the one in this case.[72]
There was no evidence that the agent knew of Mr. Huff’s poor
health when he sold him the policy.
However, the court thought that had United been required to investigate
Mr. Huff’s medical history before issuing the policy, it most likely would not
have been issued. The court stated that
it would be in the interest of the insurer and the applicant but also of
judicial economy for the insurer to investigate the applicant’s health history
before issuing a policy. However, until
the insurer is required to conduct a pre-issue investigation, the sale of this
type of life insurance policy with no serious attempt to determine the
applicant’s true health history will continue to frustrate the “beneficiaries”
of the insured.
C. Insurance Industry Position
These critics and courts, unfortunately, do not consider or
simply choose to ignore long standing principles of first-party insurance law
as they relate to the insured’s obligations to the insurer and the requirements
an insurer must satisfy before coverage may be rescinded. Policies issued on the basis of incorrect or
even fraudulent information provided by an insured result in excessive claims
and increased premiums for all insurance customers.[73] If insurers are precluded from voiding an
insurance policy in which a material misrepresentation was made in the
application, insurers would likely have to depend entirely on independent
examinations to assess their relative risks and the total cost of all premiums
would substantially increase.[74]
Trust is an essential element of underwriting.[75] Although underwriters carefully examine
applications for signs of false or misleading information, they presume that
the information presented by the applicant and the agent is true.[76] It is a well established principle of
insurance law that an applicant has a duty to act in good faith towards an
insurer.[77] This duty includes making a full and complete
disclosure of all relevant information requested when completing an insurance
application so the insurer can evaluate the risk and determine whether the
applicant meets its underwriting standards.[78] The proposed insured alone has complete
knowledge of facts concerning his health, and the statements and answers in the
application often are the determining factors the insurer uses in deciding whether
to issue a policy.[79] This traditional view allows an insurer to
rely upon the information contained in an insured's application for insurance
and provides that it does not have to independently verify the accuracy of
reported information.[80]
The law also recognizes that insurers must be provided with
the ability to challenge claims without fear of tort liability. The obligation to pay meritorious claims is
accompanied by the right to deny those claims that are without merit.[81] The insurer should not be required to honor a
contract that it entered into on the basis of the proposed insured’s
representations contained in the application when in fact these statements were
false and the risk that the insurer assumed was either greater than that which
it believed it was assuming or was one that the insurer would not assume at
all.[82]
The plaintiffs’ challenge to post-claim underwriting is
especially important because it not only attacks a specific insurer’s conduct
but also an entire method of doing business nationwide in the insurance
industry. This article examines the
statutory and common law principles surrounding the insurer/insured first-party
relationship. It will demonstrate that
post-claim underwriting is not illegal but, to the contrary, is a valid method
utilized by insurers to protect themselves from adverse selection practiced by
a small portion of the public that purchased insurance.
An insurer is entitled to rely upon the information provided
by prospective insureds on applications when issuing coverage and any material
misrepresentation contained therein provides the insurer with an appropriate
basis to rescind coverage.[83] There are already in force adequate
protections for the insured against an insurer’s abusive conduct. In fact, many of the cases finding insurer
liability for post-claim underwriting really are using this doctrine as a
“catch-all” for existing insurance law principles when rejecting an insurer's
ability to rescind due to the insured’s misrepresentation contained in the
application.
IV.
Statutory/Common
Law Governing Rescinding Coverage
Generally, the duty to provide insurance is strictly a
matter of contract law.[84] Absent an agreed or implied contractual
provision, there is no duty to insure.[85] An application for insurance is an offer
that, like any other offer, does not become a contract until accepted by the
insurance company. No insurance company
can be required to provide insurance coverage to every applicant who seeks
coverage. The power of acceptance lies
with the insurance company, and without its acceptance, no valid contract
exists.[86] Once an insurance is issued, however, there
are in place specific rules governing an insurer’s ability to cancel coverage
should it discover false answers in the application.
A.
Rescinding Coverage
It is a basic principle of contract law that if one party to
a contract has been led to make it by the misrepresentation of the other party,
the contract is voidable at the option of the innocent party.[87] This principle is as applicable to insurance
policies as to other contracts.[88] A combination of statutory law and court
decisions determine whether a misrepresentation will avoid an insurance
contract. The rule in most states is
that when an applicant for life, health or disability insurance is asked on an
application for material information about his health or medical history and
the specific information requested is not provided or answered untruthfully,
and coverage is issued in reliance thereon, the insurer is entitled to rescind
the policy.[89] With respect to all of the grounds for
rescission, the insurer bears the burden of proof to establish facts supporting
rescission[90]
by either a preponderance of the evidence[91]
or by clear and convincing evidence.[92]
1.
Misrepresentation
A misrepresentation in an insurance application is an untrue
statement or fact.[93] Incomplete answers or a failure to disclose
material information on an application for insurance may also constitute a
misrepresentation.[94] However, a misrepresentation alone is not by
itself grounds for denial of coverage.
The “materiality” of the misrepresentation must be established.[95]
2.
Materiality
The question of materiality is determined by the extent the
false answer influenced the insurer to assume the risk of coverage.[96] Generally, if the insurer with knowledge of
the true facts would not have issued a policy or would have issued one under
different terms from that which it did issue, the test of materiality has been
satisfied.[97] When a misrepresentation is material it
deprives the insurer of its freedom of choice in determining whether to accept
the risk.[98] If the information given by the applicant is
false, but the insurance company would have issued the same policy regardless,
then it is not material.[99] Consequently, the question of materiality is
determined at the time the policy was issued.[100]
Materiality often is a question of fact[101]
but, in the appropriate situation, may become a question of law.[102] In most cases the proof offered by the
insurer consists of testimony or affidavits by company underwriting personnel
or the medical director as to what the company would have done had it had all
the facts,[103]
supplemented, in some cases, by portions of the company’s underwriting manual.[104]
3. Reliance
The third element is that, at the time the policy was
issued, the insurer reasonably relied on the representation made by the
applicant.[105] An insurance company cannot avoid liability
on a policy if it can be shown the insurer did not actually rely on the
applicant’s misrepresentation.[106] This failure of reliance can be established
if the insurer had actual knowledge of the true facts, or at least a sufficient
indication that would have put a prudent person on notice.[107] This may preclude the insurer from rescinding
its contract if it disregarded that notice and did not make reasonable
inquiries to confirm or refute those indications.[108]
Similarly, when an applicant gives sufficient information to
alert an insurance company to his particular medical condition or history, the
insurer then becomes obligated to make such further inquiry as is reasonable
under the circumstances in order to ascertain the facts surrounding the
information given.[109] The question of what constitutes “sufficient
indications” is ordinarily one for the trier of fact.[110]
The mere fact that the insurer conducts an independent
investigation does not, by itself, indicate a lack of reliance.[111] This is true unless the investigation
discloses facts sufficient to expose the falsity of the representations of the
applicant or facts that are of such a nature as to place upon the insurer the
duty of further inquiry, but the insurer decides to issue the policy anyway.
This point is illustrated in Story v. Safeco Life
Insurance Co.[112] The insurer rescinded a life insurance policy
based on the insured’s material misrepresentation of his health on the
application. The insured admitted on the
application only that he was under treatment for controlled high blood
pressure. Two doctors and a VA Hospital
were listed on the application. One
doctor was contacted and a policy was issued at a rated premium. The insured died less than one year
later. Only then did the insurer contact
the VA hospital and learn the insured had been treated for coronary artery
disease. Coverage was rescinded.
The plaintiff argued the insurer knew or reasonably should
have known the insured had this condition.
The court found that an insurer having knowledge the insured had some or
all the risk factors for a disease does not necessarily equate with knowledge
that the insured actually has the disease.
So too, the court rejected the plaintiff’s argument that once an insurer
begins an investigation it is accountable for any information obtained or which
easily could have been obtained. The
insurer’s investigation in not obtaining VA Hospital records was at most
negligently conducted. Mere negligence
in discovering facts concerning an insured’s misrepresentations is not
equivalent to knowledge of those facts.[113]
4.
Additional Requirements for Rescinding Coverage
Many courts hold that a material misrepresentation alone,
even if innocent, voids the contract.[114] Some state statutes and courts require that
an insurer seeking to avoid a policy on the basis of misrepresentation also
show fraud by the applicant.[115] Intent to deceive may involve either the
insured’s knowledge of the falsity of the statement and its materiality to the
risk[116]
or circumstances in which the insured must have known the statement to be
material to the risk.[117] Several states have statutes that require
that the facts misrepresented must contribute to the actual loss.[118] In these states the law imposes a far greater
burden on an insurer than that imposed at common law.
5.
Application Questions
Questions in an application seek to elicit material
information. The insurance company that
intends to rely exclusively on the application should ask questions tailored to
yield all the information that it needs.
This is because the use of a nonmedical application may produce a pool
of policyholders who will have higher mortality or morbidity rates than those
that would be produced by full medical underwriting. The foregoing requirements governing an
insured’s duty to disclose and an insurer’s ability to rescind coverage are
applied based on the type of questions asked by the insurer in the application.
a.
Objective Questions
Objective questions call for information within the
applicant’s knowledge, such as whether he has been examined or treated by a
physician, or “have you ever had (naming various conditions).” These representations are considered to be
objective because their truth or falsity may be established by direct evidence.[119] These questions do not ask the applicant to
respond in the affirmative only if the applicant believes the treatment or
conditions presented a serious health threat.
An applicant’s failure to disclose pertinent information will not be
excused on the grounds that the applicant thought the problem to be minor.[120] Nor must an insurance applicant completely
understand all effects of a health condition before a duty to disclose this
information to an insurer is triggered.
The insurance company, not the insured, determines whether the matters
concerning which the insured consulted a physician and whether the treatment received
was serious or unimportant. An insured
is not entitled to take this choice away from the insurer by failing to
disclose information specifically inquired about that is considered by the
insurer to be material to the risk.[121]
b.
Subjective Questions
In contrast, there are other situations in which an
applicant is asked to respond to questions on the application that call for
statements that amount to matters of opinion or judgment. Subjective questions are concerned with more
ambiguous issues, such as what is the state of the applicant’s health.[122] Courts have been more lenient when reviewing
an applicant’s misrepresentations made in response to a subjective question
than to an objective question because the question is directed toward probing
the applicant’s knowledge and belief.[123] Insureds in such instances sometimes
interpret their policy application questions very differently from their
insurers. Insureds believe that their
responses to application questions are correct.
In order to be material and entitle an insurer to cancel a
policy, an incorrect statement to a subjective question must be one that the
applicant could be reasonably expected to have sufficient information to answer
or state he lacked knowledge to give a responsive answer.[124] There is no breach of the duty to disclose if
the applicant is ignorant of the relevant information, or if the applicant
acting in good faith does not understand the significance of the information he
fails to disclose. A layperson will not
be held to the level of knowledge or understanding that a doctor or other
expert might have had.[125] However, an applicant’s belief is to be
accepted only to the extent that it is not clearly contradicted by the factual
knowledge on which it is based. Thus, if
the underlying facts known to the insured were in clear contradiction to his
statements, his stated belief will not be accepted and the insured will be
deemed to “know” of the misrepresentations.[126]
Representations of good health, as distinguished from answers to purely factual questions, are subjective and call for statements of opinion.