Through the years I have seen Life policy applications and agents' reports with erroneous information. You probably have, too. I don't mean judgment calls with room for honest disagreement; I mean downright wrong information. One of the most common untruths may be the statement that a new policy will not replace an existing policy, when in fact it will. The agent may save the trouble of bothering with replacement forms, but he or she also may be buying a big problem. Here's an example:
A businessman bought a Life policy for $250,000 and a second policy less than a year later. The application for the second policy contained some misrepresentations:
(1) It indicated that the applicant (an avid mountain climber) had not climbed within the last three years.
(2) It stated that the new insurance was not intended to be a replacement policy.
(3) It stated that the preexisting policy was for $40,000 in benefits, rather than for $250,000. When the second policy arrived, the insured discontinued paying premiums on the first. Within a year, he died in a mountain- climbing accident. The second insurer denied the Life claim on the grounds of the misrepresentations in the application. The decedent's widow sued the insurer, and a Washington district court ruled in her favor. The insurer appealed.
The higher court found that the insurer could raise a misrepresentation defense. The appellate court noted that when the Life insurance policy was issued to the decedent, he had an opportunity and a duty to read the application and correct any misrepresentations. Moreover, the insured ratified the misrepresentations concerning his mountain-climbing by his signature.
However, the higher court also found that the insurer might have breached a duty to the insured because the insurance agent knew, or should have known, that the policy was a replacement policy. Accordingly, the court reversed and remanded the case to determine whether the insurer's negligence caused the insured to cancel his old policy. [Strother v. Capitol Bankers Life Ins. Co., 834 P. 2d 1111 (Wash. App. Div. 1 1992). Case information courtesy of Legal Notes For Insurance, published monthly by Data Research, Inc., P.O. Box 490, Rosemount, MN, phone (800) 365-4900.]
My feeling is that the spirit and letter of anti-replacement laws and rules (and some company contracts) are anti-consumer and anti-agent in order to be pro-carrier, in effect forcing or encouraging agents to advise clients to retain obsolete policies. This is not to support 'twisting,' which is the improper replacement of a policy to the client's detriment so that the agent may get a higher first-year commission; that's an abuse by the agent. A proper replacement is 180 degrees from twisting; it benefits the client. This case illustrates the importance of following the rules.
The spotlight is now on the agent. What defense can he or she offer? The obvious alibi might be that the agent didn't know the applicant and would drop the existing policy. And that might be the truth. Unfortunately, that may not count, because the law in many jurisdictions states that if an existing policy is dropped within six months of issuance of a new Life policy, that's prima facie evidence of a replacement. Some agents have had applicants sign a statement to the effect that they would keep existing Life policies in force for at least six months; those agents were defeated in court.
The only sure defense is to consider that any existing policy may be replaced with or without your involvement, and to follow replacement procedures for them. Then tell the new carrier what you know about the replacement possibilities. Until we get sensible replacement regulations, we have few choices.
I was recently an expert witness in a case with many parallels to the case just cited. Many lessons for agents in the case will be discussed in an upcoming issue.