How the Principle of Waiver Can Save a Life Insurance Policy From Rescission
A recent court ruling has reaffirmed the power of waiver, especially in cases where insurers try to rescind a policy for alleged misrepresentation but continue to accept premium payments. The decision is a warning to life insurance companies: if you want to void a policy, you must act quickly and consistently—or risk losing that right entirely.
Understanding Waiver in Life Insurance Law
In legal terms, waiver is the voluntary relinquishment of a known right. In the context of life insurance, it often applies when an insurer knows of a reason to cancel a policy—such as a material misstatement—but continues to treat the policy as valid by accepting premiums, sending renewal notices, or otherwise affirming coverage. By doing so, the insurer may waive its right to rescind the policy.
This concept becomes critical when a policyholder is accused of material misrepresentation on their application. Even if the insurer has legitimate concerns, courts will often find that continued acceptance of premiums amounts to a waiver of the right to cancel the policy. The result? The policy remains in force, and beneficiaries remain protected.
The Case: Rescission Denied After Premiums Were Accepted
In the case at hand, a life insurance company attempted to rescind a policy based on what it claimed was a material misstatement on the application. The company alleged that the insured failed to disclose important health information that would have changed the underwriting decision. However, after sending a rescission notice, the insurer continued to accept and cash premium payments.
The insurer argued that its computer systems had automatically processed the payments, and that this did not reflect an intentional decision to continue coverage. But the court was unconvinced. It held that by accepting premiums without immediately returning them or taking decisive action, the insurer had waived its right to rescind the policy. The policy remained in force, and the insured’s coverage was preserved.
Why the Timing of Rescission Matters: The Contestability Clause
Most life insurance policies include a contestability clause that allows the insurer to review and potentially void a policy within the first two years if material misrepresentations are discovered. After this period, known as the contestability period, the insurer can only rescind the policy if it can prove fraud—intentional deception—not mere omission or error.
In this case, the insurer failed to act during the contestability period. Even if the alleged misrepresentation was material, its delay in addressing the issue—and its ongoing acceptance of premiums—meant that it could no longer legally rescind the policy. Courts interpret the contestability clause as a critical protection for policyholders, especially when their health status changes and they can no longer obtain new insurance.
What This Case Means for Policyholders and Beneficiaries
This ruling has far-reaching implications. It reinforces that insurers must be diligent and timely in investigating potential misrepresentations. They cannot send a rescission letter on one hand and accept payments on the other without consequences. For policyholders and their families, it offers a powerful legal shield: if the insurer tries to deny a claim based on outdated or waived objections, courts may enforce the policy based on the insurer’s conduct—not just what’s written in the contract.
This case also serves as a crucial reminder that a life insurance policy is not easily voided once issued. Insurers must follow strict timelines, and any action that treats the policy as valid—especially accepting premiums—can undo their efforts to rescind coverage.
FAQ: Waiver and Rescission in Life Insurance Claims
What is the principle of waiver in life insurance?
Waiver is when an insurer gives up a known right—such as rescinding a policy—by acting inconsistently with that right, like continuing to accept premiums after discovering a misstatement.
Can an insurer rescind a life insurance policy after two years?
Only in cases of proven fraud. Once the two-year contestability period ends, most policies become incontestable, and the insurer must pay claims unless they can prove intentional deception.
Does accepting premiums mean the policy is still active?
Often, yes. If the insurer continues to cash premium checks after alleging misrepresentation, courts may view this as affirming the policy and waiving the right to rescind.
What is the contestability clause in a life insurance policy?
It gives insurers up to two years to investigate and deny claims based on material misrepresentations. After that, the policy becomes incontestable unless there was fraud.
What qualifies as a material misrepresentation?
A misstatement that would have affected the insurer’s decision to issue the policy or the terms of coverage—such as failing to disclose a serious health condition.
Is waiver automatic if premiums are accepted?
Not necessarily, but courts often rule that accepting premiums without returning them shows intent to treat the policy as valid, especially if done repeatedly or after rescission is attempted.
What if the insurer claims a computer processed the payments?
That defense has been rejected in court. Insurers are responsible for how their systems operate and must manage them in accordance with the policyholder's rights.
Can waiver prevent a claim denial after the insured dies?
Yes. If the insurer had a chance to cancel the policy during the insured’s lifetime and didn’t, it may be legally prevented from denying the claim after death.
What should I do if my policy was rescinded?
Contact a life insurance attorney immediately. There may be legal grounds to challenge the rescission and enforce the policy based on waiver, delay, or bad faith.
Do you charge for legal help with rescinded life insurance policies?
No. Our firm works on contingency. You pay nothing unless we recover your benefits.