When a person whose life is insured under a life insurance policy dies, insurance company’s sometimes seek to deny the insurance claim by rescinding the policy based on misstatements in the insurance application. A denial based on rescission of a life insurance policy poses evidentiary challenges, as the rescission is usually based on alleged misstatements by the person who passed away and is not available defend him or herself or answer questions. Although a successful rescission voids the policy but, an unreasonable attempt to rescind the policy supports a bad faith claim. Rescission is an all or nothing strategy by the insurance company.
An insurance company can only rescind a life insurance policy during the “contestable” period of the policy, which is two years after issuance or reinstatement. (California Insurance Code §10113.5.) Once the contestable period passes, an insurer cannot deny a claim based on the insurance application even if there was “gross fraud in procuring the policy.” (John Hancock Mutual Life Ins. Co. v. Greer (1998) 60 Cal.App.4th 877, 881.) Because reinstatement of a policy allows for a new two-year contestable period, insurers often require a reinstatement application whenever possible following a lapse in coverage.
Assuming the policy is in the two-year contestability period when a person whose life was insured dies, an insurance company can seek to rescind the policy in California based on misstatements in the application. To effectuate a rescission, the insurance company must give notice and refund all premium payments. (California Civil Code §1691.) Notice of rescission must be “prompt.” (Citicorp Real Estate, Inc. v. Smith (9th Cir. 1998) 155 F.3d 1097, 1103.) An insurance company’s delay in providing notice of rescission can be grounds for losing the right to rescind where the insured or beneficiary was substantially prejudiced by the delay. (California Civil Code §1693.) In refunding policy premiums, an insurance company must refund “any premiums . . . which they may have received.” (Imperial Casualty & Indemnity Co. v. Sogomonian (1998) 198 Cal.App.3d 169, 184.) A failure to provide adequate notice or refund premiums is grounds for denial of a right to rescind.
Efforts to rescind a life insurance policy following the death of an insured, if unreasonable, can give rise to bad faith liability. (See e.g., Hailey v. California Physicians Services (2007) 158 Cal.App.4th 452, 473.) Indeed, it is akin to “post-claim underwriting,” which is classic bad faith. (Hailey, supra, at 465-66.)
Where an insurance company seeks to rescind a life insurance policy following a death and a claim being made, it must comply with California’s procedural requirements and have a valid basis to seek rescission. Unreasonable efforts to rescind are actionable under California’s bad faith law, just as any unreasonable denial of insurance benefits would be. Efforts by an insurer to rescind a life insurance policy following death should be scrutinized.