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The case of the "questionable answer"

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The incident
A life insurance agent wrote a $25,000 life insurance policy on a nine-month-old infant. In applying for coverage, the parents responded “No” to the following question:

Has any person proposed for insurance consulted or been seen by a physician, psychiatrist or medically licensed practitioner in the last five years, or has any such person ever been declined for life insurance or offered a policy with an extra premium charge?

Three months into the policy, the infant passed away. Upon investigation of the claim, the insurer discovered that the child had been confirmed as having a terminal condition within days of the application being submitted for coverage. The parents had been advised of the probability of their child’s condition on February 22, and received test results confirming the diagnosis on March 3. They then applied for life insurance on the child on March 8. When the claim was tendered later that year, the life insurer denied the claim due to the material misrepresentation on the application.

The claim
The parents filed suit against both the life insurer and the agent. They alleged that the agent gave them negligent advice as to how to complete the life insurance application. The life insurance company was under no obligation to defend the agent as the applicant was not an acceptable risk and the agent’s E&O insurer defended the claim.

The outcome
Although the E&O investigation confirmed that the agent did not instruct the parents to falsify the application for coverage, the application did contain an obvious misrepresentation regarding the child’s medical history which should have been recognized by the agent. The agent’s failure to question information provided by his client resulted in a finding of negligence on behalf of the agent. The parents were awarded $25,000 paid by the E&O carrier along with additional $17,133 in defense costs. The agent was responsible for his $5,000 deductible.

How it could have been avoided
The agent was responsible to question the accuracy of the responses on the application. As is standard with the care of a newborn baby, the infant more than likely would have been seen by a doctor two to three times in its first four months of life. When the parents indicated that the infant had not previously seen a doctor, this should have raised a red flag to the agent. Had the agent questioned and documented their response to the application question, the likelihood of finding the agent negligent could have been avoided all together.

Lisa Rush, is AVP and Program Leader for Cita Insurance Services. She has been in the insurance industry for more than 28 years. Lisa’s experience with Professional Liability includes well over a decade of sales, servicing and underwriting programs including insurance agents, accountants, dentists, lawyers, architects and engineers, real estate as well as many miscellaneous professional liability programs.

Previous “Claim of the month” article: “The case of the faulty conditional receipt