Generally speaking, a representation is an oral or written statement made by a party to a contract prior to or contemporaneously with the formation of the contract. It is not a part of the contract but is an inducement to the contract. It refers to facts or conditions existing at the time the statement is made. It may be a fact within the knowledge of the person making the statement or merely an expression of opinion or belief. It does not bind the party making it to anything that may happen after the contract is made. If it did, it would be a promise or condition of the other party�s promise and would have to be embodied in the contract. It would be the equivalent of a warranty. Finally, a representation need be only substantially true when made.

In life insurance representations are made by both the applicant and the soliciting agent, but for all practical purposes, only the applicant�s statements have legal significance. Hence, the discussion in this chapter will be concerned only with the applicant�s representations.

Since representations do not purport to change the terms of a contract, they are not subject to the parol evidence rule, discussed earlier, and in the absence of a prohibitory statute or policy provision, can be oral in form. However, most states have enacted statutes, directed at life insurance and referred to as entire-contract statutes, that state, in substance, that the policy and the attached application constitute the entire contract between the parties. These statutes have been interpreted by the courts to exclude all of the insured�s representations other than those contained in the application attached to the policy. In other words, the application or a copy thereof must be attached to the policy if the company is to treat the statements in the application as representations. In addition, most states require that every policy include a provision that excludes all of the applicant�s statements other than those contained in the application from consideration. A typical provision reads as follows:

Technically, when the application is made a part of the contract, either by physical attachment to the policy or by reference to it in the policy, all the statements in the application pertaining to the risk become warranties. To avoid this untoward result, more than half of the states have enacted laws that convert statements in the application from warranties to representations. Other states have removed the sting from warranties by requiring that the matter misrepresented be material or, stricter still, have contributed to the loss, before a company can use the breach of warranty as a basis for voiding the contract.

Apart from statute or judicial ruling, most companies� policies provide that all statements in the application are deemed representations and not warranties. As a matter of fact, it is customary for insurance companies to incorporate into one omnibus clause provisions that state that the policy and the application attached thereto constitute the entire contract, that statements in the application are deemed representations, and that no statement of the insured will be used to void the policy or to contest a claim unless it is contained in the application attached to the policy. A typical provision is as follows:

A representation has legal consequences only if a person, acting in reliance thereon, is induced to enter into a contract to which he or she would not otherwise have become a party. If the representation turns out to be false, the aggrieved party can sue to recover damages from the person who made the misstatement or to rescind the contract that he or she was induced to make. The first remedy is available against anyone who fraudulently or deceitfully makes a misrepresentation. The second remedy is available only if the person who makes the misrepresentation is a party to the contract. Thus if a life insurance company is induced to issue a policy because of the fraudulent misrepresentation of the medical examiner, it can recover damages, if any, from the medical examiner, but it cannot rescind the policy unless it can prove that the applicant conspired with the doctor to have the misrepresentation made or at least knew of the fraud before the policy was issued. Cases of this sort are occasionally unearthed, but the typical remedy for a misrepresentation in a life insurance application is rescission of the contract.

A misrepresentation does not of itself make a contract void; it only makes it voidable. The difference is that with a voidable contract the aggrieved party may elect to affirm the contract, in which event he or she is bound by its terms (but not precluded from suing for damages for any fraud involved), or he or she may elect to rescind the contract. The party is under an obligation to exercise this option within a reasonable time after discovering the falsity of the representation. In this respect, a misrepresentation differs from a breach of warranty, in that a breach of warranty can be offered in defense of a claim even when the company has delayed making its election between affirmation and rescission beyond a reasonable period. However, this distinction has lost some of its significance because of a number of court decisions that treat the insurer�s retention of premiums after discovery of either a misrepresentation or a breach of warranty as a waiver or estoppel (see chapter 6). In any event, the insurer�s delay bars its power to rescind on the ground of misrepresentation only if the insured was prejudiced by the delay.

An insurance company�s notice of rescission must be accompanied by a tender of all premiums paid under the contract. This is necessary because the purpose of rescission is to wipe out the contract and restore the parties to the positions they occupied before the contract was made. If the insured owns the contract and is still alive, the tender of premiums is made to the insured, but if the insured is deceased it is usually made to the beneficiary, and in legal effect, is an offer of settlement. In those circumstances, a prudent insurer seeks a release from both the beneficiary and the insured�s estate.

To make its rescission conclusive, the insurance company must obtain an adjudication of its power to rescind. It may do this by defending a judicial proceeding brought by the beneficiary to recover on the policy or by instituting a suit in equity to obtain a decree of rescission. In the former, the question of misrepresentation is usually left to a jury if there is any conflicting evidence, since the beneficiary�s suit to recover the sum payable by the policy�s terms is an action at law. Suits in equity are usually tried by a judge who determines both the law and the facts. Insurance companies prefer suits in equity because of juries� tendency to favor the adversary of an insurance company.

To obtain a rescission of a life insurance policy on the grounds of a misrepresentation, the company must prove that one or more statements of fact in the application were both false and material to the company�s decision to accept the risk or to set the premium. It is not necessary, unless required by statute, to prove that the statement was made with intent to deceive the insurer. While considerable authority can be found for the argument that only a fraudulent misrepresentation of a material fact will provide grounds for rescission, a majority of cases hold that an innocent misrepresentation of a material fact suffices to make a policy voidable. The doctrine is well established that the test of a misrepresentation is the effect on the insurer, not the culpability of the insured or the agent in making it. By the same token, it is held that a fraudulent misstatement of an immaterial fact will not make a policy voidable. The purpose of rescission is to protect the company�and, indirectly, its policyowners�against an increase in risk arising out of a misrepresentation, not to punish the insured whose dishonesty caused the company no harm.

An important exception to the rule that a misrepresentation need not be fraudulent to obtain a recision exists when the misstatement is a matter of opinion, belief, or expectation. It is not sufficient that the applicant�s belief about the status of a matter material to the risk turns out to be erroneous. If the applicant�s statement accurately reflects his or her state of mind at the time of the assertion, no misrepresentation occurs. A statement of opinion is false only if the person making it does not have that opinion at the time the statement is made. Therefore, to void a policy on the ground of a false statement of opinion, the insurer must prove that the insured spoke fraudulently. This leads to the conclusion that a statement of opinion must be false, material, and fraudulent before it makes a policy voidable.

If the statement in the application is qualified by such words as "in my opinion" or "to the best of my knowledge and belief" or "the above is as near correct as I can recall," it is clearly one of opinion or belief. However, even unqualified statements will be construed by the courts to be statements of opinion if the fact to which they relate is deemed to be one not susceptible of the insured�s accurate and conclusive determination. In other words, an unqualified assertion about a situation or an event for which there may obviously be differences of opinion may be construed as a statement of opinion.

A statement that the applicant "is in good health" has been held to be a statement of opinion since it calls for an inference rather than a report on observed facts. Statements about the future are construed as expressions of intent or expectation and thus are also opinions, rather than representations of facts. The following are typical questions taken from the application form of a large life insurance company calling for a declaration of intentions:

Negative answers to such queries are of no avail in litigation unless the insurer can prove that at the time of application, the applicant had a definite intention of doing the thing that was the subject of the inquiry.

Moreover, a representation need be true only at the time it is made; it is not necessary that it continue to be true until the contract is consummated. At one time the federal courts and some state courts accepted the view that a representation had to be true at the moment the contract became effective, a doctrine referred to as the rule of continuing representation. With some exceptions, however, the view today is that the intervening falsity of a representation will provide grounds for rescission only if notice of the changed circumstances is fraudulently withheld from the insurer. In other words, the applicant must be aware of the change, must realize that the change is material to the company�s underwriting decision, and must deliberately withhold notice of the change to the company.

However, no such duty to disclose exists if the insurer has already accepted the risk. This would be the case if the applicant had paid some or all of the first premium and a conditional receipt had been issued. Legally, such subterfuge by the applicant is not construed to be a misrepresentation, but a concealment, which is discussed later in this chapter.

A representation of the insured is significant only if it is communicated to the insurer and in some way influences the insurer�s decision with respect to a contract. If a statement of the insured induces the insurer to enter into a contract that it would not have made had it known the true statement of the fact, or would have made only on different terms, the statement is material. More accurately, the facts misrepresented in the statement are material.

A distinction must be made between the materiality of the subject matter of a question in the application and the materiality of a misrepresentation made in the answer to the question. Not all statements the insured makes in response to the insurer�s questions about matters of consequence to the risk are material. To void a policy on the ground of a material misrepresentation, the company must prove not only that the insured made a misstatement about a matter of concern to the company, but also that the extent of the falsity was substantial enough to be significant. In other words, the difference between the actual facts relating to a matter material to the risk and the facts as falsely represented must be sufficient to induce the company�s decision to accept the risk. This is simply another way of saying that knowledge of the facts would have caused the company to reject the risk or to accept it only on different terms.

The distinction between a material matter and the materiality of a false response relative to the matter can be illustrated by any number of questions in the typical application form. For example, one large company�s application form contains the following question: "Have you now or have you ever had or been treated for any disease or disorder of the nose, throat, lungs, or pleura?" Suppose that an applicant gives a negative answer to that question when, in fact, he or she had suffered an attack of tonsillitis 10 years earlier that was severe enough to require medical treatment. Obviously, the condition of the applicant�s throat is material to the company�s consideration of the risk, but is the undisclosed attack of tonsillitis 10 years ago of sufficient consequence to justify rescission of the policy?

In adjudicating cases involving a misrepresentation, the courts may attempt to test the materiality of the misrepresented facts by referring to the underwriting practices of insurers generally or by referring to the practices of the particular company involved in the litigation. The first test has been characterized as the prudent-insurer standard, while the second has been designated the individual-insurer standard.

Prudent-Insurer Standard. The prudent-insurer standard has been adopted in the majority of jurisdictions, presumably because it is thought to provide objective standards for issues in which judgments are likely to be subjective or emotional. It is argued that the judgment of the litigating company�s officers is likely to be warped by their assumption that anyone who dies within one or 2 years after issuance of the policy must have concealed some physical impairment. Under the prudent-insurer standard the judgment of objective experts on underwriting practices�usually officials of other companies�is substituted for the subjective opinions of the officers of the company that accepted the risk. A fundamental weakness of this standard is that it presupposes a uniformity of opinion and practice that does not exist. For example, medical directors of various insurance companies disagree about the significance of many types of impairments. Furthermore, relying exclusively on the testimony of outside experts may impose liability on an insurer, particularly a conservative one, for a risk that the company would unquestionably have rejected if it had had knowledge of the facts misrepresented.

Individual-Insurer Standard. The individual-insurer test, which is applied in many jurisdictions, has been adopted by statute in several important states. The New York Insurance Law, for example, states, "No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract." This test conforms to the basic principle of rescission for misrepresentation and has considerable support in judicial precedents involving transactions other than insurance contracts.

One would naturally assume that in applying this test, the courts would place great reliance on testimony of officials associated with the company involved in the litigation. Most states, by statute or court ruling, permit testimony as to the practices of the insurer involved in the litigation. The New York Insurance Law, for example, expressly permits the admissibility of the litigating insurer�s underwriting practices as follows: "In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible." Under this provision, the insurer�s medical director (or some other qualified official) is permitted to testify in court that it is the company�s practice to reject applications that reveal facts similar to those proved in the case under consideration. In fact, if qualified, the witness will be permitted to testify that had the insurer had knowledge of the facts misrepresented the company would have rejected the application in dispute. If the testimony is uncontroverted, the evidence (if not patently absurd) is ordinarily deemed conclusive, and the question of materiality will not go to the jury. In several other states, while the insurer is permitted to prove what it would have done had it known the facts later disclosed, such evidence is not deemed conclusive.

The individual-insurer test enables an insurer to apply its standards of insurability in all cases, including those in which the applicant did not disclose all the facts that the insurer requested. This, of course, assumes that the insurer is permitted to prove its standards of insurability, rather than leaving the matter to the conjecture of the jury or judge. Maintaining underwriting standards benefits not only the insurer but also the host of honest policyowners who have made no misrepresentations. Moreover, the test of what a particular insurance company would have done in a specific factual situation can be more accurately formulated and more reliably proved than the test of what insurance companies in general would have done.

The principal disadvantage of the individual-insurer test is that the proof of materiality comes from the files of the insurance company and the testimony of its officials, and the counsel for the beneficiary has little chance of controverting it. His or her only hope is to prove that the company has not consistently followed its alleged practices.

Some recent decisions have ruled that misrepresented facts are material if knowledge of the facts might have caused the insurer to reject the application. This is a much stricter standard from the insured�s standpoint and a much more difficult one to apply in practice. Facts that would have caused the company to further investigate the applicant even though, in the end, the company would have approved the application would be treated as material. A California statute even holds that misrepresented facts are material if knowledge of them would have led the company to make further inquiries or to delay acceptance of the application.

The common-law effect of misstatements by an applicant for life insurance has been modified by statute in many states. The most significant modification is by statutes enacted in most states (and discussed earlier) that convert statements in the application from warranties into representations. The effect of these statutes is to eliminate the conclusive presumption of materiality of statements in the application, forcing the company to prove the statements� materiality.

Other statutes, which are far less prevalent, permit companies to void a contract only if the matter misrepresented increased the risk of loss. Such statutes usually apply only to representations. They were apparently intended to provide a more objective test of materiality than that furnished by the common-law definition. However, any fact that would be considered an inducement to contract under the common-law concept of materiality would, if so unfavorable as to be misrepresented by the applicant, tend to increase the risk. Hence, these statutes by judicial construction have been given the same effect as the prudent-insurer test of materiality.

A few states have statutes that require the misrepresented fact to have contributed to the loss. The Missouri statute, which reads as follows, illustrates this type of legislation:

Under this type of statute, an applicant can conceal or misrepresent a condition that, had it been known to the insurer, would have unquestionably caused it to decline the risk. Yet, the company will be held liable if the insured�s death resulted from a cause not related to the misrepresented condition. For example, if an applicant concealed a serious heart impairment and later died in an automobile accident not caused by his or her heart condition, the company would have to pay the face amount of the policy, despite the fact that it would not have been at risk if the heart condition had been revealed at the time of application.

Any statement in the application that is designed to elicit information directly relevant to the risk is a potential source of litigation. Yet some of the application�s subject areas seldom serve as the basis for denial of a claim, while others are a frequent source of dispute. Whether the applicant�s answer to a particular question is construed to be a statement of fact or a statement of opinion makes a significant difference.

Answers to questions concerning the amount of insurance the applicant carries and the disposition of applications he or she submitted to other companies are generally regarded to be statements of fact rather than of opinion. In recent years, however, insurance companies have rarely been successful in invoking a false answer to this group of questions as a material misrepresentation. Since the companies that do the bulk of the life insurance business are members of the Medical Information Bureau (MIB), they will ordinarily have access to information about impairments discovered by other companies. If a company were notified about detrimental information in the MIB files, it would be permitted to void the contract only if there were other material information that the applicant should have disclosed.

Unequivocal answers to questions about the applicant�s past and present occupation are regarded as statements of fact. Yet there are few reported cases where the insurer attempted to void the contract on the basis of a misrepresentation as to occupation. The chief explanation for this is probably that the inspection report is likely to uncover any discrepancy in the applicant�s statement as to occupation. Statements about a change of occupation are considered to be declarations of expectation and could serve as a basis for voiding the contract only if false and fraudulent.

Answers to questions about family history that call for information about events that occurred many years before or happened to relatives long separated from the applicant are deemed to be opinions. Rarely have answers to such questions been used as a basis for litigation. It would ordinarily be difficult for the insurer to prove the materiality of the facts misrepresented without also proving that the applicant suffered from a serious medical impairment traceable, in part, to family history. In that event, it would be simpler to void the contract on the grounds of the physical impairment. Answers to questions about exposure to contagious diseases, while significant for underwriting purposes, are of little value in litigation because of the difficulty of proving the materiality of the exposure.

The applicant�s statements about his or her habits are usually treated as opinions. Questions directed at the applicant�s use of intoxicating beverages or narcotics call for distinctions of degree, such as infrequent, moderate, or excessive use. Moreover, the applicant is asked for a self-evaluation, which he or she cannot be expected to do objectively. For these reasons, and because the inspection report reveals the most serious cases of addiction to alcohol or drugs, the applicant�s statements as to habits seldom constitute the basis for litigation.

Answers to questions about specific ailments or diseases are in most�but not all�jurisdictions deemed to be statements of fact and not merely statements of opinion. An applicant is expected to know whether or not he or she has ever had or been treated for disorders of critical organs of the body. Some courts infer the applicant�s knowledge of the falsity and materiality of the answer from the serious consequences to him or her of the disease and the treatment. On the other hand, if the evidence indicates that the applicant�s physician did not inform the applicant about the nature of his or her ailment�for instance, that it is an incurable disease�the applicant�s statement as to that particular disease may be treated as an opinion and not be sufficient to permit the insurer�s voiding the contract.

Answers to general questions about medical treatment, consultation, or hospitalization have been the ones most frequently invoked as defenses in litigation. The questions are usually regarding treatment that has taken place only during the last 5 years, and the applicant is expected to have a sufficiently keen awareness of the events to provide the insurer with accurate information. With some exceptions, the answers are treated as statements of fact and not of opinion. Except in states that have adopted the physician-patient privilege, the facts can be proved by the testimony or records of the physician or of the hospital.

Of course, the applicant�s failure to disclose, or positive misrepresentation of, an instance of medical treatment is of itself neither material nor immaterial. The thing that is material is what the company would have learned, with the full cooperation of the physician or the hospital, if it had been put on notice as to the medical treatment and had made inquiry as to its nature. In order to avoid any disputes or disagreements about the materiality of an applicant�s misrepresentation of his or her recent medical history, the New York Insurance Law states as follows:

It does not follow that in all cases the facts misrepresented by the applicant�s failure to disclose a medical consultation will be sufficient to void the contract. If the consultation was for the purpose of obtaining treatment for a common cold or some other slight temporary ailment, the facts misrepresented would not, because of their immateriality, constitute grounds for avoidance of the contract.

Many states have enacted statutes that regard information about a patient�s physical condition obtained by a physician through medical treatment or professional consultation as a privileged communication, which can be divulged only with the consent of the patient, or if deceased, his or her personal representative. In those states a physician is not permitted to give testimony about the medical treatment of an applicant for insurance unless the applicant or his or her personal representative agrees that the physician�s findings be made public. If the physician is not permitted to testify, a suspicion arises that the ailment was one material to the defense of misrepresentation. The suspicion is so strong that since 1940, the New York Insurance Law has contained a provision that if the insurer proves that an applicant misrepresented the facts relating to a medical consultation and the applicant or any other person claiming a right under the insurance contract prevents full disclosure and proof of the nature of the medical impairment, such misrepresentation will be presumed to have been material. The presumption can be rebutted by evidence from the claimant that the ailment was not material to the risk.

This provision, which followed a decision of the highest court of New York to the same effect, has been successfully invoked in New York courts and in federal cases governed by New York law. In other states having the physician-privilege statute, no such presumption of materiality arises.