In the remainder of this chapter, no attempt will be made to distinguish between waiver, estoppel, and election. The practical effect is the same, irrespective of the particular doctrine the court uses to justify its decision. The emphasis hereafter is on the types of factual situations in which the courts are likely to invoke one of the doctrines outlined above to deprive a life insurance company of a defense that would have enabled it to avoid paying a claim.

The validity of most life insurance policies is contingent on the fulfillment of three conditions precedent:

The existence of a life insurance policy is usually conditioned on payment of the first premium, or the first installment thereof, in cash. The cash-premium clause is typically coupled with the delivery-in-good-health clause.

The requirement that the first premium be paid in cash has been rather strictly enforced by the courts. Upon proof that the soliciting agent delivered the policy without payment of the premium, or any part thereof in any form, the courts in most jurisdictions hold that the policy is not in force, even though the agent orally assured the applicant that it would take effect at once. The view is that an agent having authority merely to solicit insurance and to collect premiums in cash has no actual or apparent authority to extend credit.

In reaching this conclusion, the courts seem to place great emphasis on the existence of a nonwaiver clause in the application, as opposed to the policy. In a leading New York case on the subject, the court, holding that the cash payment requirement had not been satisfied through the payment of the premium by the soliciting agent on behalf of the applicant, stressed that the insured agreed in the application that the insurance would not take effect unless the premium was paid at the time the policy was delivered. In another case, the taking of a promissory note payable to the soliciting agent was not deemed a waiver of the cash-premium clause since there was also a nonwaiver clause in the application.

The nonwaiver clause will not prevent a finding of waiver in all cases; it is merely notice to the applicant of the agent�s limited authority. If it can be proved that the agent actually had authority to extend credit for all or a part of the premium, the agent�s doing so will, in most courts, constitute an effective waiver of the cash-premium requirement. Thus an agent who had the power to employ subagents and had received detailed instructions from the home office as to how to deal with premium notes was held to have authority to issue a binding receipt in exchange for the applicant�s note.

In another case, it was proved that the insurer followed the practice of requiring its soliciting agents to remit only the difference between the gross premium and the agent�s commission. It was held that the agent had authority to extend credit for the balance to an applicant who had paid the agent more than the amount remitted but less than the full amount due�despite the existence of cash-premium and nonwaiver clauses in the application. In cases like this, the company�s formal printed instructions to the agency force are not conclusive proof of an agent�s actual authority. To avoid a waiver, the company�s action must be consistent with its announced policy.

It is common practice, of course, for premiums to be paid by check. If the check is honored by the bank upon which it is drawn, the premium�for all intents and purposes�has been paid in cash. A check is considered to be a cash payment if an applicant has sufficient funds in his or her bank account to cover the check for a reasonable period of time. If a check tendered in payment of the first premium is not honored upon presentation within a reasonable time, however, the status of the policy depends on the terms under which the check was accepted. If the premium receipt states that the check is accepted as payment only on the condition that it be honored (a common practice), the policy will not go into force if the check is not honored. If the premium receipt does not so state, however, some courts have construed the issuance of a premium receipt to be an election to treat the check as payment of the premium. In that event, the condition of the policy has been fulfilled, and nonpayment of the check merely entitles the insurer to sue the drawer of the check.

Insurance contracts are normally issued subject to a good health clause, which is usually found in the application. This clause is made a part of the contract at the time the application is attached to the policy when it is issued and delivered to the policyowner. A typical good health clause reads as follows:

Some companies accomplish this goal with such language as:

The policy may be delivered to an insured who is not in good health when that fact is known by the agent, or when the agent does not inquire as to the state of the insured�s health. Has the insurer waived its rights to contest the breach?

It is clear that either waiver or estoppel may prevent the insurer from asserting the good health clause as a defense. This may be avoided if the insurer has warned the policyowner about the good health clause and the limitations on the agent�s power to alter the contract. Thus both of those clauses are usually prominently printed on the insurance application. Nevertheless, one court has held that the agent�s failure to inquire about the insured�s health resulted in a waiver of the carrier�s right under the good health clause.

The applicant for a life insurance policy must submit a written application that supplies various types of information, including information about the applicant�s past and present health. The applicant may also have to undergo a medical examination, including an interrogation by the medical examiner. It is standard practice for the soliciting agent to fill out the application for the applicant and for the medical examiner to write in the answers to the questions which he or she asks the applicant.

There is always the possibility that the agent or medical examiner may incorrectly record information supplied by the applicant in the application. This may occur inadvertently or by design. Unless there is collusion, the medical examiner has little or no reason to falsify the medical records. The agent, however, because he or she is paid on a commission basis, does have an incentive to falsify information�either with or without the applicant�s knowledge�that might adversely affect the application�s acceptance.

If there is collusion between the applicant and any agent of the insurer to falsify the application, the insurer loses none of its defenses. If, on the other hand, the agent is acting alone and tells the applicant that an item of information is not being recorded correctly, the agent is likely to imply that the information is immaterial and should not be permitted to complicate home office underwriting officials� consideration of the application. In cases where the applicant�s truthful answers have been falsely recorded in the application by the agent (or the medical examiner), it becomes important to determine the legal effect of these misstatements.

It is a well-settled rule that one who signs and accepts a written instrument with the intention of contracting is bound by its terms. However, if the instrument contains false statements, the aggrieved party has the right to avoid the contract. Hence in accordance with strict contract law, material misstatements in the application should give the insurance company power to avoid the contract, regardless of the circumstances surrounding the statements� falsification. However, the courts, recognizing that a life insurance policy is a contract of adhesion that the insured seldom reads, do not apply strict contract law in these cases. The rule supported by the weight of authority is that if the application is filled out by an agent of the company who�without fraud, collusion, or the applicant�s knowledge�falsely records information that the applicant had provided truthfully, the company cannot rely on the falsity of such information in seeking to avoid liability under the contract. According to one court, "To hold otherwise would be to place every simple or uneducated person seeking insurance at the mercy of the insurer who could, through its agent, insert in every application, unknown to the applicant, and over his signature, some false statement which would enable it to avoid all liability while retaining the price paid for supposed insurance."

The key to the rule is that the agent, in filling out the application, is acting for the company, not for the insured. In other words, the soliciting agent is, in a legal sense, the agent of the company, the principal. This finding can support either of two legal theories, both of which have been used by the courts to justify their decisions. The first theory holds that there is no deception of the insurance company since it knew through its agent that the written statement or statements were not true. The second theory, more widely used, recognizes that there is deception but holds that since the company through the knowledge of its agent knowingly issued a voidable policy, it is estopped from voiding it. In both theories, the insurer has a right of action against the agent for breach of his or her duty to the principal.

To find an estoppel against the insurer, the courts must permit testimony, usually from the beneficiary, as to the answers the applicant provided to the agent. This would seem to be in violation of the parol evidence rule, but the general holding is that the parol evidence rule does not exclude oral testimony to establish waiver or estoppel.

The courts are likewise inclined to find a waiver or an estoppel when the applicant knows an answer is false but the agent asserts that it is immaterial. The view is that the applicant is entitled to rely on the superior knowledge of the agent or medical examiner, as the case may be. Even a stipulation in the application that oral statements made to the agent will not be binding on the company has been held unenforceable. However, when the applicant knows that the agent or medical examiner is not truthfully reporting obviously material facts to the company, the applicant is guilty of fraud and cannot invoke the doctrine of estoppel, which requires honest reliance. The applicant�s behavior in this situation is regarded as collusive.

If a condition is breached after a policy has gone into effect, the breach can be waived by the insurer in either of two ways: