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Locke Lord QuickStudy: Rescinding Life Insurance Policies Can Be Risky Business

6/1/2012

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Rescinding Life Insurance Policies Can Be Risky Business
Companies Cannot Accept Premiums After Rescission Notice

The American General Life Insurance Company vs. Salamon decision by the United States Court of Appeals for the Second Circuit stands for the proposition that under New York insurance law, a life insurance company can’t attempt to rescind a life insurance policy for misrepresentations in the life insurance policy application after continuing to accept premiums once the company had knowledge of facts supporting rescission. Although there is an “inadvertent acceptance” exception to the long-established New York rule, the Court of Appeals concurred with the federal District Court which had concluded that acceptance by the life insurance company of more than $212,000 of premium payments and maintaining the life insurance policy on ‘active’ status following the company’s rescission notice to the owner of the life insurance policy cannot be overlooked as inadvertent. In other words, by the life insurance company accepting the premiums after it was on notice of the grounds for rescission, the life insurance company was estopped from rescinding the life insurance policy and was deemed to have affirmatively waived its right to rescind the life insurance policy for material misrepresentations contained in the life insurance policy application. At no point did American General attempt to refund the premium payments or, apparently, pay them into the registry of the court.

In the May 22, 2012, decision, American General’s argument that its investigation of the underlying facts was ongoing did not persuade the Court. Under New York law, if a life insurance company accepts any premiums after it learns of any facts that support rescission of the policy (and does not promptly refund the premiums), it is estopped from rescinding the life insurance policy.

Unanswered is the issue of whether the life insurance company may pursue a claim for damages based upon misrepresentations contained in the policy application. Also not addressed in the decision is the life insurance company’s duty to return premiums accepted before it learned of facts sufficient to support rescission of the life insurance policy.

The United States Court of Appeals declined American General’s request that the federal Court of Appeals ‘certify’ the question for review by the New York Court of Appeals, finding that applicable New York law is well settled on this issue.

Lesson learned for life insurers: For life insurance policies issued in New York at least, it must adjust its internal systems and communications to ensure that once any department within the company learns of facts that support rescission of a policy (whether or not communicated to the policy owner by a rescission notice or otherwise), the accounting department must be alerted so that it does not thereafter accept premium payments on behalf of the life insurance company and credit them to the account of the policy owner.

For more information on the matters discussed in Locke Lord’s QuickStudy, please contact the authors: 

Brian T. Casey | T: 404-870-4638 | bcasey@lockelord.com
Thomas D. Sherman | T: 404-870-4672 | tsherman@lockelord.com