Material Misrepresentation
A false statement that would have influenced the insurer's decision to issue the policy or at what rate. Only material misstatements affect contract validity.
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Practice This Concept
An insurer rescinds a life insurance policy because the applicant made a material misrepresentation in the application. With respect to the premiums the insured paid, the correct result is:
The premiums are refunded to the insured, because rescission voids the contract from its inception — Rescission treats the contract as void from the beginning — as if it never existed. Because the policy is void ab initio, the parties are generally restored to their original positions, which means the premiums the insured paid are returned. Rescission is not a penalty; it undoes the contract because the insurer's consent was obtained through a material misrepresentation.
National insurance concept
When an insurer rescinds an insurance policy, the legal effect is that:
the contract is void from its inception and both parties are restored to their original positions — Rescission unwinds the insurance contract entirely: the policy is treated as if it had never existed, and the parties are restored to their original positions. The insurer returns the premiums it collected, and the insured gives up the right to recover for any losses under the policy. Rescission is available when the insured has committed a material misrepresentation or concealment, or has breached a material warranty, because those defects go to the heart of the contract's validity. Because rescission wipes out the contract from its inception, it is a far stronger remedy than merely denying a single claim, the whole contract falls, not just the pending loss. This is why the remedy is reserved for cases where the consent to contract was fundamentally flawed.
National insurance concept
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