Life Insurance – Rescission For Misrepresentation Of Income

By: Donna Russo, Esq.

Life insurance policies generally have a provision that allows two years for the insurance company to contest the issuance of the policy. Within these two years, the policy can be rescinded for misrepresentations that are material to the issuance of the policy. Misstatements about one’s heath and medical history are frequent reasons for rescission.

In Mi Ja Jae v. Metropolitan Life Insurance Company, A-2302-11T4, Appellate Div., February 14, 2013, the Court affirmed a trial court ruling granting rescission of a life insurance policy wherein the policyholder misstated his income. A $1,000,000 life insurance policy was issued to plaintiff’s husband based on his representations that his annual earned income was $300,000 ,his net worth was $1,800,000 and he had only one existing life insurance policy issued in 2004 in the amount of $1,500,000. After the husband’s death and within the two year contestability period, the insurance company requested documents to verify the husband’s annual income. The tax returns showed that his income for the last several years was between $6,600 and $11,700 and that he had other life insurance policies.

The insurance company argued that there was a misrepresentation of material facts in the life insurance application and the policy should be rescinded. The insurance company’s underwriter testified that “life insurance is not an investment.” It is not a vehicle to create wealth and that over insurance is a risk factor. The underwriter testified that life insurance is intended to indemnify a beneficiary for a financial loss and its purpose is not to place the beneficiary in a better financial position because of the death of the insured.

The Appellate Division, affirming the trial court’s grant of rescission, held that an insurance company is entitled to rescind based on equitable fraud when “it relies on incorrect information provided by an insured in an insurance application if the information was material either to the insurer’s decision to insure or to the terms of the contract.” citing Mass. Mut. Life Ins. Co. v. Manzo, 122 N.J. 104, 118 (1991). The Court further held that intent is not an element of equitable fraud and innocently false statements and omissions may justify rescission. The Court ruled that the insurance company proved by clear and convincing evidence that the application contained at least on material misrepresentation that influenced the insurance company to issue the policy and the policy should be rescinded.