53. A disability income insurance applicant has a mild form of diabetes controlled by diet. This diabetic condition is not noted on the application because the applicant does not regard it a serious condition. The insurance company issues a standard policy. Five years later the condition worsens, resulting in a coma. If the insured's spouse files a claim for total disability benefits, the insurance company will MOST likely take which of the following actions?
Answer: D
The insurance company will most likely deny the claim, rescind the contract, and refund all premiums paid.
In this situation, the insurance company is likely to deny the claim and rescind the contract because the applicant failed to disclose a pre-existing condition, which is significant to the underwriting process. This nondisclosure can lead to the cancellation of the policy as the insurer would not have issued it under the same terms had they known about the diabetes.
A) Pay the full claim.
Paying the full claim is unlikely because the insurer has grounds to deny the claim based on the nondisclosure of the applicant's diabetic condition. Since the condition is relevant to the risk assessment, the insurer would not fulfill the claim without proper disclosure.
B) Pay the claim minus the additional premium that would have been charged if the condition had been disclosed on the application.
This option is also incorrect because it suggests that the insurer would still honor the claim in part, which is not typical when there has been a material misrepresentation. The insurer is not obligated to adjust the claim based on potential premiums that would have been charged if the condition had been disclosed.
C) Deny the claim only.
While the insurer might deny the claim, this option does not encompass the likely rescission of the contract due to the material nondisclosure. The insurer's typical course of action would involve both denial and rescission to protect against the misrepresentation.
D) Deny the claim, rescind the contract, and refund all premiums paid.
This is the most appropriate action for the insurance company. By rescinding the contract, the insurer acknowledges that the policy was issued based on incomplete and misleading information. Refunding the premiums is a standard practice when a contract is rescinded due to nondisclosure.
Conclusion
The insurance company will most likely deny the claim, rescind the contract, and refund all premiums paid because the applicant failed to disclose a significant pre-existing condition. This nondisclosure directly impacts the risk assessment and the terms under which the policy was issued, necessitating the insurer's right to rescind the contract entirely. All other options do not adequately address the implications of the applicant's failure to provide complete and honest information on the application.