Question 17

A life insurer that accepts an incomplete application and issues a policy is obligated to honor the contract.

When a life insurer accepts an incomplete application and issues a policy, it is legally bound to uphold the terms of that contract, provided that the policyholder has paid the necessary premiums. This obligation stems from the principle of good faith in insurance contracts.

A) honor the contract

This option is correct because, upon issuing a policy, the insurer establishes a contractual relationship with the policyholder. Even if the application is incomplete, the insurer must adhere to the contract's terms unless there are specific provisions allowing them to rescind it due to material misrepresentation or omissions.

B) complete the application within the Contestable Period

This option is incorrect because the insurer does not have the obligation to complete the application themselves. The responsibility lies with the insurer to honor the policy issued; they cannot unilaterally complete the application to justify denial of the claim later during the contestable period.

C) return only the premiums paid, with interest, on the insured's death

This option is incorrect as it suggests a limited obligation. If the insurer issues a policy based on an incomplete application, they are not merely obligated to return premiums upon death; they must honor the policy as per its terms unless proven otherwise in a court of law.

D) charge a lower premium for the initial period of coverage

This option is also incorrect. The insurer is not obligated to charge a lower premium simply because the application is incomplete. Premiums are determined based on underwriting criteria, and issuing a policy with an incomplete application does not alter the premium structure.

Conclusion

In summary, the correct answer is A, as the life insurer must honor the contract once a policy is issued, regardless of the application's completeness. The other options incorrectly suggest limitations or obligations that do not align with the contractual nature of insurance agreements. This highlights the importance of understanding the obligations that arise from the issuance of an insurance policy.