An insurance company may not base its decision for refusing to issue a policy on information uncovered by extraordinary investigations that would not have been undertaken if death had not occurred.
Defendant, an insurance company, appealed from the Circuit Court of Coles County (Illinois), which allowed plaintiff to recover death benefits on a life insurance policy. Plaintiff's son applied for a policy of life insurance with defendant, gave defendant's agent a check for the first month's premium, and received a conditional premium receipt in return. He died while his application was on its way to defendant's home office. Aware of his death, defendant investigated the applicant's answers to some questions on the application and learned that he had understated the number of his traffic convictions and license suspensions. Thus, defendant declined to issue the policy and denied coverage, relying on the provision in the conditional receipt that no insurance would issue unless the applicant were found by defendant's underwriters to be an acceptable risk for the exact premium and policy applied for. Plaintiff, the beneficiary on the application, sued for and recovered the death benefits of the policy. Defendant appealed.
May an insurance company's good faith rejection of an applicant under an insurability receipt have retroactive effect?
The court reversed and remanded for a new trial. The court found a jury instruction incorrectly required defendant to prove certain propositions as elements of the defense of uninsurability. The affirmative defense of uninsurability requires the insurance company to show that its decision was objective, not subjective or arbitrary; the necessary standard of insurability will be supplied by the company's own underwriting rules, limits, and standards. A standard prevalent in the industry but not shared by the company in question is irrelevant to the company's defense, yet the plaintiff may introduce it if that evidence shows that the company's evidence of its own standard is improbable.