Applications, Receipts, Delivery and Medical Evidence
Most disputed life claims trace back to the first forty minutes of the sale: what was asked, what was written, what money changed hands and which receipt the applicant got. One application is followed from the kitchen table through underwriting to delivery, and the claims that can arise on the way are solved. The people and companies are invented, and the evidence requirements shown are one insurer’s example, since every insurer sets its own.
Taking the Application
The application is the foundation of the contract. In Michigan the policy must contain the entire contract, and nothing may be incorporated by reference to an application unless it is endorsed upon or attached to the policy when issued (MCL 500.4004). The policy, with the application attached, is the whole agreement, and an application taken electronically counts if its information is attached (MCL 500.4014, 500.4016(2)). A statement that never appeared in the written application attached to the policy cannot be used to void it (MCL 500.4016(1)).
The producer has three duties that follow from this.
- Ask each question as written and record the answer the applicant gives. A blank is not a “no.” Michigan forbids anyone but the applicant from altering a written application for life insurance without the applicant’s written consent. The only exception is an insertion by the insurer for administrative purposes, made so that it is clearly not ascribed to the applicant (MCL 500.2216). A producer who changes an answer the applicant gave, without the applicant’s written consent, has violated that rule.
- Correct errors on the form. The mistake is crossed out, the right answer is written in, and the applicant initials the change, which is the applicant’s own written consent to it.
- Remember whose agent you are. In a controversy between the insured or beneficiary and the insurer, a person who solicited the application is regarded as the agent of the insurer and not of the insured (MCL 500.2220). What the producer says and writes at the table is therefore the insurer’s conduct, for good and for ill.
Whose Signature Is Needed
The applicant signs, and so does the proposed insured when they are different people. Michigan adds a consent rule. An individual who has an insurable interest in another person’s life may not insure that life for the individual’s own benefit unless the person to be insured consents in writing, and the person’s signature on the application is the consent. The rule applies to policies of $10,000 or more and does not apply to an insured under 18 (MCL 500.2211). Elena Torres applies for $250,000 on her husband Rafael, and Rafael is not at the appointment. The producer arranges for Rafael to sign it himself, and never signs for him. The application is incomplete until he does, and a signature by anyone else is a forgery and puts the producer’s license at risk.
The producer also completes the producer’s report, which most insurers require with the application. It records what the producer saw and knows that a form cannot show: the applicant’s apparent health, the home, the relationship between owner and beneficiary, and how the amount of coverage compares with the applicant’s income. Gathering accurate answers and reporting what the form cannot show is field underwriting: the producer is the underwriter’s first look at the applicant, and a producer who sees an applicant short of breath on the stairs and says nothing is withholding the most useful fact in the file.
When an Answer Turns Out to Be Wrong
Michigan treats application answers as representations, not warranties, absent fraud, and a statement cannot void the policy unless it is in a written application that is attached to the policy (MCL 500.4016(1)). A misrepresentation voids the contract only if it was material. It is material only if the insurer, knowing the facts, would have refused to make the contract, and the insurer’s own practice in accepting or rejecting similar risks is admissible to show that (MCL 500.2218(1), (3)). Michigan’s Supreme Court reads “the contract” as the contract actually issued, at the premium agreed, so a misstatement is also material if the truth would have led the insurer to charge more (Oade v Jackson National Life Insurance Co, 465 Mich 244 (2001)). For one common error, the statute fills in the answer. A false denial of previous medical treatment, consultation or hospital care is treated as a false denial of the disease or impairment for which the treatment was given, in deciding materiality (MCL 500.2218(4)).
Tomas Wieczorek, 52, applies for $300,000 of term coverage and answers “no” to a question about treatment by a cardiologist in the past five years. He had seen one 14 months earlier for chest pain. He dies of a heart attack 11 months after the policy date.
- The death is inside the contestable period, so the insurer investigates.
- The attending physician’s records show the cardiology visit.
- The false “no” is treated as a denial of the heart condition that was being evaluated (MCL 500.2218(4)).
- The insurer shows from its underwriting guidelines that it declines applicants with a recent unresolved cardiac workup. The misrepresentation is material because the insurer would have refused the contract (MCL 500.2218(1), (3)).
- The insurer may rescind, and in practice returns the premiums.
Change one fact and the result changes. If he had died 30 months after the policy date, the policy would be incontestable. It is incontestable after two years in force during the insured’s lifetime, apart from nonpayment of premiums, violations of the policy relating to naval and military service in time of war, and, at the company’s option, provisions on total and permanent disability and accidental death benefits (MCL 500.4014). Change another. If the producer had written “no” after Tomas said “yes,” the person who solicited the application, who is the insurer’s agent in this dispute, created the error, and the insurer faces a hard argument in any contest.
A misstatement of the insured’s age or sex is a different problem with a different remedy. It does not void the policy. The policy must pay what the most recent mortality charge or premium would have purchased at the correct age or sex (MCL 500.4018). If the insured was really 52 and the application said 47, the premium bought less coverage than the policy states, and the death benefit is cut to match.
Medical Evidence
Underwriters want enough evidence to price the risk and no more. The required evidence rises with the age of the applicant and the amount of insurance. An example of one insurer’s requirement for new term business follows.
| Face amount | Ages 18 to 40 | Ages 41 to 50 | Ages 51 to 60 |
|---|---|---|---|
| Up to $250,000 | Application and prescription history | Application and prescription history | Paramedical exam with blood and urine |
| $250,001 to $1,000,000 | Paramedical exam with blood and urine | Paramedical exam with blood and urine | Exam plus electrocardiogram |
| Over $1,000,000 | Exam plus electrocardiogram | Exam plus electrocardiogram and attending physician statement if indicated | Exam, electrocardiogram and attending physician statement |
In simplified issue, a low face amount buys a policy with no exam and only a few health questions, and the limit on the face amount is what protects the insurer from adverse selection.
The attending physician statement. An attending physician statement, usually called an APS, is a report from a physician who has treated the applicant, requested by the insurer under the authorization the applicant signed. The underwriter orders one when the application discloses treatment, when an exam or lab result is abnormal, or when the age and amount call for it. It is the most complete source because it shows what the physician actually found, not what the applicant remembers.
A case shows the work an APS does. Priyanka Nair, 47, discloses treated high blood pressure, and the application is for $500,000. The APS shows the pressure is controlled, but it also records a stress test for chest discomfort two years ago with an inconclusive result. The underwriter had no way to know about the test. Without the APS the policy might have been issued standard. With it the underwriter offers a table rating and asks for an updated electrocardiogram. A producer who makes sure the application gives the physician’s name, address, dates and the reason for each visit shortens this process by weeks.
Other sources. The investigative consumer report, which an outside firm prepares, checks occupation, finances, driving, and habits. The Medical Information Bureau file records codes insurers have reported from earlier applications. A code is a lead, and the underwriter follows it to the physician or the applicant. Laboratory tests on blood and urine detect nicotine, drugs, diabetes, and liver and kidney function. The applicant must consent before an HIV-related test, and the result is confidential and may be disclosed only to authorized persons.
Receipts and Claims During Underwriting
When the producer takes the initial premium with the application, the applicant receives a receipt. The type of receipt decides what happens if the applicant dies before the policy is issued. Underwriting often takes several weeks, and these are the cases that arise.
Case 1: a conditional receipt and a death, applicant insurable. Walter Osei, 39, applies for $400,000, pays the first premium and receives a conditional receipt. A paramedic exam is done five days later. He dies in an accident on day 12, before the insurer finishes underwriting. The insurer reviews the file and decides it would have issued the policy on standard terms. The condition of the receipt is met, so coverage is treated as effective from the later of the application and the exam, as many receipts provide, and the insurer pays $400,000.
Case 2: a conditional receipt and a death, applicant not insurable. Marguerite Boone, 55, pays with the application and receives a conditional receipt. She dies of a stroke on day 20. The APS shows she had a stroke and was on blood thinners, a condition the application did not mention. The insurer would have declined her. The condition of the receipt is not met, so there is no coverage, and the insurer returns her premium to her estate.
Case 3: no premium with the application, applicant dies. Chen Wei, 44, completes an application and says he will pay when the policy arrives. He dies two weeks later. No offer and payment have joined, so no coverage is in force during underwriting, and nothing is owed under the policy.
A binding receipt is the opposite case. It binds the insurer to the terms applied for from the start, and an applicant who turns out to be uninsurable but dies before the decision is paid in full. Insurers use it sparingly for that reason. Whatever the receipt says, the producer states plainly what the applicant has and does not have, and does not call a conditional receipt “coverage starting today.”
| Situation | Premium paid with application? | Outcome if the applicant dies during underwriting |
|---|---|---|
| Conditional receipt, insurable | Yes | Covered |
| Conditional receipt, not insurable | Yes | Not covered, premium refunded |
| Binding receipt | Yes | Covered on the terms applied for |
| No premium with application | No | Not covered |
Delivery
When the insurer approves the application, the producer delivers the policy. Delivery is where the producer confirms the contract the applicant is accepting.
- Check that the policy matches the application. A policy with a rating, an exclusion rider or a different amount is a counteroffer, and there is no contract until the applicant accepts it. The producer explains what changed and why.
- Review provisions, riders and the beneficiary. The producer explains the grace period and the free look. A life policy other than group must carry a notice on its front page that, for not less than 10 days after the policyholder receives it, the policyholder may cancel and receive a prompt refund of premium (MCL 500.4015). The date of receipt starts that period, so the producer records the delivery date on a signed delivery receipt.
- Collect the premium for the insurer. If the first premium was not paid with the application, it is collected at delivery, held for the insurer and remitted promptly. The check is payable to the insurance company.
- Obtain the statement of good health when required. The applicant confirms that his or her health has not changed since the application. Suppose Priyanka’s policy is issued and, between the application and the delivery visit, she was admitted to the hospital for chest pain. She cannot truthfully sign the statement, and the producer does not deliver the policy. The producer returns it to the insurer, which decides whether to reconsider.
A producer who delivers a policy knowing the applicant’s health has changed, and collects the premium, has put the insurer in the position of covering a loss it would not have accepted, and has put the applicant in the position of believing in coverage that may later be rescinded.
Lesson summary
- Michigan makes the policy and the attached application the entire contract, so the producer records answers accurately and nobody may alter a written life application without the applicant’s written consent (MCL 500.4004, 500.2216).
- A person who solicits an application is regarded as the insurer’s agent in a dispute with the insured or beneficiary (MCL 500.2220).
- Statements are representations, not warranties, absent fraud, and a misrepresentation voids a contract only if material, meaning the insurer would have refused the contract as issued or charged more for it (MCL 500.4016(1), 500.2218(1); Oade).
- A false denial of earlier treatment is treated as a false denial of the condition treated, and after two years in force the policy is incontestable apart from stated exceptions (MCL 500.2218(4), 500.4014).
- Underwriting evidence rises with age and amount. An attending physician statement comes from the treating physician and often changes the underwriting decision.
- A conditional receipt covers a death during underwriting only if the applicant was insurable, a binding receipt covers it regardless, and with no premium paid there is no coverage until delivery.
- At delivery the producer checks the policy against the application, explains changes, records the date the free look of at least 10 days begins, collects the premium and obtains a statement of good health if required (MCL 500.4015).