Twisting and Rescission: How to Avoid 2 Insurance Policy Pitfalls
Author: Frank N Darras
In the zeal to close that health or life insurance deal, producers must not forget that they have a duty to perform due diligence when completing the applications, discussing the policy exclusions and limitations, and replacing policies.
Two terms you should become familiar with and avoid are rescission and twisting. So what exactly do these terms mean?
Rescission is when the insurance company declares an insurance contract void or cancelled — the client’s policy is no longer considered active. The policy may be even revoked even after the insured has started paying premiums on it.
Typically, a policy is rescinded because a client has concealed, lied about, or misinterpreted important material information that directly affects the outcome of the underwriting procedure, and subsequent predictions on the insured’s mortality. For example, if you conceal a client’s tobacco usage on the application, that would be considered material and the policy would more than likely be rescinded.
Also make sure you and your client understand the difference between a warranty and a representation.
* A warranty is something that the client guarantees to be true in the insurance application. If the life insurance company finds that the client has lied about the warranty, it has the right to revoke the contract.
* On the other hand, a representation is something that the client states in the application and that affects the formation of the contract. If the representation is found to be untrue, the insurance company can cancel the contract. Most life insurance companies will resort to rescission if material information was not included in the application.
The only way to avoid the risk of rescission is to make sure your client includes all relevant information in their insurance application. You should let them know that, if a particular health condition or lifestyle habit can affect their mortality, they need to disclose the information. They may run the risk of a denial or being issued a policy with an exorbitant premium, but they will be able to apply to other companies. This is not so if they have a policy rescinded. In addition, if a question is vague or unclear to either you or a client, you should contact the insurer to determine exactly the intent of the question and document their answer.
Twisting is, by definition, when an agent, for the purposes of generating a commission, persuades a client to lapse, surrender, or otherwise terminate an insurance product and replace it with another product that provides little or no economic benefit to the client.
Agents are prohibited from making misleading, derogatory, false, or maliciously critical statements about the financial condition of an insurance company. This includes repeating market rumors or circulating news articles questioning a competitor’s solvency. Most states have now made twisting a criminal offense.
If you suggest a replacement, you should give the policyholder a written and signed proposal setting forth all the facts with respect to and comparing the relative benefits of the two policies. You should also encourage the policyholder to submit the written statement both to the company whose policy is proposed to be issued and to the company whose policy is to be replaced. By following these two simple steps, you are protecting yourself from any legal action and prove to your clients that you are their trusted advisor in insurance.
Unfortunately, there are agents out there who are giving the entire industry a bad name, and in some cases, you’ll have to overcome the stereotype perpetrated in the media and public opinion. However, if you deal honestly and adhere to the code of ethics that have been established for the insurance industry, you will succeed in your career.
Frank N. Darras is the founding partner at DarrasLaw. He can be reached at firstname.lastname@example.org or 866-266-7186