Insurance Law Lesson 51: Rescission

To rescind means to take back or to undo. In the contract sense, to rescind means to make it as if the contract was never signed. By now you know — an insurance policy is a contract.

This comes up when an insurer finds out that the policyholder made a material misrepresentation (or concealment) in the procurement of the policy. Here’s how it happens:

Jimmy talks to his independent agent (Lessons 3 and 4). The agent fills out a policy application. Jimmy signs it. The app is submitted. A policy is issued. Jimmy pays his premiums. Everything is fine.

Then Jimmy has a big loss. Now the insurer takes a closer look at Jimmy. It determines that Jimmy’s application had an error that resulted in Jimmy’s premiums being 50% lower than they should have been.

Now the insurer says “Jimmy, had you been honest, we would not have issued you this policy.” Then they write Jimmy a check to return the premium he paid and go on as if the policy had never been issued. That’s rescission.

Jimmy gets his premiums back, but he is stuck with the (much larger) claimed loss and no insurance.

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