Recission

Example

“The life insurance company pursued recission of the policy after discovering the applicant had failed to disclose a previous heart attack on the application.”

Memory Tip

Think 'RECISSION = Really Erasing Contract - Insurance Stops, Scrapped In Original Nullification' - the policy is erased from the beginning.

Why It Matters

Recission protects insurance companies from fraud and ensures honest applicants don't subsidize dishonest ones through higher premiums. For consumers, understanding recission emphasizes the critical importance of complete honesty on insurance applications, as lies can void coverage even after years of paying premiums.

Common Misconception

Many people believe that once they've paid premiums for several months or years, their policy can't be cancelled for application errors. However, recission can occur even years later if material misrepresentation is discovered, though most policies have contestability periods (typically two years) that limit this timeframe.

In Practice

Tom applies for $500,000 life insurance and fails to mention his diabetes diagnosis. He pays $3,000 annually in premiums for three years, totaling $9,000. When Tom dies in year four, the insurance company investigates and discovers his undisclosed diabetes. Since this occurred within the two-year contestability period after the policy's issue date, they pursue recission, refund the $9,000 in premiums to his estate, but deny the $500,000 death benefit claim because the policy is treated as never having existed.

Etymology

From the Latin 'rescindere' meaning to cut back or annul, literally 'to cut again,' referring to cutting away or undoing a contract.

Common Misspellings

Related Terms

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See Also