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FSM SUPREME COURT TRIAL DIVISION

CIVIL ACTION NO. 2004-2004

SHRUE K. SIGRAH, ERWIN K. SIGRAH, and WINEDA K. SIGRAH, surviving spouse of decedent Kingsley E. Sigrah, and representative of minors Lolian K. Sigrah and Shrew K. Sigrah,
Plaintiffs,

vs.

MICRO LIFE PLUS and LILY J. IRIARTE,
Defendants.

___________________________

ORDER AND MEMORANDUM

Martin G. Yinug
Associate Justice

Decided: January 15, 2009

APPEARANCES:

For the Plaintiffs: Canney L. Palsis, Esq.
Micronesian Legal Services Corporation
P.O. Box 38
Tofol, Kosrae FM 96944

For the Defendants: Mary Berman, Esq.
P.O. Box 163
Kolonia, Pohnpei FM 96941

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HEADNOTES

Insurance
 An insurance policy's benefits are payable only to those who are beneficiaries. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 256 n.1 (Kos. 2009).

Insurance
 Life insurance premiums paid after the insured's death are unearned premiums and may be recovered from the date of the insured's death, provided that the date can be satisfactorily established. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 257 (Kos. 2009).

Contracts  Formation; Insurance
 An insurance contract, like all contracts, requires an offer and acceptance to be effective, and, like any contract, an insurance contract is formed when an unrevoked offer by one person is accepted

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by another, thus satisfying the two prerequisites of mutual assent. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 257 (Kos. 2009).

Contracts  Formation; Insurance
 An application for insurance standing alone does not constitute a contract upon which judgment can be recovered. It is merely an offer or request for insurance which may either be accepted or rejected by the insurer. An insurer is at liberty to choose its own risks and is not bound to accept an insurance application for insurance. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 258 (Kos. 2009).

Contracts  Formation; Insurance
 An insurance contract may be established when one of the parties to the contract proposes to be insured and the other party agrees to insure, and the subject, the amount, and the rate of insurance are ascertained or understood and the premium is paid if demanded. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 258 (Kos. 2009).
Insurance
 An insurer may rely on an applicant's representations as truthful, and, in the absence of information that gives an insurer notice that an insurance applicant has misrepresented facts, an insurer has no duty to investigate an applicant's representations. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 258 (Kos. 2009).

Insurance
 In the absence of special circumstances, such as the existence of an incontestable clause in the policy, fraud is fully available to the insurer as a defense in an action at law on the policy. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 258 (Kos. 2009).

Insurance
 An insurance applicant has a duty to be truthful and accurate in making representations when applying for insurance. In insurance law, a representation is a statement made prior to the issuance of a policy which tends to cause the insurer to assume the risk. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 259 (Kos. 2009).

Insurance
 A misrepresentation in a negotiation for a life insurance policy is a statement as a fact of something that the insured knows or should know is untrue. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 259 (Kos. 2009).

Insurance
 It is a long-established common law rule that an insurance applicant has a duty to inform the insurer of answers that would need to be changed between the date of the application and the insurance policy's effective date. The rule is that the insured must inform the company of any change in his physical condition of which he becomes cognizant after making the application for the policy and prior to the delivery thereof. This duty to disclose any change in health exists regardless of whether there is a policy provision requiring such disclosure. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 259 (Kos. 2009).

Insurance
 An insurer may void an insurance contract on the grounds that the insured willfully misrepresented a material fact since the misrepresentation prevents a meeting of the minds, or mutual assent, as to the risk to be insured. A material representation or omission of fact in an insurance application, relied on by the insurer in issuing the policy, renders the coverage voidable at the insurance

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company's option. This protects the insurer's right to know the full extent of the risk it undertakes when an insurance policy is issued. The mutual good faith which is required in a life insurance contract will not permit a recovery where the insured intentionally withholds or conceals material changes in the condition of his health. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 259 (Kos. 2009).

Contracts  Rescission; Insurance
 An insurer seeking rescission of an insurance contract based on a misrepresentation in an insurance application must tender the premiums back to the insured. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 260 (Kos. 2009).

Contracts  Rescission; Insurance
 An insurer seeking to rescind a life insurance policy upon a ground which rendered it voidable from the beginning must return or tender the premium paid thereunder because rescission of an insurance contract would, if granted, absolve an insured from liability for the premium and entitle him to return of the premium paid since the general rule is that a contract must be rescinded in whole and cannot be rescinded in part. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 260 (Kos. 2009).

Insurance
 Reinstatement of an insurance policy cannot take place until after the insurer learned of the insured's misrepresentation and then waived it. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 260 n.3 (Kos. 2009).

Contracts  Rescission; Insurance
 If an insurer seeks to avoid liability for the policy death benefit because of the insured's misrepresentation in the application process, it must tender the premiums to the beneficiaries. If it does not, it cannot prevail on the defense that the insured's misrepresentation made the policy voidable. This is because, after an insured's death, if a tender of the premium in avoidance of the life insurance policy for misrepresentation is not made to the beneficiaries in a timely manner or within a reasonable time, the defense of fraud or misrepresentation is deemed waived, and if the beneficiaries refuse the tender, it should then be paid into court before the insurer seeks a decision on the merits of its defense of fraud or misrepresentation. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 260 (Kos. 2009).

Contracts  Rescission; Insurance
 The court will not hesitate to deny rescission and order enforcement of the contract when the party seeking rescission has not made a timely tender of the premiums (or benefit) it received under the contract. Sigrah v. Micro Life Plus, 16 FSM Intrm. 253, 261 (Kos. 2009).

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COURT'S OPINION

MARTIN G. YINUG, Associate Justice:

 This comes before the court on 1) Defendant Microlife Plus Motion for Summary Judgment, filed on March 21, 2008, with supporting affidavits and exhibits; 2) the plaintiffs' Memorandum in Opposition to Defendants' Motion for Summary Judgment, in the Alternative this Court Must Grant Summary Judgment to the Plaintiffs, filed on April 11, 2008, with supporting affidavit; and 3) the Defendant Microlife's Reply to Plaintiff Sigrah et al.'s Opposition to Summary Judgment, filed on May 6, 2008, with supporting affidavit and exhibits. Summary judgment is granted in the defendants' favor, in part, and in the plaintiffs' favor in part. The court's reasons follow.

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I. Facts

 On February 13, 2002, Kingsley E. Sigrah visited the Micro Life Plus insurance office on Kosrae and applied for $10,000 of life insurance coverage. On the application form, which he signed, Sigrah answered "no" to the health question: "Have you, your spouse, or any of your children ever been diagnosed with, or treated for high blood pressure, diabetes, aids or HIV, stroke, or any diseases of the heart, arteries, brain, kidney or lungs?" If Sigrah had answered "yes" to this question, Micro Life would not have issued him a life insurance policy. Aff. Iriarte para. 5. The health question was followed by a declaration in which, among other things, the applicant (Sigrah) stated that he understood that any false statements "may void this agreement and deny any claims." The insurance application did not contain a provision authorizing the release of the applicant's medical records to the insurance company. Micro Life would not have had any right to see Sigrah's medical records unless Sigrah signed such a release.

 On February 14, 2002, Sigrah, who had a history of chronic liver disease, visited the Kosrae State Hospital. He was diagnosed with, and treated for, chronic (congestive) heart disease and edema of the lungs. Sigrah did not inform Micro Life of this diagnosis or treatment.

 Sigrah's premiums were paid through a $10 allotment from his biweekly paycheck. Sigrah's life insurance policy became effective either on March 7, 2002, when he authorized the paycheck allotment, or on March 21, 2002, when the first premium payment was actually made. Sigrah made 42 premium payments ($420). He died on October 3, 2003. Two of the premium payments ($20) were made after his death.

 When the insurer did not pay the death benefit upon the presentation of Sigrah's death certificate, counsel, on March 23, 2004, wrote to the insurer requesting payment. When none was forthcoming, the named beneficiaries filed this lawsuit alleging that the defendants (Lily J. Iriarte is the owner of the insurer, Micro Life Plus) were liable to them for the $10,000 death benefit on the basis of breach of contract, conversion, negligence, or unjust enrichment.

II. Summary Judgment Motion(s)

 The defendants ("Micro Life") move for summary judgment on the ground that Sigrah had a duty to answer the insurance application's questions truthfully and to provide the insurance company with correct information, but since he did not do so before the policy took effect, the policy is void and they are not liable for the policy's $10,000 death benefit. Micro Life contends the application was fraudulent because Sigrah must have known he was seriously ill when he applied for the insurance policy. Micro Life further contends that Sigrah's duty to inform Micro Life continued until the policy took effect so that even if Sigrah's application was not fraudulent (that is, even if Sigrah did not know on February 13, 2002, that he had heart and lung disease), his failure to inform Micro Life of the heart and lung disease diagnosis constituted a misrepresentation in Sigrah's application and rendered void the insurance policy it issued based on that application.

 The four beneficiary plaintiffs contend that there is no proof that Sigrah's application was

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untruthful on February 13, 2002, the day he signed it, so that therefore it was not void on October 3, 2003, the day he died. They also contend that since Sigrah did not die from any of the excluded causes of death, Micro Life must pay the $10,000 death benefit. They further contend that Micro Life was at fault for failing to include a medical records release provision in its application form so that Micro Life itself could have consulted Sigrah's medical records at the Kosrae Hospital to determine if he were insurable. The beneficiaries also contend that whether Sigrah knew on February 13, 2002, that he was seriously ill is a fact in dispute and therefore no summary judgment can be granted on the fraud ground and that, even so, a court of equity should not cancel an insurance policy after the loss insured against has occurred merely because the policy was procured through the insured's fraud.

 The beneficiaries further contend that they are entitled to summary judgment in their favor because Micro Life breached the terms of the insurance contract, which in their view, was in effect. They also assert that Micro Life had no intention of paying the policy benefits. The beneficiaries conclude that they are entitled to summary judgment in their favor for the $10,000 death benefit. In the alternative, they contend that they are at least entitled to the cash surrender value of Sigrah life insurance policy. Mem. in Opp'n at 12.

III. Analysis

A. Posthumous Premium Payments

 Micro Life received two premium payments after Sigrah died. Life insurance premiums paid after the insured's death are unearned premiums and "may be recovered from the date of the insured's death, provided that the date can be satisfactorily established." 44 Am. Jur. 2d Insurance § 930 (rev. ed. 2003). Since the date of Sigrah's death is not in dispute, the $20 in premiums paid after that date may be recovered.

 There being no genuine issue of material fact about the posthumous premium payments and since Sigrah is entitled, as a matter of law, to recover those two payments, Micro Life must disgorge this $20 regardless of whether it is liable for the policy death benefit. That is, if Micro Life is liable for the $10,000 death benefit, it must disgorge the $20 in addition to paying the $10,000 benefit; and if it is not liable for the death benefit, it still must disgorge the unearned $20.

B. Life Insurance Contracts

 An insurance contract, like all contracts, requires an offer and acceptance to be effective. See, e.g., Mitchell v. AARP Life Ins. Program, 779 A.2d 1061, 1069 (Md. Ct. Spec. App. 2001) (essential element to contract formation is the parties' mutual assent to the terms thereof); Callahan v. Washington Nat'l Ins. Co., 608 N.W.2d 592, 597 (Neb. 2000). And, like any contract, an insurance contract is formed when an unrevoked offer by one person is accepted by another, thus satisfying the two prerequisites of mutual assent. Mitchell, 779 A.2d at 1069.

 The beneficiaries contend that the insurance contract was formed when the insurer offered and Sigrah accepted by agreeing to being enrolled in the Micro Life Plus Insurance Plan. The beneficiaries

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are incorrect. "An application for insurance standing alone does not constitute a contract upon which judgment can be recovered. It is merely an offer or request for insurance which may either be accepted or rejected by the insurer." Mitchell, 779 A.2d at 1069-70; see also Callahan, 608 N.W.2d at 597 (an insurance application "is simply an offer"). An insurer is at liberty to choose its own risks and is not bound to accept an insurance application for insurance. Mitchell, 779 A.2d at 1070.

 An insurance contract may be established when one of the parties to the contract "proposes to be insured and the other party agrees to insure, and the subject, the amount, and the rate of insurance are ascertained or understood and the premium is paid if demanded." 43 Am. Jur. 2d Insurance § 208, at 257 (rev. ed. 2003). The court thus concludes that Micro Life accepted Sigrah's offer to insure him when, after reviewing and accepting Sigrah's application, it received his first premium payment on March 21, 2002. (This is not one of those cases where the insurer's retention of the premium does not signify acceptance of the offer to insure an applicant because it may take a reasonable time to determine if it is willing to accept the risk.)

C. No Duty to Investigate

 The beneficiaries contend that Micro Life was at fault because its insurance application form did not contain a medical records release provision so that Micro Life could investigate the accuracy of Sigrah's "no" answer to the application's health question. They are incorrect.

 An insurer may rely on an applicant's representations as truthful, and is under no duty to investigate. "In the absence of information that gives an insurer notice that an insurance applicant has misrepresented facts, an insurer has no obligation to investigate an applicant's representations." Story v. Safeco Life Ins. Co., 40 P.3d 1112, 1117 (Or. Ct. App. 2002) (citing Kraus v. Prudential Ins. Co. of Am., 799 F.2d 502, 505 (9th Cir. 1986)). To hold otherwise would only encourage insurance applicants to act in bad faith in the hope that their misrepresentations would not be discovered.

 Since there is no evidence that Micro Life had any notice that Sigrah's answers on his application misrepresented the facts, Micro Life was under no obligation to investigate those answers or to seek release of Sigrah's medical records. Thus, the application's omission of a medical records disclosure provision has no bearing on the beneficiaries' claim.

D. Whether Insurance Policy Is Void for Misrepresentation

 1. Incontestable Clause

 The beneficiaries contend that Sigrah's life insurance policy was not void when he died. The beneficiaries, relying on 43 Am. Jur. 2d Insurance § 431 (1982), assert that a "court of equity will not, after the loss insured against has occurred, cancel a policy of insurance merely on the ground that it was procured through the fraud of the insured." They apparently contend that even if Sigrah knew that his "no" answer to the health question was false when he signed the application, Micro Life is still liable on the policy.

 However, in quoting American Jurisprudence Second as authority, the beneficiaries ignored the rest of the sentence they quoted. That sentence, now located at 43 Am. Jur. 2d Insurance § 458 (rev. ed. 2003) (footnotes omitted), continues, "since in the absence of special circumstances, such as the existence of an incontestable clause in the policy, the fraud is fully available to the insurer as a defense in an action at law upon the policy." Sigrah's policy did contain an incontestable clause, but under that clause, an applicant's representations do not become incontestable until after five years have passed. Sigrah died only 1½ years after the policy took effect. His representations were therefore not

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incontestable. Micro Life may thus use fraud or misrepresentation as defenses in this action at law upon Sigrah's policy.

 2. Duty to Disclose

 An insurance applicant has a duty to be truthful and accurate in making representations when applying for insurance. In insurance law, "a representation is a statement made prior to the issuance of a policy which tends to cause the insurer to assume the risk." Allstate Ins. Co. v. Boggs, 271 N.E.2d 855, 858 (Ohio 1971). Sigrah's "no" answer to the application's health question is a statement that caused the insurer to assume the risk  if he had answered "yes" Micro Life would not have assumed the risk by issuing Sigrah a life insurance policy. Sigrah's representation was thus material as a matter of law.

 A misrepresentation in a negotiation for a life insurance policy is a statement as a fact of something that the insured knows or should know is untrue. Massachusetts Mut. Life Ins. Co. v. Allen, 416 P.2d 935, 940 (Okla. 1965). It is a long-established common law rule that an insurance applicant has a duty to inform the insurer of answers that would need to be changed between the date of the application and the insurance policy's effective date. See, e.g., Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316-18 & n.1, 48 S. Ct. 512, 513-14 & n.1, 72 L. Ed. 895, 898-99 & n.1 (1928); Life Ins. Co. of N. Am. v. Cichowlas, 659 So. 2d 1333, 1335 (Fla. Dist. Ct. App. 1995) (Warner, J., concurring); 44 Am. Jur. 2d Insurance § 1073, at 327 (rev. ed. 2003).

"The rule is that the insured must inform the company of any change in his physical condition of which he becomes cognizant after making the application for the policy and prior to the delivery thereof. This duty to disclose any change in health exists regardless of whether there is a provision in the policy requiring such disclosure."

Disposable Servs., Inc. v. ITT Life Ins. Co. of N.Y., 453 F.2d 218, 221 (5th Cir. 1971) (quoting 1 J. Appleman, Ins. L. & P. § 219, at 355).

 If Sigrah did not know on February 13, 2002, that he had heart and lung disease, he knew, or should have known on February 14, 2002, when he was diagnosed and treated for edema of lungs and congestive heart disease that his February 13, 2002 answer to the insurance application's health question was no longer accurate. His failure to inform the insurer of this development therefore constituted a misrepresentation since the policy had not yet come into force.

 3. Effect of Misrepresentation

 An insurer may void an insurance contract on the grounds that the insured willfully misrepresented a material fact since the misrepresentation prevents a meeting of the minds, or mutual assent, as to the risk to be insured. Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664, 672 (Ind. 1997). "[A] material representation or omission of fact in an insurance application, relied on by the insurer in issuing the policy, renders the coverage voidable at the insurance company's option. The right to void insurance coverage due to a material representation in making the policy is well established in the common law. Id. "In the insurance context, this protects the insurer's right to know the full extent of the risk it undertakes when an insurance policy is issued." Id. "'The mutual good faith which is required in a contract of life insurance will not permit a recovery where the insured intentionally withholds or conceals material changes in the condition of his health . . . .'" Disposable Servs.,453 F.2d at 221 (quoting 9 G. Couch, Couch on Insurance 2d §§ 38.21-2, at 346-47).

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 Micro Life is therefore entitled to avoid liability for the death benefit  to seek a rescission of the insurance contract. But an insurer seeking rescission of an insurance contract based on a misrepresentation in an insurance application must tender the premiums back to the insured. See, e.g., Henson v. Celtic Life Ins. Co., 621 So. 2d 1268, 1277 (Ala. 1993); Robinson v. State Farm Mut. Auto Ins. Co., 45 P.3d 829, 837 (Idaho 2002); cf. Phillip v. Marianas Ins. Co., 12 FSM Intrm. 464, 470 (Pon. 2004) (rescission of an insurance contract could entitle an insured to the return of the premium paid). "An insurer seeking to rescind a life insurance policy upon a ground which rendered it voidable from the beginning must return or tender the premium paid thereunder." 43 Am. Jur. 2d Insurance § 429, at 480 (rev. ed. 2003). Rescission of an insurance contract would, if granted, absolve an insured from liability for the premium and entitle him to return of the premium paid. Phillip, 12 FSM Intrm. at 470. This is because the general rule is that a contract must be rescinded in whole, and that it cannot be rescinded in part. E.g., Prudential Ins. Co. of Am. v. Smith, 108 N.E.2d 61, 65 n.5 (Ind. 1952).

 Micro Life contends that Sigrah is not entitled to any refund of the premiums paid because, in its view, once Sigrah reached 50 years of age on May 28, 2002, his premium payments should have increased to $15 biweekly, and when they did not, the policy's accumulated cash value was used to cover the increased premiums and keep the policy in force as required by the policy's terms. Answer to Pls.' Second Interrogs. paras. 12-13 (Feb. 2, 2008). Micro Life makes the same contention to assert that the policy's cash value (instead of the death benefit) cannot be paid either  the cash value was exhausted covering the premium increase. Id.

 Micro Life misses the point. Sigrah's misrepresentation rendered his life insurance policy voidable before the policy came into effect. If Micro Life seeks to avoid liability for the policy death benefit because of Sigrah's misrepresentation in the application process, it must tender the premiums to the beneficiaries. If it does not, it cannot prevail on the defense that Sigrah's misrepresentation made the policy voidable. This is because, after the death of an insured, if a tender of the premium in avoidance of the life insurance policy for misrepresentation is not made to the beneficiaries in a timely manner or within a reasonable time, the defense of fraud or misrepresentation is deemed waived. See, e.g., Grand Lodge of Bhd. of R.R. Trainmen v. Clark, 127 N.E. 280, 282, 18 A.L.R. 1190, 1194 (Ind. 1920) (tender made 17 months after fraud discovered was not timely); Gary Nat'l Bank v. Crown Life Ins. Co., 392 N.E.2d 1180, 1181 (Ind. Ct. App. 1979) (tender 50 days after loss and, after that was refused; second tender into court custody before pretrial or trial on merits were within reasonable time); Robinson, 45 P.3d at 837 (tender only after case submitted for trial was not timely). If the beneficiaries refuse the tender, it should then be paid into court before the insurer seeks a decision on the merits of its defense of fraud or misrepresentation. Gary Nat'l Bank, 392 N.E.2d at 1182. There is, however, some authority that when an insurer defends on the ground that the insurer was induced to issue the policy by fraud, the insurer is not required to tender the premiums paid before trial on the action. Berger v. Manhattan Life Ins. Co., 805 F. Supp. 1097, 1110 (S.D.N.Y. 1992). Other authorities hold that the return of the premium is not essential to the avoidance of the policy, especially when the insured used fraud or misrepresentation to obtain the policy and knowledge of the ground for avoidance was first obtained after the loss. See, e.g., Taylor v. Grand Lodge of A.O.U.W. of Minn., 105 N.W. 408, 414 (Minn. 1905) (insurer had manifested willingness to return premiums); State ex rel. Metro. Life Ins. Co. v. Shain, 66 S.W.2d 871, 874 (Mo. 1933) (tender not necessary); Spaulding v. Mutual Life Ins. Co., 117 A. 376, 382 (Vt. 1922) (delay in tendering a return of premiums did not constitute waiver since return not required). But in light of the authorities cited and the general rule that, in order

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to rescind a contract, the benefits obtained under the contract must be returned, the court concludes that the better view is that when an insurer has grounds to void an insurance contract, the insurer must return the premiums in order to prevail on its avoidance defense.

 Micro Life learned of the misrepresentation early in discovery and raised the affirmative defense of fraud and misrepresentation in the application process, thus seeking rescission, in its amended answer filed December 6, 2004. It has had ample time within which to tender the premiums to the beneficiaries, but has not done so. This is a case of first impression in the FSM. No party briefed the issue of timely tender of the premiums. Therefore, if Micro Life tenders to the beneficiaries the $420 of premiums paid or, if the defendants intend to appeal this ruling, pays the $420 into court, no later than March 20, 2009, the court will enter judgment in the beneficiaries' favor for $420. If the $420 tender is not made by then, the court will enter judgment in the beneficiaries' favor for the $10,020  the $10,000 death benefit plus the $20 in posthumous premiums.

 This order puts insurers (and others) on notice that henceforth the court will not hesitate to deny rescission and order enforcement of the contract when the party seeking rescission has not made a timely tender of the premiums (or benefit) it received under the contract.

IV. Conclusion

 Accordingly, the insurer may avoid liability for the policy death benefit because of the insured's material misrepresentation when applying for life insurance since he did not inform the insurer before the policy became effective that his answer to the health question should be "yes." In order to avoid liability for the death benefit on this ground, the insurer must return the premiums paid by the insured to the beneficiaries, and the insurer also has no right to retain any premium paid after the insured's death. There being no material facts in dispute on these points and the insured being entitled to judgment for the premiums as a matter of law, summary judgment shall be rendered to favor of the four beneficiaries for the amount of the premiums paid  $420, if that sum is tendered to the beneficiaries or paid into court before March 20, 2009. If the defendants fail to tender $420 by March 20, 2009, their fraud and misrepresentation defense will be deemed waived as a matter of law and judgment entered for $10,020, the $10,000 death benefit plus the $20 in posthumous premiums.

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