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Abstract

It is unchanging black letter law that a contract of insurance is a transfer of risk. The insurer collects premiums from a group and pools them to cover the losses and the operating costs of the insurer. Individuals fund the operation of a system that achieves a social good in an effective and efficient manner. The perfect operation of the system can be thwarted by free riders in two ways. First, when individuals who have chosen not to participate in the group attempt to transfer risk for a loss that already has occurred, the prevalence of the risk is altered in the group. Second, the system also is defeated to the extent that legitimate losses are not indemnified. Judicial doctrines have attempted to find solutions that balance the desire to protect innocent insureds with the desire to avoid encouraging insurance fraud. One of those doctrines is the so-called “first manifest” doctrine. This doctrine uses policy language to avoid incontestability facilitated fraud by allowing coverage, but limits the risks transferred to those intended by the contract. The doctrine allows the insurer to deny a specific claim for a concealed condition while allowing the insured to keep coverage under the policy in effect for any condition that was unknown to the applicant. This article discusses a recent leading case in the area, Paul Revere Life Insurance Co. v. Haas. Haas represents an example of a state supreme court making new law to achieve policy objectives. Analysis of Haas and similar cases in other jurisdictions suggests that the relevant policy factors behind both incontestability and exceptions to incontestability can be described in equation form. A review of historical trends suggests that those variables leading to legislative recognition of incontestability have been supplanted by other factors. In contrast, those variables leading to judicial exceptions to incontestability, including insurance fraud, have become more prominent. This perspective suggests that recent first manifest cases represent a judicial balancing of an equation thrown out of balance by rising insurance fraud. Finally, the economic perspective suggests that the doctrine is a more efficient way to achieve multiple policy goals than the legislative alternative available in some states.

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