The South Carolina Department of Insurance recently issued a bulletin with the stated purpose of reminding life insurers “that they are required to include and comply with the Required Provisions set forth in” S.C. Code § 38-63-220(d). See SC Bulletin No. 2-2019, 2019 WL 1498182 (Apr. 3, 2019). South Carolina’s statute mandates that individual life insurance policies include a provision that the policies are “incontestable as to the truth of the application … after they have been in force during the lifetime of the insured for a period of two years from their date of issue[,]” and that “[i]f an insurer institutes proceedings to vacate a policy on the ground of the falsity of the representations contained in the application for the policy, the proceedings must commence within the time permitted in this subsection.”
The Department’s apparent focus was a concern over unilateral rescissions (i.e., an insurer seeking to rescind a policy within the two-year period by providing notice to an insured or beneficiary that the policy has been cancelled). The Bulletin cautions against unilateral rescissions: According to the Department, the only way to effectuate a rescission is through “proceedings to vacate [the] policy,” which must be “a judicial proceeding commenced to cancel the policy or declare it null and void.” Unilateral notice will not suffice. The Bulletin does not address or in any way criticize mutual rescissions.
In addition to its apparent criticism of unilateral rescissions, the Department fleetingly addressed the timing of rescissions and/or judicial contests. According to the Department, section 38-63-220(d) requires “that if an insurer want[s] to challenge the truthfulness of the application for insurance, it must do so during the first two years of the policy.” But what does this mean if the insured dies before the expiration of the two-year contestability period and the insurer has a good faith basis to rescind the policy? In the absence of a mutual rescission, must the insurer rush to the courthouse to file suit before the end of two years?
Although a conservative and literal interpretation of the Bulletin seems to require a judicial contest within two years, the Department did not engage in a full analysis of the timing of a judicial contest. Indeed, a literal interpretation (i.e., requiring a judicial contest within two years) is arguably undermined by the statute, which contemplates that a policy will be incontestable after it has “been in force during the lifetime of the insured for a period of two years.” Consistent with the industry’s historical approach, this statutory language suggests that a policy that was not in force for two years because the insured died within two years may be contested after the end of two years. Nevertheless, the absence of direct guidance on this topic coupled with the Department’s general statements in the Bulletin may favor initiating contests before the expiration of two years.