Alex,
The insurance company is well within its rights in refusing the claim arising from your sisters death. The first clause you mentioned, the 180 day 'no change of health' circumstances clause covers their risk. A risk did arise which in their assessment was an uninsurable or unacceptable risk.
What would have been appropriate under the circumstances involving your sisters case would have been for her and any of you to have complied with the condition by informing the insurer and then seeking to negotiate a newer and perhaps higher premium policy considering her diagnosis. Not all cancers result in death. It would have put the parties in an equal bargaining position because whilst your sisters risk would be her health and surviving her condition, the insurer's risk would have been whether to risk covering her and for how long and how much.
It is sad especially for those of you left behind to mourn her loss. However, to go after the company now as someone suggests on the knowledge of an apparent breach on your sisters part in failing to inform the company whereby they are prima facie covered, would be to throw good money after bad.
Insurance companies work on the basis of risk and insurable risk, probabilities and yes profits and losses. Those who do not understand it make fictitious claims of bias and unilaterality etc and thats not correct although it may appear so.
I am sorry for your plight and, No don't go after the insurer for misrepresentation. It is unlikely to succeed. If an insurance agent made misrepresentations you will only have a claim against him or her and not the company.
The second clause you mentioned is mutually exclusive in the context of the first clause if read with the policy which I think is universally standard although I have not read your particular one.
I hope this helps.
