We’ve all heard the old adage, “honesty is the best policy.” That advice is particularly on-point when you’re filling out a life insurance application. This is because even seemingly unimportant mistruths on an application can be grounds for your insurance company to deny payment to your beneficiaries upon your death.
In this day and age, insurance policies have become so commonplace that people sometimes forget they are legally binding contracts. We have insurance policies for everything – health, life, home, and auto, just to name a few. Each of those policies is ultimately an agreement between you and your insurer. You agree to pay your premiums on time and, in exchange, your insurance company agrees to pay benefits should a qualifying event occur. In the case of a life insurance policy, that event is death.
That seems like a simple enough arrangement. As we’ll explore below, however, there’s more to an insurer’s obligation to pay death benefits than many people realize.
Why the truth matters
Like any other contract, a life insurance policy can’t be based on lies. To illustrate this point, we’ll explore the concept outside of the insurance realm for a moment.
Let’s say you contract with someone to buy a large sailboat. The seller tells you that the boat is seaworthy, has never been in an accident, and has never leaked. Based on these representations, you agree to make monthly payments to the seller, and the seller gives you possession of the boat.
Imagine later finding out that, in fact, the boat has been in two accidents and has an inconspicuous crack in the hull that will cause it to sink very quickly. Are you obligated to continue making monthly payments on that boat? Generally speaking, no.
This is because the seller committed fraud in selling you the boat. He told several lies that you relied on in making the purchase. In the law, these lies are known as “material misrepresentations.” So long as the lie was important enough to cause you to do something you otherwise wouldn’t do – in this case, buy a leaky sailboat – the lies are deemed “material” and the underlying contract can be voided.
Material misrepresentations in the life insurance context
This same principle holds true when it comes to obtaining life insurance. When your insurance company agrees to sell you a certain policy for a certain premium, it is doing so based on its analysis of your “seaworthiness.” In other words, the insurance company has determined that your health, habits, lifestyle, and age make you worthy of insuring.
On some level, we’re all aware of this when we apply for life insurance. It’s human nature to want to appear healthier than we really are. Consequently, it can be tempting to tell little white lies in the application process.
Saying you are a non-smoker when you know you smoke a few cigarettes every time you’re out with friends on weekends.
Reporting that you exercise several times per week when the last time you went to the gym, Jane Fonda’s “Jazzercise” was all the rage.
Claiming that you have a clean driving record when, in fact, you’ve had six accidents that you paid for out of pocket and did not report to your auto insurer.
To most people, these seem like innocent – even justifiable – diversions from the truth. What harm could it possibly do to smoke a couple cigarettes every now and again? While you may be technically correct, your insurance company sees things very differently.
Indeed, to your insurer, things like occasional cigarettes, a lack of exercise, or driving recklessly are a lot like the cracked hull in the sailboat we discussed above. The company has charts, graphs, and research suggesting that each of these behaviors put you at risk for dying earlier than you would if you didn’t do those things.
When you pass away, the insurer may claim that had it known of these behaviors when you applied, it never would have granted you a policy in the first place. Thus, it may deny benefits based on a claim of material misrepresentations. Just like in the sailboat example above, that may be enough for the insurer to avoid its obligations under the policy.
What you lie about doesn’t matter
Another critical point to understand is that even if your death is wholly unrelated to the lie on your application, the insurance company may still deny your claim. Let’s say, for example, that you did fail to disclose occasional cigarette smoking in your application. You paid you premiums on time for years and later died in a bicycling accident. Surely your lie about smoking wouldn’t matter, right? Not so fast.
If the insurance company finds out about the smoking, it could argue that had it known the truth, it never would have given you a policy to begin with. In other words, it will claim that you used fraud to obtain the policy and that, consequently, it has every right to deny your claim.
What to do if a claim has been denied based on material misrepresentations
So, what do you do if you’re facing denial of a life insurance claim based on alleged material misrepresentations? First of all, don’t panic. There may ways to defeat that denial.
For instance, do you think you can prove the insurance company knew about the circumstance it now claims was a material misrepresentation? Sticking with the prior example, let’s say the policy holder failed to reveal occasional cigarette smoking on his application. Let’s also say, however, that the initial physical exam required by the insurer revealed a small amount of nicotine in his system. If the insurance company granted him a policy notwithstanding that test result, there may be an argument that the company has waived any right to deny coverage on that basis now.
Of course, the possibilities here are endless. Your best option is to contact a lawyer who specializes in life insurance claim denials. We can dig through the policy history and contest what may turn out to be a bad-faith denial. We have the knowledge and expertise to take on the insurance companies and are never intimidated by their hardball tactics. If you need assistance with a recent denial, give us a call.
Contact us today if you have a delayed or denied life insurance claim.