When a life insurance company issues a policy, the contract almost always includes a 2-year contestability period. If the insured dies within two years of being covered, the insurance company reserves the right to contest the payout, if they believe that there were misstatements or omissions on the life insurance application. They will also generally deny claims when the cause of death is suicide, and the suicide occurs within the contestability period.
When an insured dies within two years of policy issuance, you can expect the life insurance company to apply some scrutiny to the application itself and to the cause of death. The insurer is likely to go over medical records, toxicology reports, police reports, social media and the application itself with a fine-toothed comb, looking for evidence of false statements or material omissions on the application that they can use to avoid paying a claim.
During the two-year contestability period, the insurance company may be able to rescind the policy – thus denying the claim - if they can prove any material false statements or omissions on the application.
However, the burden of proof is usually on the life insurance company, and sometimes their reasons for denying a claim or rescinding a policy are very difficult for them to prove in court. First, they have to prove that there was a false statement, misrepresentation or omission on the application, and then they also have to prove that the false statement, misrepresentation or omission was material. And courts generally expect life insurance companies to meet a high standard of proof in order for them to deny a death benefit to widows, orphans and other life insurance beneficiaries.
Many times, when a policy is rescinded or a claim is denied, the insurance company is counting on beneficiaries not knowing their rights, and not making them prove their case in court.
This is why it’s critical to get legal advice right away, in the event a life insurance claim is denied or delayed, or if a carrier attempts to rescind a life insurance policy.
What does “material” mean?
In a life insurance context, “material” means that the false statement, misrepresentation or omission on the application or supporting documents is non-trivial and directly relevant to the life insurance company’s decision to issue a policy. The carrier must not only prove there was a misstatement or omission, but also that if the information they received was complete and correct, they would have denied coverage, issued a different policy, added exclusions to the policy or charged higher premiums or approved a lower face amount.
Even when the carrier can prove there was a misstatement or omission, that doesn’t mean they can legally deny the claim outright. State laws vary, but in many cases, if the misstatement or omission cannot be proven to be intentional, the insurance company is obligated to reform the contract, and pay the death benefit they would have approved had they received accurate information.
- A life insurance company issues a $500,000 term non-smoker standard risk policy to a 40-year-old man for $50 per month.
- A year later, the insured dies in a car accident.
- The life insurance company obtains medical records that show the insured was a smoker.
- The life insurance company finds recent pictures of the insured on Facebook, showing him smoking cigarettes.
- The life insurance company tries to rescind the policy, denying the claim altogether, based on the applicants’ misrepresentation of his or her status as a non-smoker.
Can they do this? Not necessarily. There are a number of ways an experienced attorney may be able to contest the life insurance company’s decision and force them to pay.
First, the life insurance company will have to prove that the insured was a smoker at the time he filled out the application.
Second, depending on state law, the life insurance company may have to prove that the smoking was material to the cause of death. State laws vary on this point – especially during the 2-year exclusion period. Some states allow life insurance companies to rescind a policy even if a misstatement or omission is not material to the cause of death, and some don’t. This is another reason why if you are facing a rescission or claim denial, you almost certainly need a lawyer.
You can be certain that the life insurance company has one.
Third, you may be able to force the carrier to pay a reduced amount. For example, depending on your state and the overall circumstances, an experienced attorney may be able to force the company to pay the death benefit that $50 per month would have bought had the carrier issued a smoker’s policy rather than a non-smokers’ policy.
A bit of research may show that at the time the policy was issued, $50 in premium on a smokers’ policy for a 40-year-old standard risk application would have purchased $250,000 in term life insurance. In that case the company must adjust the contract and pay the lower death benefit. It’s not ideal – but it is much, much better than getting nothing because you didn’t have an attorney helping you with your case.
Intentional vs. unintentional misrepresentation
Depending on the jurisdiction, a lot can ride on whether a misstatement or omission was intentional or accidental. In order for the insurance company to outright rescind a contract in most states, the intentional misrepresentation must be of a material fact. However, a few jurisdictions allow insurers to rescind a contract if they can prove any intentional misrepresentation, even if the misrepresented fact is not material.
After the Contestable Period
Once the two-year contestable period expires, the insurance company has fewer rights. During the contestable period, insurers can generally deny a claim for any statement material to the decision to issue a policy, whether the misstatement or admission was intentional or not.
After the contestable period expires, the carrier must normally prove that the misrepresentation was intentional and material, and therefore has a much higher standard of proof to meet.
Caution: Insurance companies will sometimes refund all premiums paid. This is often an attempt to trick you into accepting the rescission of a policy. If you cash that check, they could use that fact to argue later in court that the contract was voided when you accepted the refund. If you get a check in the mail refunding you for premiums, don’t cash that check without calling us first.
If you’re facing a life insurance rescission, claim denial or reduction, or unreasonable delay, call us for a free, no obligation consultation. We can take your call any time day or night, and walk you through the key issues and help you preserve your rights. Call us today.
Don’t go it alone. With life insurance, there is too much at stake.