By the very nature of their business, life insurance companies take on a lot of risk. For each person they agree to insure, the company is essentially betting that the policyholder will pay a greater amount in premiums than the life insurer will be forced to pay to the beneficiary when that person dies. That’s why, for example, older policyholders generally pay higher premiums than younger policyholders – the risk is greater that the old person will die sooner.
No one is immune from death, however. Thus, most life insurance companies do quite a bit of investigating before they agree to issue a policy. One of the ways they do this is by issuing a health questionnaire as part of the policy application packet. The questionnaire asks things about prior medical conditions, certain habits (like smoking), and certain lifestyle choices (like skydiving).
The life insurer collects all of this information and then makes two decisions:
- Is the applicant healthy enough to receive a policy at all?
- If so, how much should the company charge the applicant in premiums so as to maximize the chances that it will collect more money (in premiums) than it ever pays out (in a death claim)?
The importance honesty in the life insurance relationship
Given the significance of these two questions, it is extremely important to an insurance company that the applicant tell the truth in the application process. For example, if a person tells the insurer they’ve never smoked a cigarette in their lives, yet they’ve actually been a regular smoker for 10 years, the insurance company may issue a policy it wouldn’t normally issue. In contract law (which governs life insurance policies), this is known as a “material misrepresentation.”
In fact, in the life insurance context, a material misrepresentation is any lie told in the application process that does one of two things: (1) causes the insurer to issue a policy it wouldn’t normally issue; or (2) causes the insurer to charge the policyholder significantly lower premiums than it would have had it known the truth.
Given what we know about how life insurance companies make money, these legal concepts make sense. The insurance company is simply trying to keep its risk of losing money at a minimum. The law protects its right to do so.
Unfortunately, as lawyers who specialize the wrongful denial of life insurance claims, we’ve seen life insurers misuse the concept of material misrepresentations as a simple ruse for denying policy benefits. That is why for as often as we tell policyholders to be honest during the application process, we tell grieving beneficiaries to make sure the insurance company is honest when it denies a claim based on alleged material misrepresentations.
This article explores one egregious case where a life insurance company wrongfully relied on the concept of material misrepresentations to deny a claim.
Is a blank in the application a lie?
The case involved a man named Deric. When Deric applied for life insurance, he was given a lengthy questionnaire to fill out. At the time, Deric was 42 years old and, to all outward appearances, in great health.
As Deric filled out the application, however, he left one blank in the application form – the section that asked for his most recent blood pressure reading. When Deric turned in the application to his insurance broker, the broker didn’t notice the omission. If anyone at the life insurance company noticed it, they certainly never mentioned it to Deric or his broker.
Sadly, Deric passed away some 18 months after his policy issued. Among other things, that meant his policy was still in the “period of contestability.” Essentially, that means that because Deric died within two months of the policy issuance, his life insurer had the right to investigate every part of his life and death to see if there were any “material misrepresentations” in his policy application that would justify a claim denial.
Consequently, when Deric’s wife Tonya submitted a claim to the life insurance company for death benefits, she was told she would have to wait for the company to complete a thorough investigation. As part of that process, the insurer noticed that Deric had not revealed his most recent blood pressure reading in his policy application. Without investigating any further, the company denied Tonya’s claim on the basis that Deric’s omission had to be a “material misrepresentation.” In other words, they were accusing Deric of leaving the form blank to hide a problem with his blood pressure.
Tonya was too distraught to fight the insurance company on her own. Fortunately, however, she did have the wherewithal to contact an attorney specializing in the wrongful denial of life insurance claims. The attorney immediately asked if Deric did, in fact, have high blood pressure. His wife truly didn’t know but given his physical condition, she highly doubted it.
The attorney asked Tonya to retrieve the last two years of health records from Deric’s primary care physician. Those records plainly showed that Deric’s blood pressure was within the normal range at all times relevant to his policy. The attorney was not surprised that the insurance company had stopped its investigation upon discovering the blank in Deric’s application. It could have requested the same medical records and found out there was no material reason to deny Tonya’s claim. Instead, it issued its poorly-researched denial in hopes that Tonya would simply go away.
The attorney requested a hearing before the insurer’s internal appeals board. Within an hour’s time, he presented all the evidence needed to get a full reversal of the claim denial. The company knew it would be dead in the water if the case ever got to court and chose instead to pay the claim.This is a perfect example of how life insurance companies will deny some claims just to see if they can get away with it. If you suspect this is happening to you or someone you love, call us today. We’re here to help.