If a beneficiary of a life insurance claim receives a denial of death benefits, it is essential to understand a critical tool built into the denied policy: the incontestability clause. Unlike the many others that favor the insurer, this rule works for the policyholder and their designated beneficiaries. Its function is to prevent the insurance provider from denying a claim based on purposely misconstrued findings during the contestability period.
One of the primary rules of a life insurance policy contract is that if the insured gives any false or misrepresented information, or purposely fails to disclose pertinent details to their coverage (dangerous hobbies or sports, for example), then the carrier has the right to cancel the policy and deny the claim. An incontestability clause prevents this from happening under certain conditions.
A standard version of this useful clause states that insurers cannot void coverage after two years of purchasing the policy so long as the insured continues to pay premiums. It is important to note there are a few exceptions to this rule depending on the state you reside, including:
In instances where the insured misstated their gender or age on the application for coverage, the insurer may not cancel the policy. Instead, they can adjust the amount of the death benefit payout to reflect the impact of the difference in information made on the policy cost.
In blatant life insurance fraud cases, a policy can be voided by the carrier in some states.
Allowing the life insurance carrier to make the contestability period occur within the decedent’s lifetime. This creates an opportunity for the insurance company to deny benefits in a case where the insured was already sick at the time of applying for coverage and then died in that timeframe.
Life insurance carriers depend on minor errors on the insured’s initial application for coverage to purport there was fraud and then proceed to void the policy. This is a troublesome tactic used to avoid rightfully owed payouts to beneficiaries, and these misconstrued errors are typically just minor mistakes.
These actions are why the incontestability clause is a critical component of one's life insurance policy and should be carefully reviewed before agreeing to any coverage. From the moment the ink dries on the signature line, the contestability period (two-year window to investigate a policy) begins. Once this timeframe has run out, the incontestability clause kicks into place and offers increased protection against unfounded death benefit claim denials. If an insurance company still wants to attempt to cancel a policy, it often requires going to court and suing for its nullification. Additionally, most states require insurers to take policyholders, or their beneficiaries, to court to accomplish this during the contestability period since a mailed notice is insufficient.
It is well-known that incontestability clauses are in place to protect consumers from unreasonable death benefit denials, and this rule does not apply to fraudsters or identity thieves. This can be a tricky area when an individual or company purchases a life insurance policy in someone else's name or transfers to a different controlling entity later. Insurers have attempted to construe this as fraud and, therefore, exempt from the incontestability clause, but courts have not always allowed these tactics to succeed.
A recent case in a New York court involved a policy bought by a family trust in one of the family members' names. Initially, all coverage benefits were to go to the trust, but several years later, the policy rights were transferred to a new trust. When the decedent died after this occurrence, the life insurance carrier refused to pay out after discovering discrepancies in the blood samples given at the time of the application versus those taken at the nursing home where the insured lived until his death. This was proof that an imposter had applied and purchased the policy in name only of the original trust. Despite the contestability period having expired, the insurer argued the incontestability clause should not prevent a challenge to the policy's validity.
In this particular case, the court disagreed with the insurance company and struck down their claim denial. Fraud is indeed a recognized exception in the contestability period when it comes to imposters, but not against legitimate beneficiaries. Because the two-year window had passed, there could not be an exception made. The incontestability clause stood in favor of the new trust that had been designated beneficiary to the policy.
Interestingly, this insurance company also tried to make the argument that since the original purchaser didn’t have a clear interest to insure the policyholder, the coverage should be invalidated. While it is generally a requirement to have a legal or family-related interest in the covered party or have permission to carry a policy on the intended individual, it was still on the insurer to sort this out before the contestability period expired. Again, the incontestability clause won out, and the denied beneficiaries had the denial reversed.
When an insurance company takes legal action to void a policy, it also allows you to challenge their efforts. Many cases involving circumstances around contestability have used the incontestability clause to force a settlement. Still, it may be necessary to hire a knowledgeable life insurance attorney to assist. This is especially true for claims involving employer-based policies because the Employee Retirement Income Security Act (ERISA) has strict guidelines and procedures that must be followed, or the single chance for appeal could be lost.
Please do not take a life insurance claim denial at face value and speak with our experienced attorneys today who have years of experience handling these complicated life insurance claims. Many times a claim can still be paid even after an insurer tries to deny it.