When a life insurance company denies, delays, or undervalues a valid claim, it may be acting in bad faith. While insurers are legally obligated to handle claims fairly and uphold their contractual responsibilities, some prioritize profits over people. Two of the most common justifications used in bad faith denials are misrepresentation during the application process and policy lapse due to missed premium payments. Understanding how these reasons are misused can help beneficiaries recognize when an insurer may be operating in bad faith—and what legal remedies are available.
What Constitutes Bad Faith in Life Insurance?
Bad faith occurs when an insurer refuses to fulfill its obligations under a policy without a valid reason. This can take many forms:
Denying a legitimate claim without proper investigation
Delaying payment unnecessarily
Failing to communicate clearly or promptly
Offering an unreasonably low settlement
Ignoring evidence or acting with reckless disregard for the claimant’s rights
In the context of life insurance, bad faith can be especially harmful. Families are often relying on those benefits to cover funeral costs, mortgage payments, or essential living expenses. A wrongful denial not only delays support—it can cause significant financial and emotional hardship.
1. Misrepresentation as a Pretext for Denial
Misrepresentation refers to false, misleading, or incomplete information provided on the life insurance application. Insurers may try to void the policy if they discover errors after the insured passes away. But for a misrepresentation to justify a claim denial, it must meet strict legal criteria:
Intentional: The policyholder must have knowingly misrepresented or concealed information. Honest mistakes or misunderstandings generally don’t qualify.
Material: The incorrect information must have been significant enough to influence the insurer’s decision to issue coverage, determine premium rates, or define policy terms.
Bad faith arises when the insurer exaggerates minor or irrelevant inaccuracies to justify denial. For instance, denying a $500,000 death benefit because the applicant forgot to mention a minor surgery from 10 years earlier—unrelated to the cause of death—may be a clear example of bad faith conduct.
Tip for Policyholders: Be as accurate and thorough as possible on your application. If you’re unsure how to answer a question, ask your agent or seek legal guidance before submitting.
2. Policy Lapse and the Failure to Consider Extenuating Circumstances
A life insurance policy lapses when premiums are not paid within the specified grace period, typically 30 to 60 days. If the insured dies while the policy is lapsed, the insurer will often deny the claim. However, if the policyholder missed a payment due to serious illness, hospitalization, or mental incapacity, the situation becomes more complex.
Insurers are required to:
Send written notices warning the policyholder of an impending lapse
Honor the grace period stated in the policy
Consider mitigating circumstances when deciding whether to deny coverage
A denial may constitute bad faith if the insurer failed to notify the insured properly, rejected late payments after a good faith effort to reinstate, or ignored valid explanations for the missed premiums.
Tip for Policyholders: Keep records of all payments and correspondence with your insurer. If you’re experiencing hardship, contact your provider immediately to explore premium waivers or reinstatement options.
3. Examples of Bad Faith in Misrepresentation and Lapse Claims
Insurers must prove their reasons for denial, and they must do so in a fair and timely manner. Failure to meet these standards may open them up to bad faith allegations.
Bad Faith Misrepresentation Example: A policyholder mistakenly answered “no” to a question about past anxiety treatment. Upon the insured’s death from an unrelated cause, the insurer uses this to void the policy. If the misstatement was unintentional and unrelated to the death or underwriting risk, denying the claim may be bad faith.
Bad Faith Lapse Example: A policyholder missed a premium while hospitalized and sent payment five days late. The insurer refused to accept the payment or reinstate the policy and denied the claim. If the insurer failed to provide sufficient notice or ignored medical circumstances, their conduct could be deemed bad faith.
4. Legal Consequences for Insurance Company Bad Faith
When an insurer is found guilty of bad faith, the legal and financial consequences can be substantial. Courts may award:
Full payment of the life insurance claim, including interest
Compensatory damages for financial losses due to denial or delay
Punitive damages, in cases where the insurer acted maliciously or egregiously
Some jurisdictions also allow for attorney’s fees to be recovered, which means the insurer could be forced to pay the legal costs incurred by the beneficiary.
Tip for Beneficiaries: If you believe your claim has been unfairly denied, collect all correspondence, medical records, and proof of payment history, and speak to a life insurance lawyer as soon as possible.
Final Thoughts: Know Your Rights and Act Quickly
Misrepresentation and policy lapse are common grounds cited for life insurance denials—but not all denials are justified. Insurance companies cannot hide behind technicalities to escape their obligations. If you suspect bad faith, you have the right to challenge the denial and hold the insurer accountable. With the help of an experienced life insurance attorney, you can fight back, recover the benefits your loved one intended you to receive, and potentially secure additional compensation for the hardship caused. If you have a Rhode Island life insurance policy dispute contact us.
FAQ: Bad Faith Life Insurance Denials Involving Misrepresentation and Policy Lapse
What is considered bad faith in a life insurance claim?
Bad faith occurs when an insurer denies, delays, or underpays a claim without a legitimate reason, or fails to conduct a proper investigation before making its decision.
Can a life insurance company deny a claim due to misrepresentation?
Yes, but only if the misrepresentation was intentional and material to the underwriting decision. Minor or unintentional mistakes often do not justify denial.
How do insurers prove misrepresentation?
They must show that the applicant knowingly provided false information and that the misstatement significantly influenced the issuance or terms of the policy.
What happens if a policy lapses due to missed payments?
If a policy lapses, coverage may end. However, insurers must provide clear notice of missed payments, honor the grace period, and consider extenuating circumstances.
Can you challenge a claim denial based on policy lapse?
Yes. If the lapse was due to hospitalization, incapacity, or poor communication from the insurer, you may be able to reinstate the policy or argue that denial constitutes bad faith.
What are the consequences if an insurer is found to have acted in bad faith?
They may be required to pay the full claim, additional compensatory damages, punitive damages, and your legal fees.
Is it worth hiring a life insurance attorney for a denied claim?
Absolutely. These cases involve complex policy terms and legal standards. An experienced attorney can help prove bad faith and recover what you’re owed.
How long do I have to file a lawsuit for bad faith denial?
Deadlines vary by state, but typically range from 1 to 4 years. Consult an attorney promptly to preserve your rights.
What if my insurer keeps delaying my claim without explanation?
Unreasonable delays can also constitute bad faith. Insurers are required to process claims in a timely and transparent manner.