When most people think about obtaining a life insurance policy, they don’t realize that what they’re actually doing is entering into a legally binding contract with the insurance company. As such, the standard laws governing contractual relationships apply as between the consumer and the life insurance company. Learn what percentage of life insurance claims are denied.
One of the most important contract-law principles governing that relationship is the requirement that each party be truthful with the other during contractual negotiations. If one party lies during negotiations, and that lie is so important that it would have caused the other party to avoid entering the contract all together, that lie is considered a “material misrepresentation.” Material misrepresentations are significant because, once discovered, they can serve as the basis for party who relied on that lie to avoid its obligations under the contract entirely.
In the life insurance context, this issue typically arises when the consumer makes a misstatement in his application for life insurance. That application process is essentially the contract negotiation. The consumer makes certain representations about his health and lifestyle. Then, based on such information, the insurance company decides whether to issue a policy to that consumer and, if so, what the cost of premiums will be. If the consumer makes a misstatement in his application that persuaded the insurer to issue a policy (or to do so at a lower premium than it would have had it known the truth), that misstatement could be considered a material misrepresentation that would allow the company to avoid paying out on any claim against the policy.
To cite a clear-cut example, imagine a policy applicant who told the life insurance company that he was perfectly healthy when, in fact, he was suffering from known lung cancer as he filled out his application. That is a material representation that would almost certainly give the insurance company justification for avoiding a policy payout when that person died.
Not all application misstatements are so cut and dried, however. Indeed, this article explores the case of an “innocent misrepresentation,” and how it ultimately impacted the payout under a life insurance policy.
A policy application from a happy-go-lucky guy
The case involved a man named Gary. Gary applied for, and received, a life insurance policy when he was 58 years old. In the policy application, the insurance company asked Gary if he had any “serious medical conditions relating to his heart, lungs, liver, or kidneys.” Gary responded “No.”
In truth, some 20 years prior to the application, Gary had been diagnosed with a heart condition known as Mitral Valve Regurgitation (“MVR”). In its earliest stages, MVR is nearly imperceptible and poses no real health risk to those who suffer from the condition. In fact, when Gary was first diagnosed, his doctor told him that his MVR was essentially “no big deal,” and that Gary really had nothing to worry about for many years.
As was typical for happy-go-lucky Gary, he all but forgot about the condition. In fact, Gary was a fairly active guy who almost never went to the doctor. Consequently, MVR was the furthest thing from his mind. Indeed, when Gary married his wife Sandy at the age of 54, he never even mentioned to her that he had any sort of heart condition whatsoever.
What Gary did not know was that MVR is a form of irreversible heart valve deterioration that only gets worse over time. Though Gary noticed that he was suddenly much more easily fatigued than ever before, he never thought it had anything to do with his MVR.
Unfortunately, MVR was acting as a silent killer within Gary’s body. At age 60, Gary passed away from a heart attack. The autopsy report noted Gary’s advanced MVR. When Sandy heard the cause of death, she was shocked. She had no idea her husband was battling such a condition.
A life insurance claim denial based on material misrepresentations
Sandy was Gary’s sole beneficiary under the life insurance policy. When she submitted a claim for benefits following Gary’s death, she had no reason to believe the insurer would not pay. That’s exactly what happened, however.
The insurance company claimed that it had performed a thorough investigation into Gary’s medical condition following his death. During that investigation, it discovered: (a) that Gary had died as the result of MVR; and (b) that Gary had been diagnosed MVR – but failed to disclose it – when he applied for his policy. This, it claimed, was a material misrepresentation that excused the company from having to pay.
Sandy was beside herself. As a retired attorney, she knew she should speak with a lawyer who specialized in the wrongful denial of life insurance claims. Even though she could understand the insurance company’s point, she was struck by the fact that Gary never mentioned his MVR to her.
The lawyer that Sandy retained agreed. At worst, he believed Gary’s failure to reveal his MVR to the insurer was an innocent misrepresentation. To prove this, the attorney obtained other medical forms where Gary could have – but did not – reveal his MVR. He also obtained sworn statements from other people who had been close to Gary but had no idea he suffered from any heart condition. Finally, the attorney gathered expert opinions from doctors who would testify that there is no way to predict how quickly MVR will progress in a person. They also opined that, at worst, an MVR diagnosis in someone Gary’s age might be a reason to charge higher premiums, but would not be a reasonable basis for denying coverage.
Using that evidence, the lawyer argued to the insurer’s internal appeals board that its outright denial of Sandy’s claim was wrongful. After some back and forth, the insurer agreed to pay the claim, minus the amount of additional premiums Gary would have paid had the company known of his MVR.As lawyers who specialize in the wrongful denial of life insurance claims, we know that innocent misrepresentations in policy applications happen all the time. If you’re facing a situation like this, call our firm so we can help you get the maximum policy payout available to you. Call today. We’re here to help.