Corporate-Owned Life Insurance: Key Considerations and How to Handle Claim Denials
Corporate-owned life insurance, also known as key person life insurance, is a policy that an organization purchases on the lives of its top directors, executives, partners, and other key personnel. The business itself is the beneficiary of the policy, and the payout goes directly to the company in the event of the insured individual's death.
This type of insurance plays a vital role in protecting a business from the financial impact of losing a key employee. The death of an important executive or director can lead to a loss of business opportunities, disruption in leadership, and a potential revenue decline. Additionally, recruiting and training a suitable replacement can be an expensive and time-consuming process. For these reasons, corporate-owned life insurance is a common practice in many organizations and is increasingly expected by investors.
While these policies are designed to provide financial security in the event of an executive’s death, it’s not always a simple process when it comes time to make a claim. Unfortunately, insurance companies often deny or delay corporate-owned life insurance claims for a variety of reasons, such as coverage exclusions, contestable claims, fraud, or violation of policy terms.
An experienced corporate-owned life insurance attorney can assist a business in determining if their claim has been unjustly delayed or denied and help them explore legal options to recover the funds. Fortunately, many states have laws that protect corporations from wrongful denials of corporate-owned life insurance claims.
Understanding Corporate-Owned Life Insurance
Corporate-owned life insurance provides a business with a financial safety net when a key person passes away. The policyholder (the business) pays the premiums, and the company is the beneficiary, receiving the death benefit upon the executive’s death. This benefit can help the company:
Cover the financial loss from the executive’s passing.
Pay for the costs of hiring and training a replacement.
Replace lost income and business opportunities.
Given the significant role these policies play in business stability, it’s essential to understand how to manage claims and address any potential issues that arise when filing for the death benefit.
Common Reasons for Corporate-Owned Life Insurance Claim Denials
While the purpose of corporate-owned life insurance is to protect businesses from the financial effects of a key employee’s death, insurers frequently deny claims for various reasons. Some of the most common causes of claim rejections include:
1. Coverage Exclusions
Insurance policies typically include exclusions for certain types of death, such as suicides within a specified period (often two years), deaths resulting from high-risk activities, or deaths due to drug or alcohol use. If the cause of death falls under one of these exclusions, the insurance company may deny the claim.
2. Contestability Clause
The contestability clause is a standard feature in life insurance contracts, including corporate-owned policies. Under this clause, the insurer has the right to investigate the medical background and other information provided on the policy application if the insured passes away within two years of the policy’s issuance. If the insurer finds any discrepancies or misrepresentations in the information provided—such as medical history, lifestyle habits, or occupation—they may contest the claim and deny payment.
3. Fraud or Misrepresentation
If an insurer believes that fraudulent information was provided on the life insurance application, they can deny the claim. This includes situations where the insured withheld critical health information or made false statements during the application process.
4. Violation of Terms
If the company fails to comply with the terms of the policy—such as not paying premiums on time or failing to properly notify the insurer about changes in the insured’s status—the insurer may refuse to pay the claim.
How an Attorney Can Help with Corporate-Owned Life Insurance Claims
If your corporate-owned life insurance claim has been denied or delayed, it's essential to consult with an experienced attorney who specializes in life insurance claims. An attorney can help by:
Assessing the Rejection: A lawyer will review the insurer’s reasoning for denying the claim and assess whether the denial was justified based on the terms of the policy.
Investigating Misrepresentation or Contestability: If the denial is based on the contestability clause, the attorney can evaluate whether the alleged misrepresentation was material to the insurer’s decision to issue the policy.
Negotiating with Insurers: Often, insurers may deny claims without thoroughly investigating the facts. A lawyer can negotiate with the insurance company and advocate on behalf of the business to ensure that the claim is honored.
Pursuing Legal Action: If necessary, the attorney can help the business pursue legal action against the insurer, fighting for the rightful payout.
Contestability and Corporate-Owned Life Insurance
A key aspect of corporate-owned life insurance is the contestability clause, which allows insurers to challenge claims made within the first two years of the policy. This clause is designed to prevent fraud and ensure that the insurer has accurate and truthful information before issuing a policy.
If the insured dies within the contestability period, the insurer will typically conduct a thorough review of the application and medical history. If they discover any misstatements or omissions that could have influenced their decision to issue the policy, they may reject the claim.
However, not all rejections based on the contestability clause are unjust. A corporate-owned life insurance lawyer can review the case to determine if the claim denial was legitimate or if there is grounds for an appeal.
Legal Protections for Corporations
Fortunately, businesses in almost all states are protected by laws that safeguard them from wrongful denial of corporate-owned life insurance claims. These laws ensure that businesses are not unfairly burdened by insurers who refuse to pay claims for technical reasons. If your corporate-owned life insurance claim is denied or delayed, it’s important to consult a lawyer to explore your options.
FAQ: Frequently Asked Questions About Corporate-Owned Life Insurance
Why would an insurance company deny a corporate-owned life insurance claim?
Common reasons include coverage exclusions, contestability (within the first two years), misrepresentation or fraud, and violation of policy terms.
What is a contestability clause in life insurance?
A contestability clause allows the insurer to investigate the insured’s medical history and other application details if the insured dies within two years of the policy’s issuance. If misrepresentations are found, the insurer may deny the claim.
Can a corporate-owned life insurance claim be successfully challenged?
Yes, with the help of an experienced attorney, businesses can challenge wrongful claim denials. A lawyer will review the circumstances of the denial and determine if the rejection was unjustified.
What should a business do if its corporate-owned life insurance claim is denied?
The first step is to contact an attorney who specializes in life insurance claims. They can investigate the denial and guide the business through the process of appealing or pursuing legal action.
How can a lawyer help with a corporate-owned life insurance claim?
A lawyer can review the policy, assess the insurer’s reasons for denial, negotiate with the insurer, and represent the business in court if necessary to recover the death benefit.