Our life insurance law firm recently recovered a $308,500 life insurance benefit after an insurer denied the claim based on an alleged failure to disclose a prior bankruptcy. Bankruptcy related denials are becoming increasingly common, particularly when the insured dies within the contestability period. Insurance companies are now using financial history as a post-claim underwriting tool, arguing that bankruptcy should have been disclosed and using that claim to attempt rescission.
This case shows why bankruptcy based denials are often legally unsound and how they can be defeated.
Why Life Insurance Companies Focus on Bankruptcy
Life insurance underwriting is not limited to medical risk. Many insurers also assess financial stability when deciding whether to issue a policy. Bankruptcy is often treated as a supposed indicator of premium payment risk or alleged dishonesty on the application.
Many applications include questions about financial history, debt, or prior bankruptcies. When an insurer later discovers a bankruptcy that was not disclosed, it may claim the policy was issued based on incomplete information. After the insured’s death, especially during the first two years, insurers frequently conduct a retroactive investigation and assert that coverage would never have been issued had the bankruptcy been disclosed.
In reality, this argument is often exaggerated.
Contestability Period and Financial Misrepresentation Claims
Most life insurance policies include a two year contestability period. During this time, insurers are permitted to investigate alleged misstatements and attempt to rescind coverage.
Bankruptcy nondisclosure claims almost always arise within this window. Insurers typically argue that bankruptcy was a material fact that affected underwriting or premium classification. Materiality, however, is not assumed. The insurer must prove that disclosure of the bankruptcy would have changed the underwriting decision or the policy terms.
In many cases, underwriting guidelines show that bankruptcy alone would not have resulted in denial, rating, or policy modification. When that evidence exists, rescission fails.
How Different Types of Bankruptcy Affect Life Insurance
The effect of bankruptcy on life insurance depends on the type of policy and the chapter filed.
Chapter 7 bankruptcy may expose the cash value of permanent life insurance to a bankruptcy trustee, depending on applicable exemptions. If the policy is surrendered or lapses during bankruptcy, coverage may terminate.
Term life insurance typically has no cash value and is not an asset of the bankruptcy estate. Coverage remains intact as long as premiums continue to be paid.
Chapter 13 bankruptcy allows policyholders to retain life insurance while repaying creditors under a court approved plan. Problems arise only if premiums are missed or the plan fails.
A prior bankruptcy that was fully discharged years earlier often has little relevance to current underwriting risk. Insurers frequently attempt to inflate its importance after the fact.
Why Bankruptcy Based Denials Are Often Wrongful
Most bankruptcy related denials fall into two categories. Alleged misrepresentation on the application or alleged policy lapse due to nonpayment.
In many cases, the application questions were vague, ambiguous, or limited in time scope. In others, the insurer issued the policy without conducting reasonable financial review and later attempted to correct that failure after the insured’s death.
Courts routinely hold that insurers cannot rely on information they failed to reasonably investigate during underwriting, particularly when premiums were accepted and coverage was issued without conditions.
A bankruptcy that did not affect premium payments, policy performance, or underwriting classification is often not material as a matter of law.
How We Overturned the $308,500 Denial
In this case, the insurer claimed the policy should be rescinded because a prior bankruptcy was not disclosed. We obtained the underwriting manuals, internal risk guidelines, and the complete application file.
The evidence showed that disclosure of the bankruptcy would not have changed issuance or pricing. The insurer also failed to ask follow-up questions that would have clarified financial history at the time of underwriting.
Once those facts were presented, the denial collapsed. The insurer paid the full $308,500 death benefit.
Our Approach to Bankruptcy Related Life Insurance Denials
We handle life insurance claim denials involving bankruptcy nationwide. These cases require coordination between insurance law, contract law, and bankruptcy principles.
Our firm reviews application language, underwriting standards, payment history, and bankruptcy records to determine whether a denial is legally defensible. In many cases, it is not.
We also represent beneficiaries whose own bankruptcy filings create disputes over entitlement to proceeds. With proper exemptions and legal strategy, benefits can often be preserved.
Bankruptcy Alone Does Not Void Life Insurance Coverage
Bankruptcy does not automatically invalidate a life insurance policy and does not automatically justify a denied claim. Insurers must prove materiality, intent, and actual underwriting impact. When they cannot, the denial fails.
If your life insurance claim was denied due to bankruptcy, nondisclosure, or alleged financial misrepresentation, legal review is critical. These denials are frequently reversed when challenged properly.