What Are the Most Common Reasons for Life Insurance Disputes?
Life insurance disputes typically arise when the insurance company rescinds the policy because it says the applicant made material misrepresentations in the application form. Insurance companies might also deny claims when they say a premium was not paid on time. Life insurance disputes also arise when there are issues identifying the proper beneficiaries.
Misrepresentations in the Application: The Contestability Period
Life insurance companies can rescind claims when a death has occurred within the “contestable period” – two years from the date the policy is issued. When a person applies for a life insurance policy, they have to answer a variety of questions concerning their health, habits, family history, employment, hobbies, and other relevant topics. If the applicant misrepresents facts in the insurance application–for example, if they claim to be a non-smoker but in reality they smoke a pack a day, or if they fail to report that they are a recreational skydiver–the insurance company might have grounds to rescind the policy within the contestability period.
Rescission Must Be Based on a “Material” Misstatement or Omission, meaning a falsehood that is actually important to the policy. A simple typo regarding the applicant’s contact information, for example, would not give an insurer grounds to rescind the policy. However, a misstatement or omission that is material, even if it was accidental, could still be grounds for rescission.
Rescission is different than a denial of a claim. When the policy is rescinded, the insurer will give notice and refund all premiums. Insurers can rescind a policy even after the insured party passes away, so long as the death occurred within the two-year contestability period. For beneficiaries who don’t get the benefits of the policy, however, rescission feels much the same as a claim denial.
After the two-year contestability period ends, insurers cannot go back and try to invalidate the policy. Even if the insurer discovers that the insured party had glaring misstatements or omissions in their application, the insurer can no longer look to the application as a way to get out of paying. They would instead have to rely on policy exclusions or some other valid reason for denying a claim.
Life insurance policies may exclude certain causes of death from coverage. Historically, for example, many policies excluded coverage for suicide. Nowadays, policies are more likely to exclude suicide only for a set period, such as for two years after the policy is issued.
Policies might also exclude coverage for deaths that occur while the insured was committing a felony, while the insured party was engaging in particularly dangerous activity such as scuba diving or cliff diving, or while the insured was intoxicated. Some policies exclude coverage for deaths that result from underlying conditions that existed at the time the policy was entered. Policies may also exclude payment to a beneficiary who intentionally killed the insured party.
Failure to Pay Premiums & Lapsed Policies
If a policyholder fails to pay the monthly premium on the policy, the insurance company might assert that the policy has “lapsed.” Insurers will refuse to pay out on claims under lapsed policies.
Typically, lapsed policies can be reinstated if the policyholder starts making payments again within a grace period. Beneficiaries may have grounds to contest a policy lapse where the insurer failed to give notice to the policyholder that premiums were missed and the policy set to lapse, where the insurer failed to give the policyholder a grace period to remedy the missed payments, or where the insurance agent or other employee of the company misled the policyholder.
Finally, insurance disputes commonly arise when there are issues concerning the proper beneficiaries. If the named beneficiary is no longer alive or cannot be found, or if there are grounds to exclude the named beneficiary from coverage (such as if they were responsible for the death of the insured), the insurance company might delay in paying out benefits until a proper beneficiary is legally identified.
Some states have provisions that automatically remove spouses as beneficiaries upon divorce. Putative beneficiaries can also contest a life insurance payout by asserting, for example, that a change of beneficiary (removing them as the named beneficiary) was not executed legally.
Life Insurance Company Deny Your Claim? Gianelli & Morris is Here to Help.
If you are a California policyholder or beneficiary struggling to get the life insurance benefit you paid for, call the insurance law attorneys Gianelli & Morris for a free consultation regarding your claim.