Life insurance companies are in business to make a profit, and denying large claims is one way they may protect their bottom line. One common tactic insurers use to avoid paying out on a life insurance policy is accusing the policyholder or their beneficiaries of making a material misrepresentation during the application process. A material misrepresentation occurs when the information provided on the application is found to be false or misleading, and it may impact the insurer's decision to approve or deny coverage.
The Contestability Period and Misrepresentation
One of the critical times when life insurance companies look for misrepresentation is during the contestability period. The contestability period is typically the first two years after the policy is issued, during which time the insurance company has the right to investigate and potentially deny a claim based on misrepresentation. After this period, the insurer generally cannot deny a claim for misrepresentation, unless fraud is involved.
In many cases, insurers will accuse the policyholder or the beneficiary of making a material misrepresentation if the insured dies within the contestability period. This gives the company an opportunity to avoid paying out a large claim by identifying inaccuracies or omissions in the application. Some common examples of misrepresentation that may lead to a denied claim include:
1. Health and Medical History Misrepresentation
One of the most common forms of misrepresentation is the failure to disclose pre-existing medical conditions, past surgeries, or ongoing treatments. Insurers rely on accurate medical information to assess the risk they are taking on by issuing the policy. If an individual conceals important health information, such as a chronic illness or prescription medications, the insurer may argue that had they known about the condition, they would not have issued the policy or would have issued it under different terms.
Example:
In a case involving a Prudential life insurance claim for $400,000, the claim was initially denied due to a misrepresentation about the policyholder’s employment income. The insurer argued that the policyholder had not disclosed accurate income details during the application process. After an extensive legal battle, the claim was successfully reinstated, and the full $400,000 was paid to the beneficiary within a short time. (Insurance Information Institute).
2. Smoking and Tobacco Use
Misrepresenting smoking habits is another common reason for life insurance claim denial. Smokers generally face higher premiums, and failing to disclose tobacco use—whether it’s cigarettes, cigars, or smokeless tobacco—can result in the insurer denying a claim if they later discover the truth. Some individuals may underestimate their tobacco use, and when an investigation reveals the actual extent, the insurer may claim that the policy would not have been issued had the full truth been disclosed.
Example:
A policyholder might claim to be a non-smoker on their life insurance application, but upon the insured’s death, the insurer discovers that they were a regular smoker. This inconsistency could result in the insurer invoking the contestability clause to deny the claim, arguing that the policyholder’s smoking history would have impacted the underwriting process (National Association of Insurance Commissioners).
3. Occupation and Income Discrepancies
Life insurance premiums are often calculated based on the policyholder’s occupation and income. Failing to accurately disclose occupation, job title, or income level may result in a claim being contested. If the insured omitted information about hazardous job duties or overstated their earnings, the insurer might argue that the risk profile presented during underwriting was inaccurate, leading to a denial.
Example:
An individual working in a high-risk occupation like construction might downplay the dangers of their job on their application to secure a lower premium. If their death occurs in an accident related to their job, the insurer could deny the claim based on the alleged misrepresentation of their occupation (Insurance Information Institute).
4. Concealing Hazardous Activities
High-risk activities such as extreme sports or dangerous hobbies—skydiving, rock climbing, or scuba diving—are often grounds for life insurance exclusions or higher premiums. If a policyholder fails to disclose their involvement in such activities, and their death results from one of these pursuits, the insurer may argue that the policy would not have been issued had the information been fully disclosed.
Example:
If a life insurance applicant does not mention that they frequently engage in mountaineering, and they later die in a climbing accident, the insurer may use the contestability clause to deny the claim. The insurance company could argue that had they known about the hazardous activity, they would have either excluded the risk or increased the premium (National Association of Insurance Commissioners).
5. Failing to Disclose Travel Plans
Some life insurance policies contain clauses that require policyholders to disclose travel plans, especially when traveling to regions that are considered politically unstable or high-risk. If a policyholder fails to mention their travel plans to such areas and dies in a location with elevated risks, the insurer may argue that the death falls outside of the coverage provisions.
6. Alcohol and Substance Abuse History
Many insurers require disclosure of alcohol or substance abuse histories. If a policyholder withholds this information, it can affect both the underwriting process and the claim’s validity. Failure to disclose substance abuse issues can lead to a denial if the insurer believes it has impacted the insured’s health or contributed to their death.
Fighting Back Against Accusations of Misrepresentation
If you or your loved one is facing a denied life insurance claim due to accusations of misrepresentation, it’s important to consult with a life insurance lawyer who specializes in these types of cases. A skilled attorney can help investigate the circumstances, gather evidence, and advocate for your right to receive the full benefits owed under the policy.
Even when insurers claim material misrepresentation, there may be room for negotiation or legal action, particularly if the denial was made in bad faith. It’s essential to act swiftly, as challenging a life insurance denial is a time-sensitive process.
Sources:
Insurance Information Institute (III): Provides information on life insurance claims, policies, and exclusions.
National Association of Insurance Commissioners (NAIC): Offers insights into the contestability period and rules for life insurance policies.