Life insurance policies often come with a "contestability clause," a provision that allows insurance companies to investigate and potentially deny claims within a specified period—usually the first two years after the policy is issued. During this time, if the insurer uncovers material misrepresentations or omissions in the application, they may refuse to honor the claim. It's important to understand the kinds of situations where a life insurance company might invoke the contestability clause to deny a claim.
Here are several examples of life insurance claims that may be denied due to the contestability clause:
1. Material Misrepresentation: Health Conditions or Habits
One of the most common reasons for a life insurance claim denial within the contestability period is a material misrepresentation on the application. If the insured fails to disclose important health information—such as a pre-existing medical condition or tobacco use—the insurer may argue that they would not have issued the policy or would have done so with different terms had they known the truth.
Example:
Imagine a policyholder who applies for life insurance, stating that they are in good health and do not smoke. However, after their death, the insurer learns that the individual had a history of smoking and a pre-existing heart condition that was not disclosed on the application. The insurer may invoke the contestability clause to deny the claim, arguing that the policy would not have been issued if the full information had been disclosed (National Association of Insurance Commissioners).
2. Concealment of Risky Activities
Another common reason for life insurance claim denial during the contestability period is the concealment of risky activities. If the insured engages in high-risk hobbies or extreme sports but fails to disclose these activities during the application process, the insurer may contest the claim if the death occurs as a result of one of these activities.
Example:
Suppose a policyholder applies for life insurance but does not disclose that they regularly participate in skydiving. If the policyholder dies in a skydiving accident, the insurer may investigate and find that the insured failed to mention this high-risk activity. The insurer could deny the claim based on the contestability clause, as the insured’s omission of this information would have affected the underwriting process (Insurance Information Institute).
3. Fraudulent Documentation
If the insured submits fraudulent documentation or provides false information in an attempt to secure life insurance coverage, the insurer can invoke the contestability clause to deny the claim. Fraudulent actions, such as submitting doctored medical records or providing false identification, are grounds for denial and may lead to legal consequences as well.
Example:
An applicant submits falsified medical records to hide a serious medical condition such as cancer, which could have impacted the insurance company’s decision to issue the policy. If the insurer discovers the fraud after the policyholder’s death, they may invoke the contestability clause to reject the claim. Fraudulent activity will typically lead to the immediate voiding of the policy and denial of the death benefit (National Association of Insurance Commissioners).
4. Failure to Disclose Prior Claims or Conditions
Another reason for life insurance claims being contested during the contestability period is the failure to disclose prior medical claims or diagnoses that could affect the insurance company’s assessment of risk.
Example:
A person applies for life insurance and does not mention that they had previously been treated for cancer. Later, if the policyholder dies from a related health issue, the insurer may review the application and discover that the individual failed to mention the previous cancer treatment. This misrepresentation could be grounds for the insurer to deny the claim, as they might argue that the policy would not have been issued—or would have been issued at a higher premium—if the full history had been disclosed.
How to Protect Yourself from Contestability Issues
The best way to avoid contestability issues is to be completely honest and transparent when applying for life insurance. Disclose all relevant health conditions, lifestyle habits, and any high-risk activities you engage in. Failing to provide this information might not only lead to a denied claim but could also impact the amount your beneficiaries receive or prevent them from receiving benefits altogether.
If your life insurance claim is denied due to the contestability clause, there may still be recourse. A skilled life insurance attorney can help you review the details of the case, challenge the denial, and potentially recover the benefits you are entitled to.
Sources:
Insurance Information Institute (III): Offers detailed information about life insurance coverage, exclusions, and the contestability clause.
National Association of Insurance Commissioners (NAIC): Provides resources on policy rules, contestability periods, and exclusions in life insurance policies.