When a person dies with a life insurance policy in place, their life insurance company does not have a great incentive to pay claims against the policy. In fact, life insurance companies make the most money when they collect premiums for several years and then deny a claim for benefits when their policyholder dies.
As such, life insurance companies have about a million reasons to deny life insurance claims. One of their favorite excuses for a claim denial is that the insured made a “material misrepresentation” in his policy application.
The term “material misrepresentation” is derived from contract law. Basically, it means that two parties have to be truthful with one another when they are negotiating the terms of the contract. If one party tells a lie and the other party only enters into the contract because of that lie, the lie is said to be material. These material misrepresentations can serve as a valid reason for the truthful party to later avoid his obligations under the contract.
When it comes to life insurance policies, the policy applicant is expected to be truthful in his application. If he tells a lie and that lie is important enough that the insurance company would not have issued a policy had it known the truth, the insurance company may not have to pay out death benefits on that policy.
In reality, people tell little white lies in policy applications all the time. For example, a person might slightly underestimate their weight. Typically, that’s no big deal. Sometimes, however, people make other misstatements that are actually quite important to the insurer. This article explores one such case.
A slightly shady past
Nick was a 43 year-old man who, by all accounts, was an exemplary person. He was a partner in an architecture firm and married to his wife Linda for 13 years. He was an elder in his church and coached his daughter’s softball team. Everyone in his small community loved him.
When Nick was promoted to a partner in his firm, he became eligible for a group life insurance policy. The only thing he had to do to obtain the policy was fill out a five-page policy application. As he read through the application packet, one question in particular caught his eye. It asked, “have you ever been convicted of a felony?”
Nick hated this question. The truth was, he had been a passenger in a car when he was 18. The driver got pulled over. Unbeknownst to Nick, earlier that day, the driver robbed a liquor store. Witnesses described three robbers at the scene. Nick was one of three young men in the car when it was pulled over. Although he had not been with the other boys during the crime, he got caught up in the mess. He was ultimately convicted of being an accessory to armed robbery – a felony.
Because Nick had never been in trouble before and because he was an honor student at the time of the arrest, the judge showed leniency in sentencing. Nick only spent 2 weeks in jail, though the felony remained on his record for the rest of his life.
As Nick filled out the life insurance application, he thought about why the life insurance company might ask that question. Intuitively, he understood that life insurers found felons to be a greater insurance risk than non-felons. The truth was, however, Nick was about as clean-cut as they come. Therefore, he chose not to reveal his arrest on the application. He told his wife of the decision later that night.
A decision that impacted the family
Six months later, Nick was killed in a hunting accident. Linda quickly filed a claim with Nick's life insurer. The initial response was that because Nick’s death came so close to the date the policy was issued, the company needed to conduct an investigation to make sure Nick had been truthful in filling out his policy application.
Linda panicked. She knew that if the insurance company looked into Nick’s criminal background they would discover the felony. Not knowing what to do, she contacted a lawyer specializing in life insurance disputes. Although she was able to meet with that lawyer within a couple of days, by that time the insurance company had already discovered Nick’s decades-old felony. The insurer denied the claim outright based on what they said was a “material misrepresentation.”
The lawyer knew that this was going to be an uphill battle. Nonetheless, he told Linda he would do his best to get her the benefit Nick intended for her. He started by gathering declarations from people who had known Nick over the past 25 years. College professors, colleagues, neighbors, and even other church members. Everyone said under oath that Nick was an exemplary human being. The lawyer also presented background documents showing that Nick had never gotten so much as a speeding ticket following his arrest as a young man.
At a hearing before the insurance company’s appeals board, the lawyer argued for leniency. Nick was not a common felon. He was an exemplary citizen who had been caught in a bad situation in his youth. Since that time, he had led a life most insurance companies would be happy to insure.
Legally speaking, the insurance company had no real obligation to pay any benefit. Courts have long held that failing to disclose a criminal history in a life insurance application is a material representation. Here, however, the life insurance representatives thought Nick might be an exception to the rule. They offered Linda 50% of the policy payout in exchange for her agreement not to take the company to court. Linda happily accepted their offer.
While Linda never got the full policy payout, she got a much better result from hiring the specialized attorney than she would have had she tried to fight the claim denial alone. We do this kind of work every single day. If you have recently had a claim denied based on an insured's prior criminal history, feel free to call our office to discuss the situation. We're here to help.