For individuals who have received denials of rightfully owed life insurance benefits, it is critical to determine if the insurance company used bad faith practices to avoid upholding policy obligations. Many state laws and even federal requirements under the Employee Retirement Income Security Act (ERISA) require insurance carriers to perform their best efforts in fairly processing benefit claims. When this doesn't occur, there are steps that beneficiaries can take to hold them accountable and get the much-needed compensation their loved ones planned for upon death.
What Constitutes Bad Faith Practices By Life Insurance Companies?
Insurance contracts are long, detailed, and have a lot of fine print, including a promise to perform "good faith" in not interfering with the benefit rights of the policyholder or beneficiaries. To comply with this promise, the carrier must follow through with all duties required of them to fulfill expectations of the insurance policy. Failing to do so constitutes bad faith action.
Proving that such conduct has occurred by the insurance company when determining your claim will affect how much death benefit you recover. Some states will provide an opportunity for the insured or the beneficiaries to gain additional compensation as punitive damage, which could include a claim for emotional distress. This is why an experienced life insurance claims attorney is vital to pursuing these types of situations on behalf of the decedent’s designated beneficiaries.
Types of Actions That are in Bad Faith
On its face, a claim denial may appear legitimate. Insurers often use complex language and processes to justify their refusal to pay out a death benefit, and many times, they succeed in their efforts. Below are common claim denial methods that policy providers use when committing bad faith actions to avoid paying owed compensation on a loved one’s life insurance coverage:
Manipulation of Policy Provisions
When an individual purchases a life insurance policy, they rely on the interpretation of exclusions or provisions within the coverage given to them by the agent. Any misrepresentation of these terms can leave the policyholder unaware of the fine print, which can be used to deny a claim for benefits. This frequently happens if there is an unclear explanation of certain terms or requirements for coverage to be valid, or the carrier company ignores the statements made by the agent to the decedent when the policy was first purchased.
Some states view this as bad faith since it was not the insured’s fault that policy information was wrongly presented in the first place.
Delaying Claim Payouts for Unreasonable Lengths of Time
It is not uncommon for a life insurance company to investigate a policy when the death occurred during the contestability period (first two years of a policy’s effective date). When this phase of a claim takes place, it’s typical for requests of the below documents be required:
Death certificate
Medical history of the insured
Proof of paid premiums
Copy of the original policy
While this process can take some time, the insurer must do so promptly and still be thorough in their review. Generally, if there is a delay, it is considered reasonable if there is an actual reason for a dispute of the coverage or amount due. An experienced attorney is critical in these types of bad faith actions due to the difficult nature of proving that a payment was wrongfully delayed.
Bad Faith Cancellation of Life Insurance Coverage
As mentioned earlier, most life insurance policies come with a two-year contestability period, after which the coverage is incontestable. The only exception is in cases of material misrepresentation on the initial insurance application. This loophole allows insurers to purposely focus on finding information that is not accurate on an application and try to cancel a policy based on those instances. By conducting a review for the sole purpose of finding mistakes on an application, the insurer is committing a bad faith action. The contestability period has already passed, and there is no reasonable cause to deny the claim when there was an opportunity to do so during the first two years of the policy's effective date.
Abusing Policy Exclusions to Deny Claims
Exclusions are a normal part of any life insurance policy, but many are purposely worded ambiguously to allow for maximum scenario application to deny a death benefits claim. Everything from skydiving to suicide can fall under the list of causes to deny coverage. When a cause of death, like being the victim of a murder, is construed as an exclusion under suicide, and the evidence shows otherwise, this is engaging in bad faith practices.
Improper Lapse of the Policy
Paying life insurance policy premiums is a requirement to have valid coverage at the time of death. If the insured becomes ill, the transition period where loved ones may take over their financial duties could result in a missed payment. In the past, insurers capitalized on this mistake and denied beneficiaries their due benefit. Fortunately, many states have recognized this problem and tried to find a solution.
States like California require a grace period, and a specific notice sent to the insured to remind them of the missed premium and the consequences if not paid by a certain date. It is critical to review the life insurance policy terms before accepting a denial based on a lapsed policy. If the jurisdiction governing the coverage demands a notice and grace period when a monthly premium does not get paid, but it did not occur, and the policy gets canceled, speak with a knowledgeable attorney right away.
How a Life Insurance Claims Attorney Can Fight Bad Faith Determinations
Receiving a life insurance claim denial can be devastating to your finances and day-to-day living needs; it is not the end-all decision if you experienced a bad faith action by the insurer. An experienced life insurance claims attorney can make a difference in not only getting the approval you deserve but putting a stop to unreasonable delays or wrongful cancellation attempts on the policy.