Denied $308,500 Life Insurance Claim Due to Bankruptcy Nondisclosure
Bankruptcy can have surprising and far-reaching consequences on life insurance claims. One of the increasingly common reasons for claim denial is the failure to disclose a prior or ongoing bankruptcy on the original life insurance application. Our life insurance law firm recently resolved a $308,500 claim that was denied for this very reason. Insurers are becoming more aggressive in using bankruptcy history as grounds to rescind coverage, often relying on alleged material misrepresentations made during the application process. This blog will explain how bankruptcy impacts life insurance eligibility and what to do if your claim has been denied.
How Bankruptcy Can Affect a Life Insurance Policy and Claims
Insurance companies conduct risk assessments not only based on an applicant’s health but also their financial profile. A history of bankruptcy is viewed as a potential indicator that the insured might miss premium payments or misrepresent financial information on their application. While many assume bankruptcy is a private matter, insurers often request detailed financial disclosures, including debt, income, employment history, and sometimes even pending bankruptcy filings. If an applicant fails to disclose a bankruptcy and later dies, the insurer may argue that the omission was material and that they would have issued the policy differently—or not at all—had they known.
Financial Misrepresentation and the Contestability Period
Most life insurance policies include a two-year contestability period. During this time, the insurer can investigate and deny claims based on any alleged material misstatements on the application. If the insured dies within this period and bankruptcy was not disclosed, the insurer will likely conduct a deep-dive into the applicant’s financial history. If they uncover the omission, they may deny the claim entirely and rescind the policy. Our attorneys regularly challenge these denials by arguing that the bankruptcy was not material to the underwriting decision or that the insurer failed to perform adequate due diligence when issuing the policy.
Different Types of Bankruptcy and Their Impact on Life Insurance
Not all bankruptcies affect life insurance in the same way. For example:
Chapter 7 bankruptcy, which involves liquidation of assets, may expose a permanent life insurance policy’s cash value to collection by the trustee. If the policy lapses during the bankruptcy due to non-payment, the insurer has a strong basis to deny a claim.
Term life insurance, which lacks cash value, is generally safe during Chapter 7 proceedings—but only if premiums remain current. Missed payments during bankruptcy can result in a lapse and loss of coverage.
Chapter 13 bankruptcy, which is structured as a repayment plan, typically allows the insured to retain their policy. However, failure to adhere to the payment plan can result in conversion to Chapter 7, again putting the policy at risk.
Death of the insured shortly after bankruptcy may also raise concerns. If the beneficiary receives proceeds within 180 days before or after filing for bankruptcy themselves, those funds may be considered part of the bankruptcy estate. In some states, beneficiaries may need to claim an exemption to retain the death benefit.
Why Bankruptcy Leads to Life Insurance Claim Denials
Bankruptcy-related denials usually fall into one of two categories: misrepresentation during the application process or policy lapse due to non-payment. In either case, the insurance company may argue that the insured failed to uphold their responsibilities or that the policy was issued under false pretenses. Our attorneys often find that these denials lack proper legal support or are based on exaggerated interpretations of underwriting guidelines. For instance, a bankruptcy filed years prior may have no bearing on the insurer’s risk exposure—yet they may still claim it was a material omission if not disclosed.
How Our Law Firm Fights Bankruptcy-Related Denials
We understand the complexity of cases involving bankruptcy and life insurance. Whether the issue involves a denied term life policy, a permanent life policy’s liquidation, or a claim dispute arising within the contestability period, our law firm has the experience to fight back. We work with underwriters, financial analysts, and former insurance adjusters to determine whether the insurer’s denial was legally justified. In many cases, we’ve been able to reverse denials by showing that the omission of bankruptcy was not material or by proving that the insurer failed to properly vet the applicant during underwriting.
We also represent beneficiaries who lose out on life insurance proceeds due to timing issues related to their own bankruptcy filing. With careful legal strategy, exemptions, and claims against the estate, we’ve helped our clients preserve their right to policy benefits—even in complicated bankruptcy situations.
FAQ: Life Insurance Denials Due to Bankruptcy
Can failing to disclose a bankruptcy result in a denied life insurance claim? Yes. If a policyholder omits bankruptcy information on their application and later dies, the insurer may deny the claim for material misrepresentation, especially during the contestability period.
Is bankruptcy always material to life insurance underwriting? Not necessarily. The materiality of a bankruptcy depends on the insurer’s underwriting policies and whether it would have influenced the decision to issue the policy. Our firm challenges exaggerated claims of materiality.
Can a life insurance policy be liquidated during bankruptcy? Yes. Permanent life policies with cash value may be seized during Chapter 7 bankruptcy to repay creditors. If the policy is terminated in this process, beneficiaries may not receive any death benefit.
What happens if the beneficiary files for bankruptcy? If the policyholder dies and the beneficiary is in bankruptcy, the proceeds may become part of the bankruptcy estate—particularly if the death occurred within 180 days before or after the bankruptcy filing. Exemptions may apply depending on state law.
Can I appeal a denied life insurance claim related to bankruptcy? Absolutely. Our life insurance attorneys specialize in appealing these denials, including cases involving undisclosed bankruptcies or claims that the policy was void due to financial misrepresentation.
How do insurers learn about bankruptcy? Insurance companies often use third-party investigative tools to examine public records, including bankruptcy filings. If the death occurs within the contestability window, a full financial review is typically triggered.
Can a policy lapse due to bankruptcy proceedings? Yes. If the insured fails to pay premiums during bankruptcy, the policy may lapse. Many denials are based on coverage termination during periods of financial hardship.
Do FEGLI or SGLI policies get denied due to bankruptcy? Less frequently, but it's possible. Federal life insurance programs like FEGLI and SGLI are generally protected from financial scrutiny but may still involve disputes over lapses, coverage issues, or beneficiary entitlements that intersect with bankruptcy law.
What kind of life insurance is most vulnerable during bankruptcy? Permanent policies with cash value are the most vulnerable in Chapter 7 bankruptcy because their value can be tapped to repay debts. Term policies typically have no liquid value and are more secure if premiums are paid.
Should I hire an attorney for a bankruptcy-related life insurance denial? Yes. These claims involve overlapping legal issues—contract law, insurance regulations, and bankruptcy proceedings. Our attorneys bring the expertise needed to protect your rights and recover what you're owed.