Life's Not A Bowl Of Cherries

It comes as no surprise to those whose law practice entails getting money for clients from life insurance companies, that with insurers, there is no such thing as a “slam dunk” claim.

Before we started working as adversaries to insurance companies, we always thought a life insurance policy would be the exception to the usual ”let’s find a way around paying rule”, i.e., the policyholder has died, so let’s pay the policy. Boy, were we mistaken.

One would think there is no more definitive condition than death. In that regard you would be right. But, when it comes to an insurance policy, you are overlooking the credo of the insurance industry: Maybe we can find a way around it. And, they are very creative in trying to find ways to avoid paying.

A major reason for a turndown when it comes to paying life benefits is what the insurers call a “material misrepresentation” on the policy application. Because of the inadequate vetting system insurers choose to use when underwriting a life insurance application, many policies are issued which are based upon applications in which the policyholder had a spate of selective and “forgetful” memory.

Being in a hurry to grab premium dollars, many insurance companies rush their applicant screening (if any) and only take screening seriously when a policyholder dies and it comes time to pay the death benefit. Suddenly, a complete and thorough investigation is in order, including dotting every “i” and crossing every “t”. We call this “post-claim underwriting” and it is rampant in the life insurance industry.

Why leave a policyholder feeling secure for years only to deny a death benefit for a purported misrepresentation which the insurer concocted after payment is due? The insurer will tell you it is to maintain the integrity of its risk assessment system so as to be fair about the degree of risk and not to pay illegitimate claims.

But, why can’t the companies assess the risk before issuing the policy? They have access to and can review all medical records of the insured and can decline to issue a policy if there is reason to do so. That would leave them in the position of not issuing a policy they would later find they should not have issued and leave the purchaser free to seek protection elsewhere. However, that would mean no premium dollars to the insurer.

It used to be that all life insurance policies had a 2-year incontestability period, after which the insurer could not deny a claim based upon misrepresentation in the policy application. But, now nearly all states allow an exception for “fraudulent misrepresentation” in policy incontestability clauses, making the 2-year period completely illusory.

With an exception for “fraudulent misrepresentations, there is no time limit to restrict the carrier from contesting payment, even many, many years after the policy was issued. All the insurer has to do is allege “fraudulent misrepresentation” and the death benefit is off to the races on a very muddy track. So much for the peace of mind a life policy is supposed to bring.

Life insurance is a highly competitive business in which companies are willing to take risks for premiums. If you turn down an applicant, your competitor may very well say yes, leaving you out in the cold.

From the company’s point of view, it is better to zip through the vetting of the application, knowing that you can always try to reject the claim after the person dies. This procedure also is less costly to the insurer which does not have to spend serious money taking care to look at the application, before a policy is issued.

Zipping through the app procedure gets the premium dollars rolling in faster. Never mind that the later rejection of the claim may cause the beneficiary a disastrous hardship at the worst possible moment in their life.

This procedure, entrenched at most life companies, is a win-win for them.

And, that’s just the way insurance companies like it.