The Policy Should Mean What It Says

Insurance companies almost always try to close the barn door after the horse is long gone.  They seem to have a habit of waking up late when they contest a policy’s terms.  But, that doesn't stop them from denying benefits.

A good example of this “sleepy” conduct was illustrated in Patterson v. Reliance Standard,  2013 WL 6328832, C.D. Cal.) , when Reliance was called upon to pay a life insurance death benefit.  For four years the insured paid the required premiums and they were accepted by Reliance without demur.

Only when the insured had the temerity to die did Reliance shift into high gear, take a hard look at the policy and find that she had failed to provide a health form required before the policy could be issued.  Reliance refused to pay the death benefit.

However, as in most cases, there was an incontestability clause in her policy which clearly stated that Reliance could not contest the policy after it had been in force for two years.  So, a Federal District Court held that the clause prohibited the denial of benefit and found for the policyholder.

This case highlights a longstanding ploy of insurance companies:  Take the premiums and worry about the details later (“later” meaning at the time you are called on to pay benefits).  Up until that time, the money is going all one way – to the insurer.  Only when the insured has to be paid does the insurance company get serious about the details.

An insurance policy is a solemn obligation to pay and should be treated as such.  If an insurer is serious about the information it requires of an insured, it should verify that information at the time the policy is issued, not when a benefit is claimed.  If the company knows that the policy becomes incontestable after a certain period of time it should protect itself by checking the necessary facts before that time period expires.

The reason insurers don’t thoroughly check policy applications is that it costs them money to do so.  Why waste money checking when they can let the matter slide and collect premiums all the while.  Insurers think they can always look into the details of the claim when a benefit becomes due.

This is most unfair to policyholders who may pay premiums for years believing they have coverage, only to have the company strongly contest at the time benefits are triggered.  If the insurance company wins, the insured has no coverage even after paying premiums for years, believing there was coverage.

Insurance companies save a lot of money by ignoring the details on applications until a claim is made.  This type of “post-claim underwriting” should not be permitted.  The time for the insurers to do its “due diligence” is before it agrees to issue a policy, not after premiums have been collected for years.

By the time a claim is made, the best witness to the validity of the application (the insured) may be dead or disabled.  That’s why insurers should not be able to raise application issues more than 2 years after a policy goes into effect. 

If companies contest and lose, they generally have to pay only the same benefits the policy called for, so why not contest? 

If an insurance company chooses not to spend the money or the time verifying the details of an application within a reasonable time, then so be it.

“Incontestable” should mean incontestable.  Insureds must be able to rely 100% on its meaning.