What are non-contestability clauses, and how do they work?
We have written in the past about post-claims underwriting as a bad faith insurance practice when the insurer goes back over a life insurance application years later and rescinds a policy they have already issued to avoid paying an otherwise valid claim (see Post-Claim Underwriting: Can Insurance Companies Cancel Your Policy After You’ve Already Made a Claim?). It turns out there is a period during which insurance companies can legitimately engage in this practice and invalidate a policy (and avoid paying the claim) based on a lack of information or misinformation on the application. This period is known as the contestability period. Learn more below about the contestability period and non-contestability clauses in insurance policies, and contact an experienced insurance law attorney if you think your claim for benefits was unfairly denied.
A non-contestability clause is a provision written into an insurance contract, which provides that the policy cannot be contested after it has been issued based on incomplete or inaccurate information contained in the original application for insurance. The non-contestability clause will likely contain a contestability period during which the insurance company can indeed rescind your policy for such reasons.
The allowable contestable period may be set by state law. In California, contestability periods are limited to two years from the date the policy was issued. If the person named in the policy dies within this period, expect the insurer to look at the application to see if they can find a reason to deny the claim. For instance, if the death were related to an illness or risky hobby that was not disclosed on the application, the insurance company would have grounds to rescind the policy and avoid the claim.
If they legitimately deny the claim, the insurer will be required to refund the premiums paid to-date, but they won’t have to pay the benefit. They could also theoretically pay the claim but reduce the benefit by the higher premium amount they would have charged had they known about missing information upfront.
Rescission Outside the Contestability Period
There are a few limited instances where insurers could rescind policies even beyond the two-year contestability period. These situations can include:
• Nonpayment of premiums
• Sending an imposter to take the physical exam, substituting another person’s urine sample, or other similar behavior
If the policyholder intentionally lied or misrepresented facts on the insurance application with the intent to defraud, the policy might possibly be contested outside of the contestability window. Whether or not insurers are limited to the contestability period in cases of fraud depends on the applicable state law.
Insurance companies are not supposed to go back to the application looking for grounds for rescission after the contestability period. Doing so for improper motives (i.e., to avoid paying a claim) could be evidence of insurance bad faith. Insurance providers guilty of bad faith insurance could be forced to pay policy benefits and also compensate victims for other legal damages caused by their misconduct. It might take a lawsuit to get the full measure of compensation through a jury verdict or settlement after a period of litigation.
Any time an insurance claim is denied, it is worthwhile to get advice from an insurance law attorney. Most insurance lawyers who represent policyholders will offer a free initial consultation to learn the basic facts and let you know how they can help. Trying to resolve a claim denial on your own informally is okay if you want to try it, but legal representation is recommended for any internal review or appeal with the insurance company. The way an internal appeal is handled can severely impact any further external appeals that might be necessary for a successful resolution of your claim.
