Insurance Company Claim Denials: How Insurers Deny Legitimate Life Insurance Claims

The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deal with related issues in a series of articles dealing with insurance bad faith, life insurance, long-term disability and short-term disability insurance, annuities, accidental death insurance, ERISA, and other areas of the law.  This is the fourth in a series of articles on How Insurance Companies Deny Claims.  To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949) 387-9595 for a free consultation or visit our website at and complete a free consultation form.

Like the U.S. Department of Labor statistics referenced in our earlier articles in this series about the alarming number of denied long-term disability and health insurance claims, there is also empirical evidence that life insurers often do not treat their insureds fairly.  Recently, 60 Minutes profiled a national investigation headed by numerous state Insurance Commissioners confirming that life insurers had inconsistently used the Social Security Administration’s Death Master File database to identify deceased annuity holders to stop making annuity payments (to their financial benefit).  But they failed to use the database to identify deceased policyholders to pay life insurance benefits (again to their financial benefit).  This reportedly deprived life insurance beneficiaries of over $5 billion in benefits nationwide.  We blogged about this topic in prior articles.  (See  Some life insurers are still refusing to cooperate and use the database to pay life insurance benefits they owe.  The lesson is you should not trust your life insurer to grant your claim just because you believe they will do the right thing.

Life Claim Denials

How do insurers deny valid life insurance claims, whether they are governed by federal law, the Employee Retirement Income Security Act (“ERISA”), or California/state insurance bad faith laws?  One common way is “rescinding” the policy after learning the policyholder has died and the beneficiary makes a claim.  That is, the insurer invalidates or voids the policy – as if it never existed – based upon what is commonly called a “two-year contestability investigation” into the insured’s pre-insurance medical history and insurance application.  If the policy is legitimately rescinded, the insurer does not have to pay the death benefit but just return the policy’s premiums.

While that seems unfair to a grieving family who has dutifully paid premiums precisely for such a time as this, there is support for this tactic under most life insurance policies.  Fortunately, though, only under very narrow circumstances.  Almost every life insurance policy has a two-year incontestability clause.  If the policyholder dies within two years of purchasing the policy, the insurer can rescind it if the insured made a material misrepresentation about his health or his activities on his life insurance application.  After two years, in most policies, the insurer cannot contest or rescind the policy based on misstatements made in the application, even fraudulent ones.  What is a “material” misrepresentation?  That means the insurer, had it known the true facts that were omitted from the application, would have been influenced in its decision whether to accept the risk and issue the policy.

We have found that life insurers liberally interpret what is “material” to deny legitimate claims.  They will rescind the policy after a claim is made if their contestability investigation shows the insured left out any information about his health or incorrectly answered even an innocuous application question, irrespective of whether having the correct information would have changed the insurer’s mind to not issue the policy.  The law does not permit an insurer to do that.  If the insurer would have issued the same policy at the same price even if had it known the true facts about the insured’s health condition, the information is not likely considered “material” and the insurer is not allowed to rescind.  The Ninth Circuit, agreeing with the California Supreme Court, has stated:

Finally, as the misrepresentation must be a material one, [a]n incorrect answer on an insurance application does not give rise to the defense of fraud where the true facts, if known, would not have made the contract less desirable to the insurer.

Freeman v. Allstate Life Ins. Co., 253 F.3d 533, 536 (9th Cir. 2001) (citing Thompson v. Occidental Life Ins. Co., 9 Cal. 3d 904, 915 (1973)).

Illustrative of this devious practice, one of our clients, a minor child, had his recently deceased father’s life insurance policy rescinded after he submitted a claim because the insurer’s contestability investigation revealed his father did not disclose on his application he had mild kidney disease.  The insurer refused to pay the policy’s life insurance benefit and voided the policy despite that the premiums had always been paid.  When our firm became involved, we argued that such a condition is not typically considered material to life insurers and we demanded to see the insurer’s underwriting guidelines to prove that they considered the condition to be material.  We argued the father’s condition was immaterial, that the insurer would have issued him the same policy had he disclosed his mild kidney disease because it was standard to do so under its underwriting guidelines.  The insurer immediately paid the claim, thwarted in its dishonest efforts to refuse payment to a needy and now fatherless child so it could deepen its already deep pockets.

There are many other inappropriate tricks life insurers use to deny valid claims, including:

  • Enforcement of conditions never previously enforced: Accepting an insured’s premiums without requiring him to submit evidence of good health or alerting him it is needed for the policy to issue, only to enforce the policy’s good health provisions years later to argue the policy was never legally issued (after the insured’s death and a claim is made).
  • Billing miscues/errors: Where a life insurer has issued multiple policies to the same insured, we have seen insurers manipulate the accounting of premium payments to their advantage to credit all or most of the payments to one of the policies and claim the other policy lapsed for non-payment when it had been paid in-full.
  • Inappropriate policy lapses: A life insurer sends a bill for the policy premium that the insured is too sick to notice and pay, refuses to send a grace period/lapse notice to the insured and then, after the premium is not paid, improperly lapses the life insurance policy just before the insured dies.

Life insurers often try to cancel or lapse policies for non-payment of premiums without following California’s notice requirements, particularly if they suspect a claim is on the horizon.  But a life insurance policy cannot be lapsed without adequate notice to the insured which gives him or her a grace period to pay overdue premiums.  In California, a statute enacted in 2013 (California Insurance Code section 10113.71) requires individual and group life insurers to (1) include a 60-day grace period from the premium’s due date, (2) mail written notice of pending lapse and termination for non-payment of premiums at least 30 days before the effective date of termination, and (3) mail the notice by first class United States mail within 30 days after a premium is due and unpaid.  The notice is also ineffective if the insurer fails to (1) mail such notice to the named policy owner, (2) mail such notice to a designee named pursuant to Section 10113.71 for an individual life insurance policy, and (3) mail such notice to a known assignee or other person having an interest in the individual life insurance policy.  In short, a life insurer must send written notice of potential lapse to the right people, in the proper manner, and allow for the right time periods, or the policy is not lapsed.

These technical requirements have likely frustrated life insurers that underwrite policies in states other than California that have less stringent cancellation requirements.  Their claims examiners may not be well versed in this relatively new California law or, worse yet, they may ignore the laws they do not like because their insureds are not educated in them.  They may improperly deny a claim based on a purported policy lapse that did not lapse because the insurer never followed California’s special statutory notice requirements.

Our Take

These are just some of the ways life insurers find ways to deny legitimate claims.  If you have a denied life insurance claim, you need an experienced ERISA life or bad faith attorney such as the lawyers at Mckennon Law Group PC.  As mentioned in our last article, after litigating hundreds of life, health and disability claims, it is our experience that many insurers do not get serious about paying these types of claims until they perceive a true threat of their insured being represented by highly effective, experienced lawyers, especially where there is “extra-contractual exposure” (i.e., damages beyond the policy’s benefits such as emotional distress damages, attorney’s fees and punitive damages).  You cannot count on your insurer to act in good faith or do the right thing.  The Department of Labor statistics and other empirical data show that often they will not pay a claim unless credibly threatened by an insured with a highly effective and experienced lawyer.  Let us try to get your insurer to listen.

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