Life Insurance Contestability and Its Impact on Your Life Insurance Policy and Claim

When you buy life insurance, you almost certainly expect that the policy will pay benefits when the insured person passes away. Life insurance can be a valuable way for people to give themselves and their loved ones’ peace of mind, knowing that there will be a death benefit to cover the costs associated with burial or to provide for dependents.

Many people who purchase life insurance do not expect the insurance company to deny a death benefit claim in bad faith. The reality is that life insurers will go to great lengths to avoid paying benefits. Assuming the policy requirements have been met, i.e., the premiums have been paid and the insured has passed away, the insurance company will need to find another way to avoid paying benefits. One of the most important ways life insurers can do this is to contest the policy in an attempt to rescind it, effectively treating it like it never existed in the first place.

Life Insurance Contestability

Contestability refers to an insurance company’s ability to invalidate, or rescind, a life insurance policy and refuse to pay the death benefit. The law provides a window during which life insurance companies can choose to rescind a policy under certain circumstances.

Note that rescinding a policy under this provision is not the same as canceling a policy for lack of premium payment. There is no set timeline for policy cancellations due to missed premium payments. If your life insurance is set up so that you pay a monthly premium for it, the insurance company may cancel your policy if you miss paying premiums, regardless of how long you have had the policy.

Why Insurance Companies Are Able to Contest Policies

It may seem surprising that an insurance company can rescind a policy if someone has paid all their premium payments on time. However, the contestability period is necessary for insurance companies to protect themselves against potential fraud.

Typically, when you buy life insurance, you must answer several questions about yourself, including about your age, lifestyle, and overall health and medical history. For example, you will likely be asked whether you smoke or not or if you have had any major health issues in the last five or ten years. Depending on the type and amount of life insurance you are seeking, you may even be required to undergo a basic medical exam.

Insurance companies use this information to calculate the risk you present, so the insurer can decide whether to insure you, what type of policy and benefit to offer, and how much to charge for premiums. The insurance company relies on the information you provide being accurate to properly calculate this risk.

If you misrepresent information on your application, purposefully or even by mistake, the insurance company may have based its assumptions on your risk on incorrect information. The contestability period allows insurance companies to investigate a policy claim after a death has occurred to ensure that all information provided is accurate before they pay out a claim. Insurers are looking for any misrepresentations on the policy application that may be material to the risk they insured so they can deny your life insurance claim and rescind your policy.

How Long Can Insurers Contest Life Insurance Policies in California?

Under California law (California Insurance Code section 10113.5), all life insurance policies delivered or issued in California must contain a provision that states the contestability period is no more than two years. While you might find a policy that states a shorter period, most insurance companies will want to include the maximum two-year contestability period.

What Happens if Someone Passes Away Within the Contestability Period?

Suppose someone purchases a life insurance policy and passes away within the two-year contestability period. In that case, the insurance company has a right to investigate the matter further to determine if there was a material misrepresentation in the application.

This does not mean that the insurer will not ultimately pay out death benefits. If there are no problems with the application information and the death occurred as a result of a covered event, the insurance policy should pay out as expected. There simply might be a delay before the benefits are received.

If the insurance company decides to rescind the policy due to an investigation for any matter during the contestability period—whether or not the policyholder has passed away—it must explain why it is attempting to rescind the policy. The insurance company typically also refunds the premium payments.

Can You Fight the Insurance Company If It Attempts to Rescind Your Life Insurance Policy or Deny Your Claim?

Yes, you can sue an insurance company if it refuses to pay out benefits and does not provide a valid reason for rescinding a policy or denying your life insurance claim. If, for example, an insurance company claims that you or the insured committed fraud by lying on the application, you may be able to argue that there was no fraud on the application and everything was true at the time.

Consider a hypothetical case where someone completes a life insurance application because they are not feeling well or have orthopoedic problems and this has made them think about the importance of planning for the future by buying life insurance. However, other than feeling sick or having orthopoedic problems, the person has not seen a medical provider for these conditions and has not been diagnosed at the time they complete the insurance application. Is the insured expected to provide this information on the application?

What happens if the person goes to the doctor a few weeks or months later completing an application and discovers they have cancer? If the insurance company reviews the case and sees how close all these events were to the application date, they might attempt to rescind the policy and claim the person knew they had cancer and did not include it on the application.

In these types of cases—and many others—the insurance company might be acting in bad faith. There are many defenses under California law to an attempt by a life insurer to rescind a policy. Only a very experience claim denial life insurance attorney can give you guidance as to whether an insurer has properly denied your claim and if that insurer committed the tort of insurance bad faith.

To find out if you have a case against an insurance company for bad faith life insurance practices, call the McKennon Law Group PC at 949-504-5381 for a free consultation.