Understanding the Important Role of the Contestability Period on Life Insurance Claims [Part I]

J.P. Gonzalez-Sirgo
Founder of J.P. Gonzalez-Sirgo, P.A.

We all recognize the financial value of a life insurance policy in protecting loved ones in the event of an unanticipated and premature death.  Although life insurance coverage can offer replacement of a family breadwinner’s income, many beneficiaries find that insurance carriers frequently do not make recovering benefits under a policy an easy process.  This three-installment blog post covers a number of issues related to the impact of the “contestability period” on life insurance claims disputes.

Insurance companies routinely contest a beneficiary’s right to a death benefit if the insured dies during the initial two years after the date the policy took effect, which is referred to as the “contestability period”.  This critical look back window can be as short as one year in some states.  Policy premiums are based largely on an applicant’s medical history and age, so policyholders have a motivation to misstate this information to make coverage more affordable.  Applicants also might misrepresent aspects of their lifestyle and health, such as failing to disclose unhealthy habits, hazardous occupations, and/or risky hobbies.  

The contestability period is designed to address the financial interest of carriers in avoiding insurance fraud while protecting policyholders from insurers who would convert innocent mistakes on applications into a grounds for post-claim rescission of a policy.  Since many policies will never result in a payout, insurers could simply avoid the cost and effort of investigating the information in a policy application by postponing the underwriting process until a claim is actually filed. 

Relationship Between Contestability Period and Misrepresentations by Policy Applicants

When the insured under a life insurance policy passes away, carriers typically have two years to “rescind” the contract based on misrepresentations or material omissions in the application in Florida and many other states.  The period is only one year in some states.  Although misrepresentations or false statements in the application can justify denying a claim and rescinding the policy, the statement or information at issue must be “material”.  The precise meaning of this term might vary depending on the jurisdiction, but Florida courts find that a representation is material if the actual information would have impacted the insurer’s decision to issue the policy under the same terms. A mistake regarding the color of your hair would not be material, but non-disclosure of a medical condition like congestive heart failure or cancer may be material.

After the contestability period has expired, the insurer typically cannot deny a claim based on a false representation in the policy application.  However, the benefits distributed to beneficiaries can be adjusted so the net recovery approximates what should be received based on an accurate disclosure of the facts.  If an applicant lies about his or her age, the amount the beneficiary receives generally would be consistent with the insured’s actual age rather than the age indicated on the policy.  Once the two year period has expired, the policy essentially becomes “incontestable”   based on misleading and false information in the application except under narrow extraordinary circumstances.

When an insured dies during the contestability period, the insurer often refuses to pay benefits prior to completion of a thorough investigation.  The insurer will meticulously review the insured's medical files and all application documents.  The insurance company will attempt to identify disparities that can be used to justify contesting the death benefit.  In the majority of states, an insurer must pay out on a life insurance policy even if a policyholder lied about a material fact like a cancer diagnosis, and the insurer does not challenge the policy within the contestability period.  However, this is not necessarily true in every state, so policy applicants and beneficiaries should consult with an attorney about the impact of inaccurate information on a life insurance application.

You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [email protected].

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