SDV Insights

Life Insurance Contestability Clauses and Post-Claim Underwriting: A Beneficiary's Pitfall

Insurance is supposed to give us some level of confidence that should coverage be needed, it will be there. Often, however, this expectation does not correlate with reality, and beneficiaries are faced with unexpected denials on technical grounds. Life insurance is no exception. A common life insurance policy provision referred to as a “contestability clause,” coupled with an upside-down underwriting and claims philosophy, can lead to unexpected outcomes for beneficiaries.

Life insurers often issue policies based on a simple application posing questions about a prospective insured’s medical condition. This is especially true with the increasingly popular online process for applying for life insurance where a few clicks of the mouse and inclusion of payment information yield an in-force policy. These products are advertised as being quick and easy to complete, purportedly offering affordable coverage and the accompanying peace of mind that loved ones will be financially secure in the event of an unexpected death. Of course, the devil is in the details because the failure to correctly answer the myriad of questions within the insurance application can lead to draconian results.

To explain, an application question might be, “Have you consulted a physician in the past five years?” Let’s assume the applicant, who is age fifty-five, checks, “No.” Even though it is highly unlikely that a fifty-five-year-old has not seen a physician in five years, the insurer may rely on that answer when determining its risk and whether to issue a particular policy for specific premiums. That is because in many jurisdictions, there is no obligation for the life insurer to question the boxes checked “no.”

Life insurance policies have contestability clauses. These clauses are generally relied on by life insurers if an insured passes away within the first two years of policy issuance. A sample contestability clause is, “[w]e will not contest this policy after it has been in force during the insured’s lifetime for two years from the issue date.” Before deciding to pay a life insurance claim, as part of the contestability review, the insurer reviews answers in the initial application for the policy and draws a comparison to the medical records of the deceased that it collects after the death claim is made.

The phrase “post-claim underwriting” is used to describe the more robust due diligence claims procedure of collecting an applicant’s medical records after a death claim is made, in lieu of the insurer performing this function to make a risk assessment before issuing a policy. This hindsight review procedure begs the question of why the insurer did not ask for the same medical information before issuing the policy. In most scenarios, the answer lies in the win-win scenario for the life insurer (especially with respect to insurance policies with lower death benefit amounts). A quick underwriting procedure and issuance of a policy is financially efficient and leads to the collection of premiums. Should the insured pass away within the first two years of issuance of the policy, the life insurer can potentially escape liability for the claim by finding records that conflict with the application answers, coupled with a statement that it would not have issued the policy had the question been answered differently. This is true even if the cause of death is entirely unrelated to the question that was incorrectly answered in the insurance application.

Omissions or incorrect answers within life insurance applications are referred to as misrepresentations. When a misrepresentation in the application is identified, the payment or denial of death benefits hinges upon whether the misrepresentation is considered “material,” meaning that it directly impacted the insurer’s decision to issue the policy. Thus, if the insurer would not have issued the policy or would have only offered the coverage under less favorable terms, such as higher premiums or lower limits, the insurer will claim that the misrepresentation is “material.”  

Laws governing the assessment of misrepresentations vary from state to state. For example, in New York, if an insurer’s underwriter can attest that the correct answer in the application would have led the insurer to issue the policy for a different premium, as supported by its underwriting guidelines and procedures, some courts will allow rescission of the policy.1  In Connecticut, in order for an insurer to rescind, it must prove in a court of law that the insured made a knowing misrepresentation that was material to the insurer’s decision to place the policy.2  In California, an insurer must demonstrate that there was a misrepresentation that was material, and the applicant knew he made a material misrepresentation.3  Medical questions and answers are deemed to be material.4

Post-claim underwriting strips beneficiaries of the security they thought they had with in-force life insurance. Had the life insurer considered and rejected an applicant before issuing the policy, that applicant could have applied for insurance with a different insurer. But once the policy is issued, under a post-claim underwriting procedure, a beneficiary can be left with nothing. To compound a beneficiary’s problem, one of the people with significant insight into the application process with the insurer has passed away.  

While a denial of death benefit based upon an assertion of material representation can be both alarming and frustrating, all is not always lost. In some instances, the beneficiary has legitimate grounds to refute the denial. A starting point for a beneficiary is to refuse a refund of premiums paid. Cashing a premium refund check can equate to an acquiescence of the rescission. Additionally, a beneficiary can assert defenses to rescission. Some examples include scrutinizing information the insurer had in its possession before issuing the policy. To the extent the insurer had knowledge of a medical condition that in a post-claim procedure it now asserts is material, a waiver defense is viable. Casting a spotlight on the actual underwriting practices of the life insurer seeking rescission is another way to defend such a claim. Underwriting is typically subjective, and if the insurer has a pattern of deviating from its own guidelines in its fervor to sell policies, a beneficiary may succeed in demonstrating that a misrepresentation is simply not material. 

Life insurance is an asset that millions of people depend on to protect their loved ones. However, the toxic combination of a life insurer that strategically avoids a review of the information provided in the insurance application before issuing the policy and a two-year contestability clause can dilute the value of this asset. It acts as a pitfall, or trap, where the insurer hopes to find a mistake in the application (even one that has no connection to the cause of death).

If you have questions about life insurance underwriting and claims, contact Eve-Lynn Gisonni at  

1Ruiz v. First Investors Life Ins. Co., 200 N.Y.S.3d 463, 464-465 (2d Dep’t 2023).
2Pinette v. Assur. Co. of America, 52 F.3d 407, 409 (2d Cir. 1995)(citing Connecticut law).
3Tran v. Kansas City Life Ins. Co., 228 F.3d 1068, 1074 (C.D. Calif. 2017).
4Id. at 1077. 


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