Life Insurance Incontestability Clauses – Clear Rules Apply

New York and New Jersey insurance law, as well as the law of many other states, requires that all insurance policies include a standard incontestability clause. The purpose of such clauses is to create a window at the beginning of the policy during which the insurer may challenge a policy’s validity. Once the period (two years in New York and New Jersey) has passed, the insurer can no longer challenge the policy. While an incontestability clause provides strong protections for policy holders and policy beneficiaries, preventing insurance claim denials, the law withholds these protections from imposters and identity thieves who fraudulently pose as someone else to purchase life insurance in that person’s name. In such cases, New York courts have held that while the insurance policy remains valid, the policy covers the individual “seen and dealt with,” not the individual fraudulently named in the policy. Put another way, the policy insures the imposter whomever he may be, not the stolen identity used by the imposter.

But the law also allows life insurance to be legitimately purchased in someone else’s name. What happens when there is no controversy about who purchased the policy but there is a controversy about the relationship of the purchaser to the individual named on the policy? What if the purchaser misrepresented his or her relationship to the named individual? Should the purchaser still receive the protections of the incontestability clause? In Halberstam v. United States Life Ins. Co., a New York court recently clarified the reach of incontestability clauses.

The case revolved around a policy originally purchased by the Leo G. Family Trust in the name of Leo Goodstein from US Life Insurance on February 25, 2005. At first, the trust retained the beneficiary rights. Later, in October 2008, it transferred those rights to a second trust, the MN Irrevocable Life Insurance Trust. Mr. Goodstein died on March 18, 2009. US Life Insurance subsequently refused to pay on the policy. It alleged that its own investigations uncovered discrepancies between blood samples taken from Mr. Goodstein’s nursing home and blood samples submitted when the policy was purchased. According to US Life, an imposter, not Mr. Goodstein, had submitted medical records and signed off on the policy that the Leo G. Family Trust had purchased in Leo Goodstein’s name. Because of this alleged fraud, US Life argued, the incontestability clause should not bar it from challenging the validity of the policy.

The court did not agree, and refused to allow the life insurance claim denial to stand. According to the court there was no issue about who purchased the policy and who originally served as beneficiary – the Leo G. Family Trust. Moreover, there was no question that the policy had been legally transferred to the MN Irrevocable Life Trust in 2008, three years after the policy had been issued and outside of the window of contestability. When Mr. Goodstein died, MN Irrevocable Life Trust was the legal beneficiary of the policy with no allegations that it had acted improperly. Fraud or misrepresentation may provide an exception to the window of contestability only against alleged imposters, but it did not provide an exception to the window of contestability against a legitimate beneficiary. Therefore, the court stated that US Life had improperly denied life insurance benefits to the MN Irrevocable Life Trust.

US Life also attempted to argue that the policy was invalid because the original purchaser did not have an insurable interest in Mr. Goodstein. The court acknowledged that purchasing life insurance to cover someone else typically requires either (1) a familial or legal interest in that individual or (2) that individual’s consent. Life insurance policies that lack consent or some insurable interest can be rendered invalid if the insurer challenges the policy, but, the court stated, the insurer must contest within the two-year window. Regardless of whether the original purchaser, the Leo G. Family Trust had Mr. Goodstein’s consent or an insurable interest and regardless of whether an imposter had, in fact, signed off on the medical forms, US Life had failed to challenge the purchase quickly enough the incontestability clause precluded the insurance company from challenging the life insurance claim.

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