A life insurance policy is a contract between the insured and the insurance company that is intended to provide for the payment of life insurance benefits to family members or friends in the event of the policy holder’s death. These funds are often intended to replace a loved one’s income when he dies, or the value of the services of that loved one to the household. However, after the policy holder dies, life insurance claim denials are not only possible, they are common business practices of insurance companies.
When a life insurance claim is filed, the life insurance company will review both the life insurance claim and the policy itself. During this review, the life insurance company will look for possible reasons that can be used to deny the life insurance claim in a tactic known as life insurance rescission – the life insurance company declares the insurance contract cancelled, and refuses to pay any life insurance claims.
An insurance company may be entitled to deny a life insurance claim if it can show that the applicant made a material misrepresentation during the application process. Life insurance companies looking to deny claims may try to argue that a misrepresentation has been made. A misrepresentation in an application for insurance can be a false statement concerning a past or present fact, made to the insurer by the insured.
However, there are time constraints on an insurance carrier’s ability to seek to cancel an insurance policy or issue a life insurance claim denial, even on grounds of misrepresentation. For example, life insurance policies must include an “incontestability clause,” which bars insurers from challenging a life insurance claim after the life insurance policy has been in effect for at least two consecutive years.
For example, in Ilyaich v. Bankers Life Ins. Co. of New York, the Court, reinstated a valid life insurance claim after it was denied by the life insurance company. The life insurance company had claimed that misrepresentations were made in the application for coverage with respect to the purpose of the insurance. The Court found that the insurance company had wrongfully cancelled the life insurance policy based on the representations in the application for coverage, and stated that the life insurance company was required to investigate, within the two-year contestability period, the accuracy of the information found in the life insurance application. According to the Court, the life insurance company’s failure to verify the information found in the application within two years barred the life insurance company from denying claims.
If you have lost a loved one and the life insurance company has denied your life insurance claim, your ability to recover life insurance benefits might not be lost. However, every state, including New York and New Jersey, requires that lawsuits concerning life insurance claim denials be filed promptly, before the statute of limitations runs out.