Why Do Life Insurance Companies Deny Claims?

Many people apply for, and obtain, life insurance policies as a way to help their loved ones after they have passed away. Through difficult times, a life insurance policy can provide surviving beneficiaries with much-needed financial support, offering a sense of comfort and relief.

Unfortunately, some life insurance companies look for any excuse to deny a claim for life insurance benefits. Insurance companies are big businesses and they want to minimize their costs, even if that creates a financial burden for the insured’s family members.

Denial of Individual Private Life Insurance

  • Misrepresentation on application

One common reason given for denying a life insurance claim is an alleged misstatement in the application. An insurance company has a “look back” period, referred to as the contestability period, in which it can review the application to find statements it can deem material misrepresentation. If the insured dies within that contestability period, the insurance company reviews the application and likely will request additional medical and/or financial information from the family, to ensure that the information on the application was accurate. If the insurance finds such a misrepresentation, it can deny the claim for the insurance proceeds on the basis of that misrepresentation.

A representation would be material for the insurer – and therefore grounds to deny the claim – if the statement affects the risk of providing life insurance covered to the insured, such as statements regarding the insured’s:

  • Medical Hisotry

  • History of tobacco or drug use

  • Financial background

  • Criminal background (arrests or convictions for serious offenses)

An insurance company can even deny the life insurance claim when the misstatement had nothing to do with the applicant’s death. For example, if the insured died in a car accident but did not disclose a history of diabetes, the insurance company could deny payment of the claim to the beneficiaries of the insured, even though the death had nothing to do with diabetes.

The length of the contestability period varies from state to state, but in most states, including New York, New Jersey, and Massachusetts, the period is two years.

If you have had a claim for life insurance denied, contact one of the experienced life insurance lawyers from Trief & Olk. We will work to challenge the life insurance’s view of your loved one’s alleged material misrepresentation. For example, we can show that the statement is not significant enough to justify denial of the life insurance policy claim or that your loved one did not intentionally provide inaccurate information.

  • Lapse in coverage due to failure to pay premium

Too frequently, when the insured is ill or elderly and unable to properly manage her finances, the premiums are not paid on time, and the life insurance policy lapses due to non-payment. Before an insurance company terminates coverage, however, it is required to provide the insured with certain notice to warn the insured that the policy is in danger of expiring and offer a grace period during which the insured can pay the overdue premium and continue coverage. In some states, such as New York and Massachusetts, the insurance company has to give the insured a warning in advance of cancellation and then a grace period after cancellation, under certain conditions.

Additionally, some life insurance policies include a provision called a waiver of premium, which allows the insured to stop paying the premiums if the person is very ill (on the assumption that the person might not be working and, as such, is unable to afford the premium payments).

If you are assisting an ill or elderly family member or friend who has life insurance coverage, be sure to keep an eye out for invoices or statements to make sure that any premiums are paid on time. If the person is going through financial hardship, the insured should contact the insurance company to see if the premium can be waived.

If you submit a claim for life insurance proceeds after your loved one passes away and are told that the policy lapsed due to nonpayment, you may have a claim that the insurance policy should not have ended the coverage. The experienced life insurance attorneys at Trief & Olk can assist in determining if the life insurance policy gave proper notice and, if it did not, will provide options to help you challenge the cancellation or denial of benefits.

Denial of Insurance Provided Through Employer

Many employers offer employees group life insurance coverage as a benefit of employment. This coverage is provided and paid for by the employer, with the actual policy issued by an outside insurance company. Many of these employers also give the employee the option to purchase additional group life insurance coverage (referred to as optional, voluntary, or supplemental life insurance), for which the employee pays the premium. If the employee subsequently passes away, the surviving family members who are named as beneficiaries of the life insurance then seek payment from the life insurance company who issued the policy.

If the insurance company denies payment of the benefit owed under the employer-provided life insurance, the beneficiary is generally required to follow certain procedures to challenge this denial. The Employment Retirement Income Security Act of 1974, known as ERISA, 29 U.S.C. §§ 1001-1461, is a federal statute that governs insurance plans provided to employees as part of an employer’s benefits package. Under ERISA, challenges to such life insurance denials must be pursued according to the specific procedural requirements of this law.

Denials of life insurance coverage under employer-provided life insurance typically arise when the employee stops working due to a serious illness (such as cancer) that requires extensive treatment and makes the employee too ill to work. The employee is eventually required to go on long-term disability leave. He or she may continue to receive disability payments under the employer’s disability policy and therefore may assume that the life insurance coverage continues as well. Depending on the terms of the insurance plan, however, the employee’s coverage under the life insurance policy may end at a certain point. Frequently coverage ends one year after the employee first went out on disability, at which point the employee may no longer be considered an employee. The employer and insurance company cannot, however, simply cut off coverage.  They must provide notice that the policy coverage will end and explain the employee’s options.  For example, many policies require that the employee have the opportunity to convert the group policy to an individual policy (for which the former employee will be required to pay monthly premiums). Certain policies also offer the possibility of continuing coverage under the group policy beyond the standard cut-off date, if certain conditions are met. In such circumstances, the employee may be able to apply for a waiver of the monthly premiums.

If you recently lost a loved one who had employer-provided life insurance for which payment was denied, you may have a claim if the employer and/or insurer did not provide the proper opportunity to convert or extend the life insurance coverage. The life insurance attorneys at Trief & Olk are available to answer your questions and represent you if life insurance has been denied.

Disputes with Other Possible Beneficiaries

Situations arise when more than one person claims to be the beneficiary of a life insurance policy. For example, an individual might initially designate a spouse as a primary beneficiary and his children as secondary beneficiaries, get divorced and remarry, and designate the new spouse as the beneficiary of the same policy. This would create a situation where different individuals might claim the right to receive the same funds. If the life insurance company admits that it owes payment, the question just becomes who is entitled to receive the funds.

When more than one party claims the right to recover the same life insurance proceeds, the life insurance company may bring an action known as an interpleader action. In these cases, the life insurance company deposits the insurance proceeds into an account controlled by the court to be paid when the case is resolved, and the life insurance beneficiaries then work out the dispute between themselves, by litigation or settlement.

Interpleader actions can arise in various circumstances, including the following:

  • The insured’s surviving spouse and ex-spouse both claim they are entitled to the life insurance proceeds, which can occur if the insured never changed the listed beneficiary on the policy even after divorcing and then re-marrying;
  • The insured had children from two different marriages that both ended in divorce, was obligated to maintain the same life insurance policy as child support in both divorce decrees, creating a conflict between the children from the first marriage and the children from the second marriage;
  • The insured had no beneficiary designated;
  • The insured’s beneficiary designation assigned 100% of the proceeds to more than one individual;
  • The insured’s attempt to change the beneficiary was unsuccessful; for example, the insured completed the paperwork to change the beneficiary but died before the insurer received the updated designation; or
  • The insured changed the beneficiary but the life insurance company does not have a record of the change.

The experienced life insurance attorneys at Trief & Olk have represented clients in disputes between competing beneficiaries who claim to be entitled to the same life insurance policy proceeds. Disputes between beneficiaries can often settle out of court, but we have the litigation experience to take your case to trial if needed.

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