Ch 7 The Incontestable Clause

Broadly interpreted, the incontestable clause could prohibit the denial of any type of claim after the contestable period has expired

Fortunately, the majority of the courts do not interpret the clause in that manner. They make a distinction between contests that question the validity or existence of a contract and those that seek to clarify the terms of the contract or to enforce the contract's terms.

Suicide

2 years' duration & some policies contestable for only one year, a conflict could develop if the insured commits suicide during the second year of the contract. Courts have upheld company's right to deny coverage of suicide beyond the contestable period.

Potential Dates for Inception of Contestable Period

• policy date • effective date of coverage

The incontestable clause has been described as

a private contractual "statute of limitation" on fraud, prescribing a period shorter than that incorporated in the statutory enactment

no reputable life insurance company is likely to contest a policy under ordinary circumstances unless there is evidence of an intent to deceive,

may be concluded that the primary function, if not the purpose, of the incontestable clause is to protect the insured and the beneficiaries against the consequences of the insured's (or the policyowner's) fraudulent behavior or erroneous charges of fraud by the insurer.

Effect of Fraud

(1) fraud in the formation of a contract renders the contract voidable at the option of the innocent party (2) Parties to a contract not permitted immunity from the consequences of fraud.

MATTERS EXCLUDED FROM INCONTESTABLE CLAUSES

- Nonpayment of Premiums - Expressio unius est exclusio alterius - (if a particular hazard is not specifically excluded from the operation of the clause, a claim arising from that hazard cannot be avoided beyond the contestable period)

Fraud and the Incontestable Clause

Betsy was recently diagnosed as having colon cancer. She applied for life insurance and bribed the medical examiner and her physician to conceal her condition. The policy was issued, and 3 years later Betsy died of cancer, at which time the insurer discovered the fraud. The insurer is nevertheless obligated to pay the claim.

RELATIONSHIP TO OTHER POLICY PROVISIONS

Excepted Hazards At one time it was the view of the courts and the state insurance departments that once the contestable period had expired, no denial of liability based on lack of coverage could be sustained unless the hazard involved in the litigation was specifically excluded in the incontestable clause itself. Moreover, no hazard could be excluded from the scope of the incontestable clause unless the exclusion was recognized in the statute governing the clause. This is still the case

Meaning of a Contest

Gregg applied for a life insurance policy and successfully concealed from the insurer the fact that he had three previous convictions for driving under the influence of alcohol. He paid the annual premium, and the policy was issued with a 2-year incontestable clause. Twenty-three months later, the insurance agent learned of the convictions and notified the insurer. The insurer wrote to Gregg stating that, because of its standard underwriting requirements about drunk driving, it would no longer continue the coverage or accept the next renewal premium. Gregg died during the grace period in a DUI auto accident. The insurer will be required to pay the claim because its notification to Gregg did not constitute a contest of the policy in that jurisdiction.

if a policyowner died within the contestable period, the company was forced to go into court during the contestable period to seek a rescission if it wanted to deny liability for any reason. If no action was brought before the period expired, the company was estopped from erecting any defense other than lapse from nonpayment of premiums

In an effort to avoid the undesirable consequences of the Monahan case, many companies adopted a clause that provided that the policy would be incontestable after it had been in force for a specified period.with such a clause, the death of the insured would stop the period from running since the policy would no longer be in force. When the clause was tested in the courts, however, the decisions (with some exceptions) held that a policy does not terminate with the death of the insured but continues "in force" for the benefit of the beneficiary. In other words, the contract still has to be performed. Thus this clause had the same weakness as the incontestable clause litigated in the Monahan case. Despite this disadvantage, some companies have continued to use this wording in the clause or to simply omit the words "during the lifetime of the insured," since this permits suits in equity, which are usually tried without a jury. Those companies that were willing to give up the advantage of suits in equity modified their incontestable clause to make the policy incontestable after it has been in force during the lifetime of the insured for a specified period. The courts have uniformly agreed that under this clause, the death of the insured during the contestable period suspends the operation of the clause and fixes the rights of the parties as of the date of death. Under such a clause, if the insured dies during the specified period, the policy never becomes incontestable, and the claimant cannot gain any advantage by postponing notification of the claim until the specified period has expired

Reinstatement

Reinstatement will almost always necessitate a statement by the insured as to the current status of his or her health and will frequently involve a complete medical examinationcan a reinstated policy be rescinded after the original contestable period has expired?

suicide clause is independent of the incontestable clause.

Since most suicide exclusions are of 2 years' duration, and some policies are contestable for only one year, a conflict could develop if the insured commits suicide during the second year of the contract. With few exceptions, the courts have upheld the company's right to deny coverage of suicide beyond the contestable period.

Disability and Accidental Death Benefits

Sometimes an insurer may wish to exclude policy provisions or policy riders relating to disability and accidental death benefits from the operation of the incontestable clause.In order to avoid any possible conflict with the incontestable clause in adjudicating such claims, some companies keep the provisions entirely outside the operation of the clause. Under the type of clause cited above, the validity of the provisions relating to disability and double indemnity can be attacked at any time, even after the expiration of the contestable period. The general rule is that unless there is a specific exception in the policy's incontestable clause, the disability and accidental death provisions are included within the incontestable clause. However, insurers may draft policy language that excludes those provisions from the scope of the incontestable clause. If such an exclusion exists, a majority of courts have upheld it, although many other courts have held otherwise. The exclusion of disability benefits from the protection of the incontestable clause is not in conflict with the intent of the clause. The purpose of the clause is to forestall a contest over the contract's validity after the insured is dead and cannot defend the representations he or she made in the application for insurance. Disability claims are filed during the lifetime of the insured, who can defend his or her actions, both at the time the policy was applied for and at the time of the claim.

Inception of the Contestable Period

Where operative date of a life insurance policy coincides with the effective date, there is little question When effective date of protection precedes date of the policy some courts have made beginning of contestable period coincide with commencement of insurance coverage, regardless of the date of the policy This would be the normal case when conditional receipts are used. On the other hand, when the policy has been antedated so that the date of the policy is earlier than the effective date of coverage, the courts, applying the rule of construction most favorable to the insured, have usually held that the contestable periodbegins with the date of the policy. This would be applicable when a policy has been backdated to obtain a younger insurable age

Misstatement of Age or Sex

amount payable under the policy will be such as would have been purchased at the correct age (or sex) by the premium actually paid.

manifestation of the belief that a life insurance policy's beneficiaries should not be made to suffer for mistakes

beneficiary may be protected by the incontestable clause even if the error in the application is based on a fraudulent or material misrepresentation by the applicant based on the theory that after the insurance company has had a reasonable opportunity to investigate the circumstances surrounding issuance of a life insurance policy, it should thereafter relinquish the right to question the validity of the contract.

Conway decision

decision declared that the New York statute requiring an incontestable clause "is not a mandate as to coverage, a definition of hazards to be borne by the insurer. It means only this, that within the limits of the coverage, the policy shall stand, unaffected by any defense that it was invalid in its inception, or thereafter became invalid by reason of a condition broken...[Where] there has been no assumption of risk, there can be no liability...." Today it is the accepted view that a company may exclude any hazard that it does not wish to cover.In general, the right to limit coverage has been invoked only with respect to aeronautical activities, military and naval service in time of war, and suicide.

introduced in New York by voluntary action in 1864

had become so firmly entrenched and was so obviously beneficial to all parties that the legislation that grew out of the Armstrong investigation in 1906 made the inclusion of the clause mandatory in life insurance policies. no states permit a clause that would make the policy in general contestable for more than 2 years

Once the contest has been initiated, the contestable period stops running, and regardless of the outcome of the initial contest, the incontestable clause cannot be invoked to forestall any other proceeding.

if a contest is initiated with the insured during the contestable period, the beneficiary may be made a party to the proceedings after the expiration of the period specified in the incontestable clause

Monahan decision

insured died within the 2-year period, and the company denied liability, alleging a breach of warranty. The beneficiary waited until the 2-year contestable period had expired and then brought suit against the company. The company defended on the grounds of breach of warranty The beneficiary asserted that since the 2-year period for contesting the policy had expired, the insurance carrier was precluded from raising the breach of warranty as a defense. The Supreme Court of Illinois, agreeing with the beneficiary, held that the policy was incontestable and found for the beneficiary. This decision, which was accepted as a precedent in virtually all jurisdictions, established the far-reaching principle that the contestableperiod was not ended by the insured's death but continued to run until the specified time had elapsed.

Meaning of a Contest

policy can be prevented from becoming incontestable only by appropriate legal action by the company during the contestable period or, under one type of incontestable clause (to be described later), by the death of the insured during the contestable period some jurisdictions a notice of rescission accompanied by a return of the premium is deemed to constitute a contest Majority of the courts held that there must be a court action that challengesthe validity of the policy as a contractunder the majority rule, the requirement of a contest can be satisfied only by a suit in equity for rescission before a court of competent jurisdiction o

incontestable clause

provision in the insurance contract that waives most of the insurance company's rights to dispute the validity of the contract after a certain period of timeapplies to whether the contract is valid, not to whether the terms or conditions of the contract have been fulfilled

Reformation

suit for reformation of the contractan equitable remedy under which the written instrument is made to conform to the intention of the parties party seeking relief must establish that there was either a mutual mistake in drafting the written instrument or a mistake on one side and fraud on the other. A suit to rectify a mistake "is not a contest of the policy but a prayer to make a written instrument speak the real agreement of the parties.

Conditions Precedent

the incontestable clause does not bar a defense that the policy was never approved by the insurance company Most courts conclude that the delivery-in-good-health requirement and other such conditions precedent should be accorded the same treatment as representations. Sincethe incontestable clause was designed to deal with misrepresentations, it follows that the clause should bar suits based on nonfulfillment of conditions precedent if, at any time, both parties had treated the policy as having been operative.

Contestability of Reinstated Policy

• (majority) new contestable period, of same duration as original, applicable only to statements in reinstatement application • (minority) only subject to the original contestable period • (minority) reinstated policy not protected by incontestable clause

Situations Not Protected by the Incontestable Clause

• The policyowner/applicant lacks an insurable interest. • The physical examination was taken by a person other than the intended insured. • There was no manifestation of mutual assent between the insurer and the applicant. • The policy was obtained with the intent to murder the insured.

What Is a Contest of a Policy? (Majority of Courts)

• suit by insurer to rescind policy in a court of appropriate jurisdiction, or • defense by insurer in a court proceeding seeking to enforce the contract

Contestable Period

• time for insurer to investigate and rescind policy • maximum duration 2 years (unless insured dies within that period) • duration of only one year under some policies • may delay claim settlement if insured dies during the contestable period