Insurance companies are always looking for new ways to avoid paying claims; the newest trick in their book involves the denial of life insurance benefits by arguing that, despite prompt payment of premiums for a period of time in excess of two years, a contract never existed between themselves and their insureds.
In most states, life insurance policies include a clause known as an “incontestability provision” which is mandated by State Insurance Statutes. In essence, this clause prevents insurance companies from contesting the validity of a policy after a certain period of time. For example, if your policy has a two-year incontestability clause, the insurance company cannot contest the existence of a valid life insurance contract (and not pay you, the beneficiary) after premiums have been paid for two years. These clauses are designed to protect beneficiaries from an unfair denial of the life claim, especially in light of the fact that the insured him or herself is unavailable to dispute the insurance company’s arguments.
In Patterson v. Reliance Standard, Patterson v. Reliance Standard Life Ins. Co., 986 F. Supp. 2d 1140 (C.D. Cal. 2013), after paying for group life insurance for over five years, an insured with a valid life insurance policy passed away. Reliance Standard, despite the fact that five years of premiums had been paid, denied the claim on the specious ground that because the insured had not signed a form stating she was in good health, (which she was), the policy had never gone into effect, and it had no obligation to pay the $200,000 owed to her minor children in life insurance benefits.