What Does “Incontestability” Mean?

California, and many other states, require life and health insurance companies to include what is called an “incontestability clause” in their policies. What does this term mean?

Very simply, these clauses provide that if you buy a policy, and pay premiums on the policy for a period of time – typically two years – the insurance company cannot later argue that you do not have coverage because of any false or misleading statements you may have made on your policy application.

Essentially, these clauses act like a statute of limitations for insurance purchasers. People buying insurance have a right to rely on that purchase, and should not have the rug pulled out from under them by an insurer years later on the grounds that their coverage never actually went into force.

This rule has been strictly enforced in California. In fact, in one California Supreme Court case, Amex Life Assur. Co. v. Superior Court, the court held that a policy was incontestable, and thus must be paid, even when the applicant committed fraud on his application by having another person take the prerequisite medical examination.

Insurance companies are clever, however, and often try to find a way around these strict rules. Our firm recently handled a case in which a woman obtained life insurance coverage as an employee benefit under a group policy purchased by her employer. However, the policy contained a provision that required applicants to provide “evidence of good health” in order to receive the coverage. The woman was not informed she needed to provide this evidence by either her employer or the insurance company. She paid all the required premiums for her coverage for more than three years, which the insurance company accepted, until her untimely death of leukemia.

This would appear to be a clear case where the incontestability rule should apply. After all, the woman paid premiums for more than two years. However, the insurance company refused to pay. They argued that incontestability clauses only apply to policies that “go into effect,” and because there was no evidence of good health submitted, the policy “never went into effect,” and thus there was never any coverage that could be subject to the incontestability rule.

We filed a lawsuit on behalf of the woman’s sister, who was the beneficiary under the policy, and succeeded in obtaining a court order rejecting the insurer’s argument. The court correctly found that the incontestability clause applied.

As you can see, insurers do not have their insureds’ best interests at heart, and are always looking for ways to avoid their obligations, even when they appear to be clear under the law. If you are having difficulty with an insurance company, contact us. We may be able to help.

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