A life insurance denial is devastating at a time of grief and loss. This article addresses one of the most common reasons a life insurance company will refuse the death benefit payout – misrepresentation in the life insurance application.

People purchase life insurance as an essential part of financial planning. A life insurance policy is a contract which provides security to dependents and loved ones after the insured’s death.

The death benefit may be intended to provide money to pay for funeral costs, children’s education or to pay the insured’s debts. The insured will have made premium payments provide peace of mind of knowing that their dependents will be able to maintain their standard of living after they die.  

Types of Life Insurance Policies

Group Insurance Coverage

Life insurance can be provided through work as part of a group insurance package which would also include health insurance, dental benefits and long term disability coverage. A group life insurance policy may also include accidental death and dismemberment and critical illness coverage. There is no requirement to fill out at a life insurance application or to have a medical examination and the policy amount will usually be lower than the benefit available with traditional life insurance.

Traditional Life Insurance

Many people choose to purchase life insurance from an insurance advisor or agent in order to purchase more coverage than provided through their group insurance. This type of insurance will require a questionnaire which answers a number of medical questions and discloses relevant health conditions. A medical examination is usually required and an underwriting process will occur before the life insurer will approve the coverage.

Term insurance is affordable life insurance which is temporary as it is purchased for a set period or term. After the term ends, if the policy is not renewed, no amount is payable on death. There is no cash value to the policy. Whole life insurance or permanent life insurance lasts for the lifetime of the insured and has a cash value which grows over the life of the policy.

Mortgage and Loan Life Insurance (Creditor Insurance)

Creditor life insurance is a type of life insurance offered by banks when you negotiate a car loan, mortgage or line of credit. This insurance is different from most life insurance policies because it is usually tied to the amount owed for the mortgage or loan at the time of death rather than a fixed death benefit payout.

Reasons Why Insurance Might Not Pay Out

A life insurer may refuse to pay out a claim for a number of reasons.

Policy Lapses

The insurance company can deny the claim if the policy lapsed because the insured person failed to pay life insurance premiums within the grace period allowed after missing one or more payments.

Term Life Insurance – Failure to Renew

A term life insurance policy will end at the end of the specified term. The owner of the policy needs to renew or convert the policy to another one of the life insurance options available. If the insured failed to take a step at the end of the term, no benefits are payable at death.

Group Life Insurance – Failure to Convert

Many people only have life insurance through work. If an insured person leaves work, they may be entitled to convert some portion of their group life insurance coverage to a private life insurance policy. If they fail to take that step within the required time limit in the policy, the life insurance claim will be denied.

Exclusions – High Risk Activities

Most life insurance policies include policy exclusions such as participating in extreme sports, dangerous hobbies, high risk or illegal activities. If death occurred as a result of one of the listed causes, the insurance company will deny the claim.

Suicide Clause

If the insured died in the first two years that the life insurance policy has been in force (known as the contestability period), the insurance provider will rely on the suicide clause to deny payment.

Misrepresentation

The majority of life insurance claims are denied because the insurance company claims that the insured failed to fully disclose their medical history. The denial letter will claim that the deceased person misrepresented some aspect of their health condition during the application process.

Life Insurance Claim Denied? Here’s What You Need to Know

To make an application for life insurance proceeds, you need to submit required documentation including a copy of the death certificate along with the form providing the policy information. Life insurance companies will request medical records of the deceased person, particularly if death occurred in the first two years of coverage. Insurers examine the insured’s medical history to determine if any of the medical questions or questions regarding lifestyle choices were answered incorrectly in the life insurance application.

The denial letter will provide the reason your claim has been denied including whether any pre-existing health conditions were not disclosed in the life insurance application. Not all undisclosed medical conditions will allow the insurance company to deny claims.

Misrepresentation as a Reason for Life Insurance Claim Denial

When can an insurer deny a life insurance claim due to misrepresentation?

Issue 1 – How long was the policy in place – the contestability period?

The Insurance Act requires a person applying for life insurance to disclose “every fact within the person’s knowledge that is material to the insurance.”

If a life insurance policy has been in place for two years or more before the insured died, the policy is incontestable .

If the insured person died in the first two years of coverage, and innocently or negligently failed to disclose material facts about their health, the insurer is entitled to deny payment of the claim. After the first two years of coverage, the insurer can only deny the claim for material misrepresentation if the insurer can prove fraud.

The first two years of coverage is known as the contestability period.

Key points:

In the first two years, the insurer can refuse to pay if the life insured failed to disclose something innocently/negligently.

If the insured person dies after the policy has been in place for at least two years, the insurer can only deny payment for misrepresentation if it can prove fraud on the application.

The life insurance company cannot deny a claim due to suicide after the policy has been in place for two years.

Issue 2 – What is the misrepresentation/nondisclosure?

Not every misrepresentation or nondisclosure will entitle an insurer to deny a claim. The information must be material to the risk. Material to the risk means that the information which has not been disclosed must be relevant to the risk that is being insured by the company.

Material to the risk:

Material to the risk means that if the insurer had known the undisclosed information, it would not have issued the policy of insurance. If the insurer can show that it would have charged more for the policy or issued the policy with a change in the coverage, it can also deny payment. For instance, an insurer could issue a policy which excluded death from skydiving if the insured person disclosed that they participated in this risky activity.

Standard of the reasonable insurer – underwriting guidelines:

When insurance companies determine whether to issue an insurance policy, they  refer to guidelines regarding insurability which are called underwriting guidelines. Insurers need to follow guidelines which are reasonable as compared with the rest of the industry. The insurer is judged against the standard of what a reasonable insurer would have determined to be relevant to the risk. To avoid paying the policy, the insurer must show that it would not have issued the policy and that its position is reasonable as compared with other insurers.

Key points:

If the insured person failed to disclose something which is irrelevant or immaterial, the insurer cannot refuse to pay. Not every misrepresentation or nondisclosure is relevant to the risk taken on by the insurer.

The insurer cannot rely on its own internal guidelines to deny the policy. The insurer’s guidelines must be within the standard of what other reasonable insurers would have considered material.

Issue 3 – It doesn’t matter whether the nondisclosure was connected to the cause of death.

The life insurance lawyer is often asked “but how did the deceased die?” Many people believe that if the person died of a heart attack, their failure to disclose an outstanding breast biopsy result is irrelevant. However, the nondisclosure and the cause of death have nothing to do with each other.

The key question is whether the insurer would have issued the insurance policy had it known that the insured was waiting for a biopsy result. The medical condition needs to be one which reasonable life insurers would have considered relevant to the risk of offering the policy to the insured.

If the insurer can show it would not have issued the policy until the biopsy result was received, as long as that position was reasonable compared to other insurers, then no benefit is payable. Even if the insurance company can show that it would have charged a higher premium for the policy because of the outstanding biopsy result, the insurer is entitled to deny the claim at the time of the application.

Life insurance providers follow established underwriting practices which are accepted in the insurance industry. If the undisclosed pre existing medical conditions would have caused any reasonable insurer to charge higher premiums for the policy, the life insurance claim will be denied.

Conclusion

If you have been denied life insurance, you will need a lawyer who understands the law as well as the rules which govern insurers. It is a specialized area which requires skill, knowledge and experience. Few lawyers have any experience challenging life insurance denials – when considering hiring a lawyer to challenge your claim denial, ask about their knowledge of life insurance concepts and their experience handling life insurance cases.

We have the experience and knowledge necessary to investigate the reason for the denial and determine whether the insurer’s decision can be challenged. For advice, please text 613-777-0992 or call us to schedule a meeting with one of our lawyers.  We will provide a free consultation, in French or English, to ensure that your rights are protected.   In most cases, we can offer to represent you on a contingency fee basis.  This means that you do not pay legal fees unless you win or achieve a settlement on your case.

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