Life Insurance Claims & Denials

Life insurance is often purchased to protect loved ones against financial hardship following death of the policyholder. The vast majority of life insurance claims are approved and paid without issue.  But sometimes insurance companies refuse to pay.  As an insurance lawyer with more than 18 years experience litigating denied claims, I am often retained to take legal action against insurers.  This blog post will provide you with a brief overview of life insurance, and your rights in the event of claim denial.

About Life Insurance

Life insurance is a special type of contract between an individual, the policyholder, and an insurance company.  The individual pays premiums, with the expectation the insurer will pay a specified benefit to the beneficiaries upon death.  

Obtaining life insurance is an important component of sound financial planning. The payment can be used to cover expenses such as funeral costs, to provide financial support for family members, or for tax planning purposes.

There are two main types of life insurance: term life insurance and whole life insurance.   Term life insurance provides coverage for a set period of time, often 10 years, whereas whole life insurance provides coverage for the individual’s entire life, so long as premiums are paid.  Life insurance can be purchased by an individual, or obtained through a group benefits plan provided by an employer or association.

Making A Life Insurance Claim

If the policy of insurance was purchased through an agent or broker, they are usually the first point of contact, and will provide you with the necessary forms and help with submitting the claim.  You may also contact the insurance company directly.  

When a claim is submitted, the insurer will assign an adjudicator to review the documents and conduct an investigation before making payment.  The adjudicator will verify coverage under the policy and require proof of death. 

If death occurs within two years of the policy coming into effect, and in certain other circumstances, there will likely be a more thorough investigation, since these claims fall within the “contestability period”.  This means the insurer has the right to ensure the initial application was completed correctly, with no material misrepresentations.  If the claim is approved after the insurer’s investigation, the death benefit is paid.

Some claims, however, are denied.  How many exactly is hard to know.  In the United States, where more data is publicly available, approximately 3% of all life insurance claims are denied.  The most common reasons for claim denial are:

• Material misrepresentation within two years
• Fraudulent misrepresentation
• Suicide within two years
• Lapse in coverage  
• For accidental death coverage, a dispute regarding whether the cause of death was accidental

Material Misrepresentation

An insurance company may deny the claim if the initial application for insurance contains inaccurate information that is material.  Typically, this would be failing to disclose a pre-existing medical condition.  Not all misrepresentations material.  Once it has been established that a misrepresentation occurred, the insurer must demonstrate that if the application had been completed accurately, it would not have issued the policy, or it would have charged a higher premium.

A mistake on an application for insurance, however, is always a valid reason to refuse payment.  The contestability period for non-fraudulent misrepresentation on a life insurance application in Ontario is limited to two years by sections 183 and 184 of the Insurance Act, which states “… a failure to disclose, or a misrepresentation of, such a fact renders the contract voidable by the insurer… ” but has been in place “… for two years during the lifetime of the person whose life is insured, a failure to disclose or a misrepresentation of a fact required to be disclosed by section 183 does not, in the absence of fraud, render the contract voidable.”

These sections read together means an insurance company can only deny a claim for material misrepresentation within the first two years of coverage or in the event of fraud.  So if there was a misrepresentation at the time of application that was not fraudulent, and more than two years have passed, then the insurer cannot rely on that misrepresentation to deny the claim. 

Fraudulent Misrepresentation

Some misrepresentations go beyond mere mistakes.  If the insurer can prove that the application for insurance was completed fraudulently, it can deny the claim more than two years after placing the policy.

Whether a misrepresentation was material and whether it was fraudulent requires careful legal analysis.  In the case of life insurance, the person who completed the application is now deceased, which can add another layer of complexity.  In these situations, you should seek legal advice from a life insurance lawyer.

Death By Suicide

A general requirement of insurance is that the loss be fortuitous, not intentional.  Otherwise, people could commit intentional acts to recover proceeds of insurance.  In many cases suicide is an intentional act, so was traditionally was excluded from life insurance coverage.  However, as a society we recognize it would be unfair to deny all life insurance claims because the death was intentional while also recognizing it is unfair to the insurer if people who are contemplating taking their life obtain life insurance immediately beforehand.  This moral dilemma is addressed by the policy wording and the Insurance Act.  In Canada, most policies provide coverage so long as death by suicide occurs more than two years after the policy is purchased or lapsed and renewed.

Lapse In Coverage

Life insurers can effectively end coverage if the premiums are not paid.  However, there are strict requirements on the part of the insurer in order to properly void a policy for non-payment.  And even if the insurance company does properly end coverage before death occurs, there may have been negligence as against the agent or broker who initially sold the policy.   The standard of care of a broker or agent goes beyond the scope of this blog post, but generally courts have held that they must act “with reasonable  dispatch,  care, diligence  and thoroughness.”  Agents and brokers sometimes fall below this standard, in which case they could be liable for the value of the policy had it remained in place but for their negligence. Again, this is an area where an opinion from a life insurance lawyer is necessary.

Accidental Death Life Insurance

Some policies of insurance only pay out if the death was accidental, and some policies pay an increased benefit in the event of accidental death.  What is accident?  That is a question lawyers and judges have grappled with for many decades.  Certainly, life insurers do not always get this right, and may adopt a definition of accident that is inconsistent with the extensive case law.  A life insurance lawyer can provide you with an opinion on this issue.

Life Insurance Litigation

What should you do if life insurance is denied? Retaining a life insurance lawyer to take legal action is the most effective way of recovering money that should have been paid under the policy. Commencing a lawsuit does not mean you are going to trial. In fact, approximately 98% of insurance claims settle before court.   The process is generally as follows:

• Contact Michael Jordan for a free consultation.
• Michael will review the denial letter, provide his preliminary thoughts, and decide whether there are grounds to investigate further, all at no cost to you.
• Michael will then obtain and analyze the insurance company’s complete file, and in some cases consult with an expert to formulate an opinion.
• You will receive a legal opinion approximately 30 days after Michael receives the file from the insurer.
• If the legal opinion is to proceed with a lawsuit, you will be offered a contingency fee retainer agreement, which means there are no fees or other expense payable unless and until there is a settlement or judgment in your favour.  If you would prefer to pay an hourly rate, that is an option as well.
• Next, a statement of claim is issued with the court and served on the insurer and sometimes other defendants.
• The insurance company has approximately 30 days to assign a lawyer to defend the claim.
• The defence lawyer decides whether the next step is an examination for discovery (a question and answer process) or mediation followed by examinations for discovery.
• Mediation is a settlement meeting. About 90% of cases settle at mediation.
• If the case does not settle at mediation, there are additional steps before trial, but the claim can still settle, and probably will settle, before trial.

Life Insurance Lawyer

If you decide to dispute a life insurance claim by way of litigation, the lawyer you choose can have a very significant impact on the outcome. Consider the following before retaining a lawyer: 

• Does the lawyer focus primarily on insurance claims?  Many personal injury lawyers have expertise with injuries arising from car accidents and slip and falls, but might lack the skillset required to litigate a life insurance claim, which is a highly specialized area of the law.
• Will the lawyer you initially speak with handle your claim, or will he or she pass you off to someone else? This is quite common in large firms with large advertising budgets.
• Can the lawyer direct you to positive reviews written by past clients?
• Does the lawyer have a sound litigation strategy?
• Does the lawyer offer a competitive contingency fee retainer agreement?  Who is ultimately responsible for payment of disbursements, regardless of the outcome?

Conclusion

Life insurance should be there when you need it.  But if the insurance company denies your claim, then your next step should be to contact an insurance lawyer experienced with life insurance claims litigation.  This is a highly specialized area of the law that requires expertise to successfully navigate.  For more information, contact Michael Jordan for a free consultation.  All calls and form submissions are confidential and go directly to Michael.