Why Do Life Insurance Policy Benefits Get Denied?

Life insurance coverage offers a financial safety net and provides peace of mind. Whole or term life insurance helps cover final expenses and eases the burden on the surviving spouse or children. So when a life insurance claim is unexpectedly denied, it only adds to the distress of losing your loved one.

Make sure you understand your insurance policy to protect your family. Insurance protections can vary by state law. Get legal advice from a local insurance coverage lawyer to make sure you provide for your family if you should pass away.

Omissions and Misrepresentations in Life Insurance Policies

“The life insurance application process is fairly rigorous,” says Joshua L. Mallin, an attorney at Weg & Myers in Rye Brook, New York, who specializes in insurance coverage litigation. “An innocent misrepresentation — if it’s what the courts call ‘material’ or important — is something that will void the policy.”

“On policy applications, there are two general statements that people sign their name to,” adds Jason Turchin, an attorney in Weston, Florida:

1. I hereby attest that everything in this application is true and correct
2. I hereby attest that everything in this application is true and correct to the best of my knowledge and belief

“The second standard is more lenient, because it’s effectively asking what the insured themselves believe to be the truth,” explains Turchin. “For example, if a person doesn’t know medical lingo when the application asks if they’ve ever had a medical condition, and in their mind the answer is ‘no’ because they’ve never heard it — even if the doctor wrote that lingo in the records — the claim is still payable. It’s a different standard than if the statement were: ‘I hereby attest that I don’t have any of these.'”

Turchin notes that insurers will try to prove that a doctor wrote that a patient had a specific ailment. However, they must depose the doctor to prove whether they explicitly and specifically used that language with the patient during the medical examination.

“These cases aren’t always as clear as the insurance company wants them to seem. When people are paying premiums for a long time, expecting coverage, the incentive for the insurance company is to figure out any reason not to pay.”

Common Causes of Life Insurance Denial

There are many reasons why a life insurance company could deny a life insurance claim or fail to make the full payout to the beneficiaries. Common reasons insurance companies deny a life insurance claim include:

• Material misrepresentations about a terminal illness
• Policy lapse or failure to make premium payments
• Policy exclusion for high-risk causes of death (like skydiving or scuba diving)
• Died during the contestability period (for example, within the first two years)
• Suicide clause
• Failure to submit the death certificate

“If it’s an obvious misrepresentation, like you had open-heart surgery and didn’t disclose it, there’s no lawyer in the world that’s going to be able to fix it,” says Ted E. Trief of Trief & Olk in New York City, who handles life insurance claim disputes. If a question is open to different interpretations because it wasn’t clearly stated, there may be more leeway.

How Misrepresentations Impact Life Insurance Payouts

Ultimately, the potential for recovery on a life insurance policy hinges on this: Would the insurance company have issued the policy in the first place, or at the same policy premium, had it known about the misrepresentation? If not, successful litigation is unlikely.

But if the circumstances are “debatable at all,” Trief says, there may be avenues to overturn the life insurance claim denial. For example, when an insurer sought to void a $3 million life insurance claim due to nondisclosure of smoking and drug use, “There was no doubt that the decedent had used drugs at the time of his death,” says Trief.

“However, the life insurance company had to show it occurred at the time of the application or shortly before, and that it was a material misrepresentation.” The insurance company could not establish this fact, so the claim was eventually paid after trial.

Cancellation of Life Insurance After Failure To Pay

Failure to pay just one premium, even after years or decades of on-time payments, can result in policy cancellation.

“When people get sick, they don’t focus on their life insurance policy. They focus on their survival,” says Trief. They may miss mailing a payment or not realize their bank account lacks the funds to cover premiums that are automatically withdrawn.

Anti-Lapse Provisions in State Life Insurance Laws

Many states have anti-lapse provisions that require insurers to send a notice of premium due to the correct address. Trief has been able to reinstate policies by showing the notice went to the wrong location, had improper wording, or was not sent in a timely manner.

Applicants should be transparent in their responses, answer questions carefully, and work with a reputable insurance agent. Trief says agents eager to make a sale may encourage the policyholder to leave out pertinent facts.

“Consumers think they’re getting the insurance company’s advice because the agent is paid by the company,” says Trief. “However, you’re responsible for what you sign, even if the agent makes the suggestion.”

Always question inconsistencies and get everything in writing, says Mallin. When an elderly client wanted to replace a term-life policy with a policy with whole-life conversion rights. The provider issued the new multimillion-dollar policy on the condition that the conversion occur before the term ran out or by the age of 70, whichever happened sooner.

Already past the age cutoff, the policyholder received verbal and written assurances from the broker and the company’s vice president. Later, when the company denied the conversion based on age, Mallin used the documentation to bring a successful suit against the insurance provider.

Once a firm has taken the case, the lawyer will request a copy of the life insurance policy from both the beneficiary and the insurance company. Then, a demand letter for the policy benefits will be sent, and the company can either pay the benefits or explain why they are denying coverage.

Often, if the company denies coverage, Turchin will respond by filing a declaratory judgment action against them. This involves asking a judge to declare that the coverage applies.

Find Legal Help for Your Life Insurance Policy

Most life insurance attorneys work on a contingency fee, meaning the client doesn’t ever have to pay out of pocket.

“It’s my sense that if this was a $100,000 policy, they would have just paid,” says Mallin. “The bigger the policy, the more the insurance company is going to be a stickler and not write a check so quickly.”

“If people ever have a question on a claim that was denied, let a life insurance attorney review it,” says Turchin. “Oftentimes, there are a lot of mistakes that the life insurance companies make.”