Tuesday, August 02, 2016

Costly Carrier Tricks

We've written before about the 'contestability clause ' in life insurance contracts. Briefly, these allow the insurer a (brief) window of time to "review a recently approved policy to see if there were any misstatements or misrepresentations, or if relevant information was omitted." Recently, the Principal National Life Insurance Company (PNL) was "caught out" on the invocation of this clause:

"A Connecticut federal judge has ruled that it was wrong for an insurer to refuse to pay out a $10 million life insurance policy on a Hartford lawyer who died of brain cancer."

Contestability clauses generally run for the first two years of a policy (carriers may choose a shorter run); in this case, the poor fellow expired only 15 months in, from a rare but aggressive cancer. When the beneficiary (in this case, a trust) submitted the claim, the carrier chose (as is its right) to invoke the clause. This offered them the opportunity to make sure that all the i's were properly dotted, and the t's properly crossed.

What they found, though, was a bit of an issue:

"Principal learned that Coassin had seen an ear, nose and throat specialist who treated his dizziness symptoms at a visit only nine days before they issued Coassin the life insurance policy. Principal did not know about this visit when they [it]."

So they denied the claim, and the legal fireworks took off.

Here's the rub: as FoIB (and carrier rep) Brian D points out, "even for The Principal a $10 million policy takes more than 9 days to underwrite. Therefore the appointment was probably conducted while the policy was in underwriting. There was no diagnosis that was troubling. What did he lie about on the app?"

Indeed. The decision really rested on the fact that none of the doc's Mr Coassin had seen had any inkling about the cancer [ed: as an aside, one wonders when the malpractice suits will be filed]. Since the doc's didn't know, they couldn't inform Mr C, and thus he didn't materially misrepresent (aka "lie") about his health, and so the judge ordered PNL to pony up.

Lagniappe: There's also a little-discussed practice called "statement of good health" that is often required when delivering a policy that's been in underwriting a long time. Basically, it's a form the insured signs upon delivery of the policy stating that there's been no change in health, nor any doctor's visits, during that time. The article doesn't speak to this, so one presumes it wasn't utilized here, but one wonders if things might have turned out differently for PNL if they had required one to be signed and returned.
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