Incontestability provisions in IDI policies actually provide insureds with a time value “statute of limitations” preventing insurers from cancelling policies due to misrepresentations at the time of underwriting.
Additionally, incontestability provisions give insurers an incentive to examine information provided on applications for coverage very carefully, usually within two years of accepting premium on the new policy. Inaccurate or misleading information provided on initial applications for coverage is always considered to be a “misrepresentation” and not a guarantee of accuracy called a “warranty.”
Without incontestability provisions, an insurer could overlook questionable statements on an application for coverage knowing that, years later, if the insured makes a claim for benefits, it could rely on any misstatements to deny coverage. Many states require “agents” in lieu of insureds to physically complete applications for coverage, and although some agents write the information inaccurately, any “misrepresentations” subsequently found are “owned” by insureds.
In order for insurers to deny coverage it would have to prove that misstatements on the initial application were intentionally provided, thereby proving fraud. Usually, claimants and life insurance beneficiaries argue successfully that any misrepresentations initially made were unintentional oversights or misunderstandings of the question.
For private disability, if an insured files a claim withiin the two-year constestability period, insurers will immediately begin an investigation to determine if any “misrepresentations” in the form of omissions, or misstatements were made, very similar in fact to pre-existing investigations. Misinformation discovered after the two-year contestability period cannot be used to deny benefits, or rescind policies.
For Life insurance policies insurers can rescind the policy, or recalculate premium using the recently found accurate information to rewrite policies. Any underpayment of premium must be paid before the renewed policy can be reissued and go into effect. The most frequent misstatement of fact in Life insurance applications is understating one’s age. For Disability claims, it is omitting prior diagnoses or impairments.
Consider another example, where a disabled IDI insured incorrectly states in the application that he was never diagnosed with chronic back pain. If he subsequently files a back pain claim within the first two years of the effective date of coverage the insurer may be able to deny disability benefits on the basis that the insured’s omission of the prior diagnsosis on the application voided the policy.
However, once the incontestability provision is in effect (after two years) the insurance company cannot use the insured’s omission as a reason to deny benefits, unless they can show that the misrepresentation is covered under an exception to the incontestability provision for fraud.
I remember a case sometime ago when Unum attempted to rescind a policy because it was never disclosed on the insured’s initial application that the insured took Advil for an occasional headache. Of course, this allegation was not taken seriously and the matter was eventually dropped.
All disability impairments should be disclosed on the application for disability insurance so that insurers can exercise various options for coverage. First, insurers can exclude any disclosed previous impairment for coverage by issuing an “exclusion” rider to the policy.
For example, when disclosed, the insurer can choose not to include coverage for “back pain, or an impairment of the back from coverage.” Or, the insurer can use the information along with actuarial data to determine increased premium to cover the risk of a disability due to back pain or injury. Finally, insurers could choose not to issue a policy at all.
Although the incontestability period can last for no more than two years, it may begin anew if the policy lapses and is reinstated. Incontestability , or “Time Limit On Certain Defenses” provisions can be simply avoided by answering all questions on the initial application accurately, or waiting to file any claims for two years.