Fraud and the Contestability Clause

[VolAgent]

Here is Illinois' explanation of life insurance fraud:

Misrepresentations and Concealments in the Application for Insurance: An Analysis of the Insurer's Right to Rescind Coverage - FindLaw

So would non-disclosure of a health problem, allow a company to deny a claim after 2 years under Illinois law, because the company argues it is fraud?

The link you included does not directly address that.

I suspect they could, if they could show it was fraud and not a mere misrepresentation. As both Jack and I have mentioned previously, a smart company would see a declaratory judgement first. The problem with fraud is that you would need to show it was knowingly done, not merely an oversight of some sort.

For instance, having a stent 3 years ago and not disclosing that, did you forget or was it intentional? Hard to say without other evidence.

Not disclosing your cancer diagnosis last week, much more likely to be intentional.

Also, don't forget in a fraud case, the insured is most likely deceased. So they can make no statements that either helps or hurts the case. The insurance company will be left looking for other evidence and making a circumstantial case. While strictly my opinion, I think that would be very dangerous to deny a life policy for fraud without very clear evidence. I have seen the USAA lawsuit posted in several FB groups for agents, and almost without fail agents condemn USAA. I can't see the general public being any better and it will be up to the insurance company and its lawyers to convince a jury the recession is justified and overcome that naturally high bar. At least in a trial, the insurance company will be able to present evidence and the jury shouldn't be relying just upon their preconceived ideas.

 

[adjusterjack]

That's a great article with a comprehensive explanation about misrepresentations and concealments but it doesn't answer your question because it doesn't address the contestability provision of life insurance policies.

It does, however, make a point that I was going to make in response to VolAgent's last post.

An insurer satisfies the basic requirements of the statute if the insurer is able to establish either an intent to deceive or a material misrepresentation. The elements of "intent to deceive" and "material misrepresentation" should be read in the disjunctive, i.e., if a misrepresentation is deemed to be material, it need not have been made with the intent to deceive.

If a policy is voidable during the two year contestability period due to a misrepresentation or concealment then the issue of fraud need not be raised.

Getting to your question.

So would non-disclosure of a health problem, allow a company to deny a claim after 2 years under Illinois law, because the company argues it is fraud?

Let's take a look at the statute:

215 ILCS 5/224) (from Ch. 73, par. 836)
Sec. 224. Standard provisions for life policies.
(1) After the first day of July, 1937, no policy of life insurance other than industrial, group or annuities and pure endowments with or without return of premiums or of premiums and interest, may be issued or delivered in this State, unless such policy contains in substance the following provisions:
(c) A provision that the policy, together with the
application therefor, a copy of which shall be endorsed upon or attached to the policy and made a part thereof, shall constitute the entire contract between the parties and that after it has been in force during the lifetime of the insured a specified time, not later than 2 years from its date, it shall be incontestable except for nonpayment of premiums and except at the option of the company, with respect to provisions relative to benefits in the event of total and permanent disability, and provisions which grant additional insurance specifically against death by accident and except for violations of the conditions of the policy relating to naval or military service in time of war or for violation of an express condition, if any, relating to aviation, (except riding as a fare-paying passenger of a commercial air line flying on regularly scheduled routes between definitely established airports) in which case the liability of the company shall be fixed at a definitely determined amount not less than the full reserve for the policy and any dividend additions; provided that the application therefor need not be attached to or made a part of any policy containing a clause making the policy incontestable from date of issue.

2017 Illinois Compiled Statutes :: Chapter 215 - INSURANCE :: 215 ILCS 5/ - Illinois Insurance Code. :: Article XIV - Legal Reserve Life Insurance

Again, specific exceptions are written into the statute but there is no fraud exception. I have not found any case decisions on the point but I'm seeing a statutory trend that I believe would result in a "no" answer to your question.

I have also learned that, in 1946, the National Association of Insurance Commissioners promulgated a model statute of almost identical wording that has since been adopted as law in some form by almost every state.

 

[VolAgent]

It does, however, make a point that I was going to make in response to VolAgent's last post.



If a policy is voidable during the two year contestability period due to a misrepresentation or concealment then the issue of fraud need not be raised.

I'm not sure your point, as I am in complete agreement with that statement. Misrepresentation is not necessarily fraud. Which is why even if states do allow life policies to be voided for fraud after 2 years, I don't think it is near as bad for consumers as some would like to think.

As the article and cases cited within address, misrepresentation is simply incorrect information. There may or may not have been intent, but it is clear that it is wrong.

For instance, an applicant may answer no to having cancer treatment within the last 3 years. While the applicant's medical records clearly indicate radiation treatment for a specific type of cancer 6 months prior to the application. Regardless of why the applicant answered no, you can conclusively show that treatment was received. You can get the doctor's records, insurance billing, etc. You can also conclusively show that the applicant knew or should have known that treatment was received.

Without asking the applicant you cannot definitively know why the applicant answered no. And even if you ask the applicant, you have to trust that you are given an honest answer. Depending upon the legal standard used, you would need quite a lot of supporting and circumstantial evidence to prove to the applicable standard that the applicant did it with the intent to deceive and for gain.

One thing I will add that I only alluded to. Misrepresentation also requires knowledge. If a doctor has diagnosed me with a condition, but not yet told me, then I can truthfully answer no to having been diagnosed. Which is why most applications will also ask about any planned procedures, tests, or test results that are pending.

 

[adjusterjack]

Misrepresentation also requires knowledge. If a doctor has diagnosed me with a condition, but not yet told me, then I can truthfully answer no to having been diagnosed.

That's correct if there was only one question "Have you been diagnosed?"

But, as we have seen in the USAA case, there were three questions on the app which should have yielded an admission about the sleep apnea.

Let's see how that works in your example. You went to the doctor for a reason (we'll exclude routine checkups). You had a persistent cough for several weeks and it just wouldn't go away. The doctor sent you for an MRI. The results would take a couple of weeks. Meantime you go to renew your car insurance and your agent asks how you are fixed for life insurance. You think maybe I should get some. He writes it.

Question - Have you ever consulted with a health care provider for: asthma, emphysema, pneumonia or other respiratory system disorder?

Well, a persistent cough might or might not be a respiratory system disorder (i.e; strep throat) so maybe it's reasonable to answer "no."

Question - Within the past five years: had an electrocardiogram, X-ray or any other diagnostic test or procedure that was not previously disclosed?

You're gonna have to answer that "yes" because you just had an MRI and there's a section where you explain why. The underwriter is likely to delay issue until the results of the MRI come back.

Question - Have you consulted a health care provider for any reason not previously disclosed? Could be "yes" could be "no" depending what has already been revealed.

Now let's say you've answered "no" to all three questions. You get the policy. The MRI comes back lung cancer. You're dead in six months. Your wife makes the claim, medical records are reviewed and reveal that you went in with a persistent cough, had an MRI and failed to disclose it. The company isn't going to pay. You made a material misrepresentation by concealing that you were seen for a persistent cough and had an MRI.

You didn't know you had lung cancer when you applied for the policy. That lack of knowledge doesn't help you. Had you revealed the cough and the MRI the underwriter would have had the opportunity to wait for the results, learn you had lung cancer and been able to decline to write the policy.

 

[rousemark]

I'm not sure your point, as I am in complete agreement with that statement. Misrepresentation is not necessarily fraud. Which is why even if states do allow life policies to be voided for fraud after 2 years, I don't think it is near as bad for consumers as some would like to think.

As the article and cases cited within address, misrepresentation is simply incorrect information. There may or may not have been intent, but it is clear that it is wrong.

For instance, an applicant may answer no to having cancer treatment within the last 3 years. While the applicant's medical records clearly indicate radiation treatment for a specific type of cancer 6 months prior to the application. Regardless of why the applicant answered no, you can conclusively show that treatment was received. You can get the doctor's records, insurance billing, etc. You can also conclusively show that the applicant knew or should have known that treatment was received.

Without asking the applicant you cannot definitively know why the applicant answered no. And even if you ask the applicant, you have to trust that you are given an honest answer. Depending upon the legal standard used, you would need quite a lot of supporting and circumstantial evidence to prove to the applicable standard that the applicant did it with the intent to deceive and for gain.

One thing I will add that I only alluded to. Misrepresentation also requires knowledge. If a doctor has diagnosed me with a condition, but not yet told me, then I can truthfully answer no to having been diagnosed. Which is why most applications will also ask about any planned procedures, tests, or test results that are pending.

Here is the next paragraph after what Jack posted:

4) Statements Are Representations and Not Warranties in Absence of Fraud; Written Application Made Part of Policy. A provision, except in industrial policies, that all statements made by the insured shall, in the absence of fraud, be deemed representations and not warranties, and that no such statement shall void the policy unless it is contained in a written application, and a copy of the application is endorsed upon or attached to the policy when issued;

 

[VolAgent]

That's correct if there was only one question "Have you been diagnosed?"

But, as we have seen in the USAA case, there were three questions on the app which should have yielded an admission about the sleep apnea.

Let's see how that works in your example. You went to the doctor for a reason (we'll exclude routine checkups). You had a persistent cough for several weeks and it just wouldn't go away. The doctor sent you for an MRI. The results would take a couple of weeks. Meantime you go to renew your car insurance and your agent asks how you are fixed for life insurance. You think maybe I should get some. He writes it.

Question - Have you ever consulted with a health care provider for: asthma, emphysema, pneumonia or other respiratory system disorder?

Well, a persistent cough might or might not be a respiratory system disorder (i.e; strep throat) so maybe it's reasonable to answer "no."

Question - Within the past five years: had an electrocardiogram, X-ray or any other diagnostic test or procedure that was not previously disclosed?

You're gonna have to answer that "yes" because you just had an MRI and there's a section where you explain why. The underwriter is likely to delay issue until the results of the MRI come back.

Question - Have you consulted a health care provider for any reason not previously disclosed? Could be "yes" could be "no" depending what has already been revealed.

Now let's say you've answered "no" to all three questions. You get the policy. The MRI comes back lung cancer. You're dead in six months. Your wife makes the claim, medical records are reviewed and reveal that you went in with a persistent cough, had an MRI and failed to disclose it. The company isn't going to pay. You made a material misrepresentation by concealing that you were seen for a persistent cough and had an MRI.

You didn't know you had lung cancer when you applied for the policy. That lack of knowledge doesn't help you. Had you revealed the cough and the MRI the underwriter would have had the opportunity to wait for the results, learn you had lung cancer and been able to decline to write the policy.

Any reason you failed to quote where I exactly addressed this?

Below is the full quote.

One thing I will add that I only alluded to. Misrepresentation also requires knowledge. If a doctor has diagnosed me with a condition, but not yet told me, then I can truthfully answer no to having been diagnosed. Which is why most applications will also ask about any planned procedures, tests, or test results that are pending.

 

[adjusterjack]

I thought my example amplified the intent of your post for the edification of others.

 

[Allen Trent]

I would like to add that I think the "exception for fraud" is a BAD loophole for companies to escape their obligations to a beneficiary. In the insurance industry we sell a promise on a piece of paper, and we should be strongly opposed to anything that would invalidate the promise. If consumers have doubts about the promise, they won't buy the paper.

So, if a secretary in an agents office pursues a single client romantically, then has him take out $1.5M in life insurance naming a relative of his, then the secretary changes the beneficiary to herself & has the person murdered, you believe that fraud from the purchase shouldn't be allowed to be declined as the purchase from the get go was fraudulent based on testimony in the court case that she planned the entire thing in advance.

It isn't an easy loophole to get out of paying a claim from what I can see. Almost all were purchases on business partners, strangers, identity fraud to sign the applications. I have not seen a case declined for fraud when it was a client, their spouse & kids where they failed to disclose they chewed tobacco at deer camp & then got killed in a car accident.

 

[rousemark]

So, if a secretary in an agents office pursues a single client romantically, then has him take out $1.5M in life insurance naming a relative of his, then the secretary changes the beneficiary to herself & has the person murdered, you believe that fraud from the purchase shouldn't be allowed to be declined as the purchase from the get go was fraudulent based on testimony in the court case that she planned the entire thing in advance.

It isn't an easy loophole to get out of paying a claim from what I can see. Almost all were purchases on business partners, strangers, identity fraud to sign the applications. I have not seen a case declined for fraud when it was a client, their spouse & kids where they failed to disclose they chewed tobacco at deer camp & then got killed in a car accident.

If he took out the policy, answering the questions truthfully, there would be no fraudulent purchase. The company would not have grounds to contest the policy. The secretary would not be able to collect the proceeds because A) the beneficiary change was fraudulent and therefore invalid if he did not sign the change B) In most jurisdictions a person is prevented by law from profiting from the death of someone they had a part in killing..

 

[adjusterjack]

So, if a secretary in an agents office pursues a single client romantically, then has him take out $1.5M in life insurance naming a relative of his, then the secretary changes the beneficiary to herself & has the person murdered, you believe that fraud from the purchase shouldn't be allowed to be declined as the purchase from the get go was fraudulent based on testimony in the court case that she planned the entire thing in advance.

Are you not aware that a beneficiary cannot collect on a life insurance policy if the beneficiary is proven to be instrumental in the death of the insured? That has nothing to do with contestability or any fraud exception that might exist.

I have not seen a case declined for fraud when it was a client, their spouse & kids where they failed to disclose they chewed tobacco at deer camp & then got killed in a car accident.

That you haven't seen it doesn't mean it hasn't happened. The typical question on a life insurance application is:

“have you used tobacco or nicotine in the last 12 (or 24, 36, 48, or 60) months?”

That requires an unequivocal yes or no answer. If you have chewed tobacco at deer camp even once within that period you answer yes. If you lie and die within the two year contestability period (yes, even from an auto accident) and the misrepresentation comes to light, the policy can be rescinded and the claim denied.