The laws of many states provide that life insurance policies cannot be cancelled after they have been in effect for two years, except in the case of non-payment of premiums. Additionally, a contestability period clause is frequently contained in the fine print of life insurance policies. Both New York and New Jersey have enacted incontestability laws. (See N.Y. Ins. Law § 3203(a)(3) and N.J. Stat. § 17B:25-4).
In the Nineteenth century, life insurance applications requested voluminous disclosures about myriad conditions to set up a material misrepresentation argument. The nature of the questions—along with sharp insurance sales practices—led to misunderstanding and misrepresentation. If any answers were later found to be incomplete or incorrect, the company would void the policy, sometimes many years after it was issued. Government investigations of unfair and abusive denials of coverage led to the enactment of incontestability legislation for life insurance policies.
Insurance companies argue that they are disadvantaged by incontestability laws. But this argument does not withstand scrutiny. The contestability period is similar to a statute of limitations that pertains to other causes of action—the purpose of both is to prevent stale claims. For instance, in New York a medical malpractice action, in most circumstances, must be commenced within two-and-a-half years after the wrongful act.
In all material misrepresentation cases involving life insurance, the insured is not available to testify, automatically putting beneficiaries at a disadvantage in litigation. If life insurance companies could deny coverage at any time after the policy was issued, it would be extremely difficult for beneficiaries to defend an application process that occurred years or decades earlier of which they may have had no first-hand knowledge. And in these cases the stakes are often high—the financial well-being of surviving family members.
Another argument why contestability periods are not unfair, and are similar to a statute of limitations, is that most all misrepresentations are knowable to the insurer at or before when the policy is issued. With minimal effort, the insurer could request medical and financial records, and conduct an examination of the insured, prior to issuing coverage.
From a public policy perspective, incontestability legislation laudably encourages insurers to investigate applications prior to the issuance of coverage. Yet many life insurance companies fail to do this in a comprehensive manner.
Please contact New Jersey and New York life insurance attorney Eric Dinnocenzo at (212) 933-1675 for a free consultation to discuss if you have a claim.