Life settlements and life insurance ‘incontestability’ clauses

Posted
by Eric Pearson

If you have invested in a life settlement, you probably understand the importance of the “incontestability clause” of a life insurance policy. Incontestability clauses were originally designed to apply when an applicant fails to mention something that would have been relevant to how or whether a life insurance policy would have been approved and issued.

Generally speaking, such a clause can be used by the insurance company to challenge the payout of a policy if the applicant dies within two or three years of the issuance. For example, if a smoker dies the contestability period and it turns out the deceased had misrepresented his smoker status to the insurance company, the insurer may be able to void the policy and not pay the death benefit. If you had acquired a life settlement interest in that smoker’s voided policy, you would not receive any payment for the death benefit because of the smoker’s misrepresentation, even though you were unaware of it.

The rise of life settlements and investor-initiated life insurance policies has given rise to new questions about when and whether an insurer can challenge a policy. Life settlement investors can find out too late that the death policy will not be paid because of fraud or other problems with the underlying policy.

State laws have long permitted some exceptions to the incontestability clause. For example, many states provide that if the insured’s age or gender was misstated when applying for life insurance, the insurance company may adjust the death benefits to reflect the policyholder’s true age. Some states allow insurance companies to include a provision stating that the contestability period must be completed within the lifetime of the insured. Thus, the life insurance company does not have to pay benefits if the policyholder dies within the stated (such as two years) contestability period.

Some states will allow the insurance company to void the policy if deliberate fraud can be proven. These states recognize fraud as an exception to the incontestability clause. Similarly, courts have recognized that egregious facts will allow an insurer to challenge a policy after expiration of the incontestability period even when state law does not broadly recognize misrepresentation as an exception to such clauses.

For example, in Settlement Funding, LLC v. AXA Equitable Life Ins. Co., No. 09 CV 8685 (S.D.N.Y. Sept. 29, 2010), the court held it was for a jury to decide whether the incontestability clause should prevent the insurer from challenging the policy because “a substantial factual record points to the existence of an improperly procured policy.” The court noted that other courts have held in limited instances that if the facts surrounding the creation and issuance of an insurance policy fail to demonstrate that a proper contract was entered into, then the incontestability clause will not preclude a challenge by the insurer. See American Mayflower Life Ins. Co. of New York v. Moskowitz, 17 A.D.3d 289, 794 N.Y.S.2d 32 (1st Dept.2005) (holding that if there is a forged signature to transfer ownership of a life insurance policy to a stranger, “the incontestability clause could not apply, since the provisions for incontestability inure to the benefit of the insured and his beneficiary, or to the benefit of a bona fide assignee, but not a stranger”); Fioretti v. Massachusetts General Life Ins. Co., 53 F.3d 1228 (11th Cir.1995) (Under New Jersey law, insurer was entitled to rescind life insurance contract, even after expiration of incontestability period, where applicant knowingly misrepresented his or her HIV-positive status as well as other health related information in both final policy application and “Statement of Good Health”); Protective Life Ins. v. Sullivan, 892 F.Supp. 299 (D.Mass.1995) (under Massachusetts law, there is implicit exception to statutorily required incontestability clause for actual, willful fraud); Paul Revere Life Ins. Co. v. Haas, 137 N.J. 190, 644 A.2d 1098 (1994) (statutorily required incontestability clause should not be interpreted to override the effect of fraudulent misrepresentations made by insureds in their policy applications, rather it was intended to protect those insureds who were unaware of their disease at the time of application); Sciranko v. Fidelity & Guar. Life Ins. Co., 503 F.Supp.2d 1293 (D.Ariz.2007) (Under Arizona law, as predicted by the district court, insurer may deny claim after two year incontestability period on basis of fraudulent misstatement in application, even if misstatement concerns insured’s preexisting conditions and policy language does not affirmatively preserve insurer’s right to deny claims on basis of fraud).

In short, life settlement investors need to be aware of the risk that in some circumstances an insurance company can challenge a life insurance policy even after the incontestability period has expired. More importantly, investors need to be wary of brokers who may have acquired the policy by dubious means.

Life Settlement Lawsuits

Heygood, Orr & Pearson has filed several lawsuits against Life Partners, Inc., a Waco-based subsidiary of Life Partners Holdings, Inc., in connection with the life settlement investments sold by the company. We have filed numerous cases on behalf of individual investors who allege they were overcharged for their life settlement investments based on inaccurate life expectancies prepared for Life Partners. These lawsuits allege that in many instances, Life Partners had life expectancy estimates from legitimate companies in the business of providing life expectancy estimates, but they withheld this information from their own customers.

Heygood Orr & Pearson has also filed lawsuits alleging that Life Partners charged its investors excessive amounts to cover premium payments on their life settlements. Traditionally, life settlement companies pay to the life insurance company only the minimum amount necessary to keep the subject policy from lapsing – called the “cost of insurance.” We have filed claims on behalf of investors alleging that Life Partners has been charging investors the full scheduled premium rather than just the cost of insurance. These lawsuits seek to recover from Life Partners the amount of these excessive charges for premiums on behalf of investors who have been required to pay excessive premiums.

Our firm has also filed claims on behalf of life settlement companies in situations where a life insurance company refused to pay the death benefits on a policy because it claimed that there was no insurable interest on the policy or that it was a STOLI policy.  These lawsuits have been filed on behalf of clients located nationwide.

If you or a loved one purchased a Life Settlement policy from Life Partners, or if you are a life settlement provider who has had a claim for death benefits wrongfully denied by an insurance company, you may be eligible to file a lawsuit or join an existing class action lawsuit. For a free consultation with an attorney to determine your eligibility, contact the lawyers at Heygood, Orr & Pearson by calling our toll-free hotline at 1-877-446-9001. You can also reach us by filling out the free case evaluation form located on this page, and one of our representatives will be in touch with you as soon as possible.