Incontestable Clause

Most life insurance companies have an "Incontestable Clause". It states that the insurance company will not contest any claim after two years, except in the case of fraud. Some insurance professionals claim that they can contest a claim if there is material non-disclosure, on the grounds of fraud.

I hold a different view - that the insurance company has to prove that there is fraudulent intent, in order to reject a claim after two years. I find that insurance professionals are too ready to reject a claim, even on weak grounds.

My position appears to be supported by this chapter from a textbook on "Principles of Risk Management and Insurance" by George Rejda.

The incontestable clause states that the insurer cannot contest the policy after it has been inforce two years during the insured's lifetime. After the policy has been in force for two years, the insurer cannot later contest a death claim on the basis of a material misrepresentation, concealment, or fraud when the policy was first issued. The insurer has two years in which to discover any irregularities in the contrct. With few exceptions, if the insured dies, the death claim must be paid after the contestable period expires.

The purpose of the incontestable clause is to protect the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued. Because the insured is dead, he or she cannot refute the insurer's allegations. As a result, the beneficiary could be financially harmed if the claim is denied on the grounds of a material misrepresentation or concealment.

The incontestable clause is normally effective against fraud. If the insured makes a fraudlent misstatement to obtain the insurance, the compnay has two years to detect the fraud. Otherwise, the death claim has to be paid.

However, there are certain situations where the fraud is so outrageous that payment of the death claim would be against public interest. In these cases the insurer can contest the claim after the contestable period runs out. They include the following:

> The beneficiary takes out a policy with the intent of murdering the insured.
> The applicant for insurance has someone else take a medical examination.
> An insurable interest does not exist at the inception of the policy.