Trouble with contestable claims

Each company has its own requirements for handling contestable claims. A member company of the Canadian Life and Health Insurance Association must also abide by the association’s code of ethics, which includes the obligation “to pay all valid claims fairly and promptly without unreasonable requirements.” Many companies are also members of the International Claim Association, which requires every company to adhere to its principles.

Before insurers can review a claim, the beneficiary must complete and submit a claimant’s statement. They also require an attending physician’s statement (APS) and a copy of the death certificate, or, in lieu of a death certificate, a copy of the funeral director’s statement of death.

The claim-review process only begins once the insurer receives the claimant’s statement, as this usually includes a general authorization allowing the insurer to obtain medical records and Medical Information Bureau information. The MIB offers protection services for insurers, policyholders and applicants against attempts to conceal or omit information from the underwriting of life, health, disability income, critical illness and long-term care insurance. The insurer will also want to see the APS and/or death certificate.

While some companies automatically conduct a contestable claim investigation, others do so only where it appears the insured’s health condition predates the policy issue, policy delivery or policy application dates. Regardless of how a company handles contestable-claim investigations, the purpose of the investigation is first to verify the life insured has in fact died. Second, the insurer must confirm the validity of the claim and that no material misrepresentation occurred either during the initial underwriting of the policy or during any reinstatement.

The obligation of the insurer is to pay valid claims as quickly as possible and deny claims that don’t fall within the coverage issued. My experience is over 95% of death claims are paid.

Why so many questions?

The purpose of the information being requested by the insurer is to put together as complete a picture as possible of the most recent medical history of the life insured and to assist the insurer in determining which, if any, physician it should consult in obtaining health records. The insurer also wants to avoid the delays inherent in having to return to the beneficiary for any follow-up questions. An insurer may also request an agent’s statement either at the time of the claim or shortly thereafter.

An insurer will conduct a contestable claim investigation if there’s an indication the insured may have been aware of the condition of death during the application process. This can be the case in instances of diseases like cancer. It is incumbent upon the claims professional to determine the true timing of the illness.

Claim decision delays

While a life insured’s attending physician may have completed the APS and provided medical records in a subsequent request from the insurer, sometimes they are not sufficient to confirm the timing of the diagnosis and first treatment.

An insurer may need medical records from other physicians and specialists, but these additional records are not easily obtained. Some have their own authorization forms and providing medical records to insurers is not a priority. This is why some insurers contract third parties, such as investigation firms, to obtain medical records as quickly as possible and to follow up on those records as necessary.

Occasionally an insurer will find they have received either incomplete medical records or the medical records obtained during the claim investigation reveal a new source – an additional physician, specialist, or hospital that provided treatment. The insurer may need to obtain the relevant records to form a complete view. The facts that have a bearing on the life-insurance risk the insurer is asked to take are usually known in full detail only to the party seeking to be insured. Life insurance contracts are examples of contracts uberimae fidei (of the utmost good faith), imposing a duty upon the party seeking insurance to make true and full representations of all facts material to the insurance risk. Similar duties of disclosure apply in making representations for reinstatement of a policy.

The law extends the duty of making full representations to both the applicant and the person whose life is to be insured, regardless of whether that individual is a party to the contract. Both are responsible for disclosing every material fact that is not disclosed by the other, and are bound by representations made by the life to be insured. This applies in common law provinces that fall under the Uniform Act as well as Quebec.

Known knowns

The duty of disclosure that falls on the insured, and the life to be insured, concerns only known or provable facts. Matters that are subjective or based on opinion do not need to be disclosed.

The insured and the life to be insured are not required to diagnose their own symptoms or assess their own insurability. They must, however, reveal everything they know – be it a symptom or medical test – and answer the application questions fully and truthfully. Moreover, they must do so regardless of the life insured’s belief as to their significance.

The insurer relies on the answers provided by the proposed insured. If the insurer’s underwriting requirements did not include a requirement for medical records, the insurer will not, and is not required to, seek to obtain them during underwriting. They may do so if the proposed life insured has disclosed a health condition.

One of the keys to confirming whether a material misrepresentation has occurred is to review the specific policy application questions and the proposed insured’s responses. That’s the first place the claims professional will start: comparing the answers given by the proposed insured in the application questions to the information contained in the APS, as well as any other medical records obtained.

Materiality

Whether a fact is material or not must be considered from the point of view of the insurer. It is not open to the insured or life to be insured to make the decision as to which facts are important or unimportant, or which to confirm or omit, even if they feel they’re being honest and genuine.

Under Canadian law, the test of materiality from the viewpoint of the insurer is whether the insurer would have actually declined the risk or charged a higher premium, and not if the insurer might have.

For an insurer to rescind or void the insurance contract based on misrepresentation, the misrepresentation has to be material. Traditionally, misrepresentation of certain facts, such as the age of the life to be insured, has never been regarded as justification for nullifying the life insurance contract; adjustments to the face amount are the usual remedy.

Misrepresentation is considered material, but the insurer may still issue a contract at a higher premium or with some other restriction if it thinks the risk is substandard (for example, a smoker who indicates he is a non-smoker). The test of materiality must be objective: an insurer has to show that its underwriting rules have reasonable conformity with ordinary standards for measuring insurable risks.

Materiality is tested against a reasonable insurer standard, and insurers will frequently cite one of their reinsurer’s underwriting manuals in support of their decision. Ultimately, the courts determine whether the insurer’s underwriting rules are reasonable. Thus, the onus is on the insurer to demonstrate material misrepresentation if they’re to be successful in declining a claim and voiding the policy for this reason.

Fraudulent misrepresentation

The distinction between misrepresentation and fraudulent misrepresentation is important. In the absence of fraud, the insurer cannot void the contract after it has been in force for two years. There is no time limit in the case of fraudulent misrepresentation.

A high threshold has to be met for the insurer to prove fraud. The deception must be intentional, or the statement be made deliberately without belief in its truth. Also, the insurer would have relied upon the deception to its detriment.

Typically it’s the insurer that develops the application for insurance and the questions contained therein. Any ambiguities will be construed against the insurer.

An insurer should avoid asking speculative questions such as, “Are you presently in good health?” Insurers are getting better at avoiding such questions, or questions that group together dissimilar symptoms. Every insurability question must be answered completely. Partial disclosure does not excuse the insured or life insured. If the agent mis-records answers given by the insured and life insured, recent decisions have held the agent and insurer responsible.

Insurers do not deny a claim lightly. It is a deliberate decision that has to take all facts into account. If there is doubt, the claim should be paid; when there is no doubt, the insurer should be prepared to present and defend its decision in court that day.

ELI WAHBY is a claims expert currently consulting at LOGiQ3. He has been in claims for 20+ years doing life, waiver, critical illness and ADB claims.

Eli Wahby