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Subscribers Feedback - Claim Denials
In the July 2013 Update News and the August 2013 Update News Compulife discussed problems that are occurring with life insurance claims being denied by life insurance companies. We asked subscribers to email their stories related to that issue. We promised to provide the feedback to subscribers and keep individual identities anonymous:
Subscriber 2 (U.S.)- Bob,
In the July bulletin, you asked “have you had problems with claim denials for fraud after the two year contestability period”?
No. I’ve been in the business 45 years. I’ve had over 50 life claims on policies that I personally sold and have assisted in filing claims on many other policies as a service to clients and/or advisors. I have never had a company perform an investigation of any death claim on any policy that had been in force more than 2 years.
I had a client who had three large term policies (each with a face amount in the millions) issued by the same company. Two of the policies were more than two years old. The insured died from a gunshot wound. The insurance company paid the claims on the two policies as prompt as it possibly could (payment was held up due to lack of a death certificate).
The third policy was issued in late Feb, 2000 but the policy date was backdated to Dec, 1999 to save pre-XXX premiums. The insured died in mid-Feb, 2000. The policy date was more than two years old but the policy was about two weeks shy of being in-force for 2 years. Hence, the policy was in the contestable period and the company investigated the claim.
The coroner did not issue a death certificate for many months as he conducted his investigation into the cause of death. The insurance company actually paid the claims on the two policies that were more than two years old prior to receiving the death certificate; it paid when it was determined that no beneficiary was involved in the insured’s death.
As the investigation progressed on the 3rd policy, facts emerged that the insured had not been truthful with material information prior to the issuance of the first 2 policies. Even though the company learned of this information prior to paying the claim on the first two policies, it did not use it to try to avoid paying the claims.
After several years, the insurance company settled with the beneficiaries for a very substantial portion of the face amount on the 3rd policy. I assume part of the reasoning was the recognition of how hard it would be to get a jury in SC to find for the huge insurance company. I also think this reasoning would make it hard to deny a claim for fraud except in the most egregious of cases.
I appreciate your confidentiality on these facts as the insured had a very high profile in my community.
I had a second case in which the insured died within the contestable period from stomach cancer. He had answered no to all the questions on the para-med exam. The company investigated the claim and found that the insured had seen his physician about 4 months prior to the date of the app for stomach pains. The physician stated that the insured had indeed seen him but he had told the insured that he had stomach ulcers. He further stated that the date when he diagnosed the insured’s stomach cancer was several months after the policy date. The insurance company paid this claim because it said that even had the insured revealed that he had ulcers, the company would still have issued the policy in the standard risk class so the lack of disclosure was not a material fact. [compare this with the original example from Canada, which is described in the July and August bulletins]
In summary, I have found insurance companies to be very fair in paying death claims. I have never seen a company investigate a policy that was past the contestable period but they have investigated in 100% of the policies that were within the suicide or contestable periods. The only policy on which 100% of the proceeds has not been paid is the policy discussed in the first situation described above.
Hope these comments help in your info gathering.
Subscriber 3 (Canada) - Hi Bob, I read your Life Insurance Claim Denials For Fraud article with interest. You wrote “the client had complained of stomach pains 4 months before applying for life insurance. He went to his doctor who could not detect anything and told him to wait and see if the pain persisted. It didn't.”
I have a question. Did the Applicant disclose this on the application? If the Underwriter knew that the applicant “Went to my doctor for stomach pains, tests were done, no problems found, no reoccurances, Doctor said no follow-up unless pain reoccurred - which it hasn’t.” (for example), then my understanding would be the Underwriter knew about the history, and was comfortable with it enough to approve.
So the denial due to ‘fraud’ wouldn’t/shouldn’t apply here as the Underwriter knew as much as the Applicant did on the day the policy was delivered. I’m not a lawyer, but I would find it hard to believe this could stand up in court. My 2 cents.
First, I don't know what was disclosed about the stomach pains on the Part II. I think your point was that had the insured hidden the information about the visit to the doctor, then that would be a problem. Knowing the agent in this case, I sincerely doubt that happened. I also think he would have mentioned it to me in our discussion.
Second, the doctor has taken the insured's position and is saying the failure to identify the problem was his fault, and that his deceased client did not know or believe he had a serious problem. It was certainly NOT the reason he bought the policy.
To me fraud is where someone buys an insurance policy having a plan to benefit from the policy because they know something the insurance company doesn't. In the event of a questionable claim, it is my view that the consumer should be innocent until proven guilty. Unfortunately, and to the shame of the industry, that is NOT what is happening. Consumers are being judged by the life company as guilty, and the consumer is being forced to go to court to prove their innocence. WORSE, it is not really the consumer who is going to court, it is the consumer's beneficiary which bears the burden of going to court.
And what is most disturbing is the fact that many of these cases are being settled out of court, with life companies making less than full face amount payments, and the beneficiaries being forced to sign non-disclosure agreements. Cases drag out for years, and very few of them actually make it to court. From the life companies point of view, their behavior is profitable, and they don't give a rip what they are doing to the consumers. The whole thing is disgusting and disturbing.
Of interest is this email from an agent in the U.S. who commented on my bulletin. The similiarities in the cases are striking:
NOTE: I provided a copy of Subscriber 2's comments.
I continued:
So while I take your original point, I tend to be of the view that the company would have issued the Canadian policy regardless, and we are now experiencing an attempt to evade payment of a liability that they freely assumed.
What is remarkable about the Canadian case is that the death occurred AFTER the 2 year contestability period, and the company has taken the position that it does not need to refund premiums. I would think that the failure to refund premiums adds a strong taste of malice to the case, and would strenghten the argument for punitive damages against the company. Of course this assumes the case actually gets to trial, and I think we can assume that it will be settled before that happens.
My whole point is that the fraud exclusion should be removed from Canadian incontestability clauses in policies. If the government really believes it should be there, then it should be carefully and NARROWLY defined. The problem is that it is being used to let companies evade their obligations and in the longterm that is bad for EVERYONE.
It is bad for life companies because people will lose faith in the industry and not want to rely upon life insurance. Of course they are too short sighted to appreciate that short term gain is going to cause longterm pain.
It is bad for consumers because they will have a reason to not buy life insurance. Would you give your money to a company you know is going to now provide the service or product you bought?
It is bad for agents because they will have a more difficult time selling life insurance.
It's a stain on the industry that needs to be removed.
I am curious, have you had any claim denails, or know of agents who have faced the situation?
NOTE: Subscriber 3 did not respond to my email.
Subscriber 4 (Canada) - Your mention of Canadian insurers not paying on a claim is certainly a concern to all in our industry. Particularly as the doctor and the patient had no reason to believe there was a problem after the first investigation was done. (It would not be very feasible for an applicant to detail all visits to a doctor for the prior 2 years on an application – most companies ask the most recent appt and what it was for, then ask about specific illnesses and conditions, requesting dates and details). Even if the underwriter had a full doctor’s report on every case, they would either have to turn down a lot of cases if there wasn’t a good explanation for every ache and pain someone experienced that was found to be nothing or they would have a lot of postponed cases waiting for a longer period of time to go by without any additional symptoms.
I have not experienced any problems with life insurance claims. I have had a few over the years and they all proceeded through claims in a reasonable fashion. (One was in the contestability period but was an automobile accident so included a police report but was paid quite promptly).
I do have a book that I would highly recommend which DID concern me about insurers and their claims processes – there are several detailed stories in it of families in the US devastated by insurance company refusal to pay in cases of disability and serious illnesses – one even involved a very successful advisor who sold policies to others (and herself) for many years in a long career and when she was diagnosed with Multiple Sclerosis, the company refused to pay her disability.
High Wire: the precarious financial lives of American families by Peter Gosselin, New York Basic Books 2008
ISBN 9780465002252
there are also 15 reviews of the book here: Reviews of High Wire
Book is written by a US journalist about the dramatic change in “safety nets” in America and includes some very unsettling stories about insurance companies in the USA that avoided paying legitimate claims due to some changes in state legislation.
Thanks for keeping the various industry partners in the loop about current issues!
Subscriber 5 (U.S.) - Regarding the “fraud” thing, this scares me a bit. Especially in the term market. As the carriers keep shaving the premiums down there is not much room for error on the underwriting side. The tobacco question is a concern. How many people say they never smoked when they may have smoked very casually in high school or college 20 years ago. If it is not disclosed could it be considered fraud?
Subscriber 6 (U.S.) - Years ago, I sold a simplified issue policy to a client who at 2 years and 30 days from application died from an accident. The insurance company denied the claim saying that he had not disclosed that he had a condition that would have kept them from issuing the policy. I pointed out the 2 years and 30 days. They said it was only 1 year and 364 days since they had "issued" the policy as it took them almost 45 days from application receipt until they "issued" the policy.
I am very careful now with these simplified issue policies.
Subscriber 7 (U.S.) - Have you had problems with claim denials for fraud after the two year contestability period?- no but frankly have not done that much in this market place. Have not even heard of issues after the 2 year period.
Subscriber 8 (U.S.) - I have been licensed since 1999 and have only had one claim that went without a glitch!
Subscriber 9 (U.S.) - I’ve only had 1 claim declined in my tenure. It was back from a July 2008 sale whose claim was denied in August of 2009. I sold the woman an XXXXXXX policy. The problem was she “materially misrepresented” a question asking about her going to the doctor and the reason/result of her last visit. She stated it was “routine” and results were “normal – all ok”. She disclosed her diabetes, hypertension, sciatic nerve issue and medication. She failed to disclose multiple visits to the hospital due to complications of her diabetes and actually stated it is “controlled”, when in fact it was only “controlled” under “constant medical care”. After she passed, her husband threated to sue me. I clearly explained how she answered X-Y-Z on the application was flat out inaccurate. There is no way she could say NO to the questions that she hasn’t had any problems, when the medical reports show hospital ER visits with her complaining of problems and needing treatment. I explained I am on his side as my client, but she lied on the application. The carrier refunded their premium, I received a heavy chargeback and never heard from the husband again after he apologized and stated he understands why it was denied, but doesn’t understand why she did that. Confusing part… he was at the table at the time of the application questions being answered and didn’t speak up.
Every life application is designed around how the product is filed with the state with respect to UW, from what I understand. Those questions need to be answered accurately, that is the bottom line. If I was aware of the above and didn’t add it to the agents comment section, I would be at fault and that would have been an E&O claim. I signed off stating I was not aware of any other information, based on what the client disclosed to me. She lied, she got declined. Ever since then, I go above to let every client know to be honest on the application, as the time when you’ll get caught is when it comes time to file a claim. If you don’t truly qualify now, your family won’t get the money later, so it’s not worth trying to pull the wool over the insurance carriers UW eyes. The situation is what the situation is, now let’s get the best product that fits it. Some can’t afford “the right policy” and some sales are turned down by the client because of this. We have an INSURANCE LICENSE to do right by both our client and the carrier. The facts are the facts. We need to know the product we are selling. Lazy agents give a bad name to our business. Sell the product the client needs, not the product that is “easy” and sometimes that means the client not purchasing a product.
In the case above regarding the fraud, with the VERY limited information shown, it seems the application needs to be reviewed. If the there was a question on the app that asked about her last doctor visit and results… she needed to put down, I went to see the doctor for stomach pains and he said come back if it persists, but the pain went away. The life insurance company would either approve the SI app or deny it based on further information needed. THEN the client would have filled out an UW app, attached a note from the doctor confirming, no further tests were needed as the pain went away and she would most likely have been approved. And at a lower rate since it was UW. Then after the fact when the pain came back, it would have been fully disclosed and the claim should have been paid.
If you have any further questions or would like my thoughts on topics, please let me know. We have an ever changing, however, wonderful industry which we need to fight to maintain utilizing knowledgeable and ethical agents and keep away from the “computer generated internet sales that don’t have an agent involved”.
Subscriber 10 (U.S.) - Hi Bob, regarding the above mentioned discussion. We are a BGA and have processed thousands of applications of the last 6 years and haven’t heard from any of our agents about a life insurance claim being denied. I’m not sure how many claims have actually been filed either. Sorry, but I really don’t have any feedback on this topic.
Subscriber 11 (U.S.)- In view of your requests concerning fraud and life insurance death benefits, I thought you might find this article and the comments interesting. This is a different issue than what you have been considering but nevertheless thought you might like to browse it.
http://www.producersweb.com/r/pwebmc/d/contentFocus/?pcID=fe4d6adb8a2654bf6858afedf6845468&pn=1
The subject of Claim Denial for Fraud is not new for me. I also write for a Canadian publication called Canadian MoneySaver. Apart from being one of the authors who contribute on the subject of life insurance, I think the magazine is an incredible value at only $25 per year. I recommend the on-line version of the magazine, which gives you access to current AND past articles. You can sign up here:
In September 2009 I wrote an article on the subject of claim denials for life insurance fraud:
I do need to add a correction to the article. I originally said:
While most U.S. states do not MANDATE a fraud exclusion to the 2 year contestability period, many states do allow a life company to include a fraud exclusion if the company so wishes. That means some policies in some states are better than others (a better policy does not have a fraud exclusion). Even so, I don't see any evidence that claims are being denied for fraud in the U.S., following the 2 year contestability period, in the same way that they are being denied in Canada.
In further investigating the subject, I did a google search regarding life insurance claim denials related to fraud. Here is something that turned up:
The article, from a Massachusetts based insurance agency says at the end:
In cases of fraud, life insurers can typically cancel coverage and deny claims at any time. Fraud occurs when an applicant knowingly hides a life-threatening medical condition, lies about drug use or fails to disclose their smoking status in order to qualify for coverage. It’s important to note that, even in the case of an honest mistake, most insurance contracts are worded so that a company can invalidate a client’s coverage — especially during the period of incontestability.
I have highlighted the important bit. I find this comment disturbing. Who says something is fraud? In Canada, in cases I have been made aware of, "fraud" does not mean criminal fraud. In the cases of criminal fraud, charges must be made, and the defendant found guilty in court. Unfortunately that is not what is going on in Canaada. Canadian life insurance companies are simply declaring the insured committed fraud. If beneficiary wants to contest the company's position, they have to sue in civil court. Unlike criminal fraud, the accused is considered guilty until proven innocent. Worse, in many of these cases settlements occur before trial, and one of the conditions of settlement is that the beneficiary not publicly discuss the particulars of the settlement. In other words, there is nothing to discourage life insurance companies from continuing this practice.
With that in mind, we would be happy to continue to hear from ANY subscribers who encounter issues related to claim denials. Life insurance companies cannot gag those whose claims have been denied from telling their stories during the litigation process. That's when we need to hear about these stories, and share them in the industry.
In my view, after the 2 year contestability period has expired, life insurance claims should and must be paid, regardless of what the insured did or did not do prior to obtaining the policy. And if fraud is to be allowed as an excuse to evade the payment of claims, that should be criminal fraud only.
My google search also turned up this PR Newswire article:
According to the article:
Folsom, CA, July 30, 2013 –(PR.com)– When the young son of a mid-west couple died in a car accident, the last thing they expected was for his life insurance company to deny the death claim. Yet, like many contestable life insurance claims, that is exactly what happened. Even though the death was caused by an accident, and not by a medical condition, the insurance company refused to pay the claim because of information they could not verify. The father contacted the life insurance claims department in order to get learn why the claim was not being paid, but the insurer refused to provide any specific answers. Frustrated, he contacted The Center for Life Insurance Disputes for help.
It sounds like this issue arose during the 2 year contestability period of the policy. Even so, I have written to the Center for Life Insurance Disputes. Here is my email:
Contested claims within the 2 year contestability period of a life insurance policy are not new, but I am seeing a rise in the number of Canadian life insurance policy claim denials for reasons of "fraud" beyond the 2 year contestability period. I have been discussing this subject with my subscribers over the past two months. Here is my more recent article on the subject, where I reference your July 31st PR Press Release:
http://www.compulife.com/US_bulletins/claimdenials.php
What I would like to know is whether you are experiencing any claim denials in the U.S. for fraud beyond the 2 year contestability period. In my view, except in cases of criminal fraud, life companies should not be able to contest claim payment beyond the 2 years.
Further, have you had occasion to act on behalf of Canadian life insurance consumers, or any information about what is going on in Canada regarding this issue?
I would like to hear from you on this, and would be happy to share your response with my subscribers.
I received the following response from from the Center for Life Insurance Disputes. Here is what they said:
Thank you for the email. You raise an interesting, and controversial, issue going on in a large number of lawsuits in the US. Life insurers are contesting claims well beyond the 2-year Contestability period -- in some cases up to 5 years after policy issuance. Specifically, what I am seeing is that any death claim that appears to have been from a Stranger-Owned Life Insurance (STOLI) policy, is being contested. Many of these are well beyond the 2-year period but, as you correctly state, the insurers are taking the position that the policies were fraudulently issued and therefore the 2-year period does not apply. Because the focus of the litigation is fraud, there is not a lot of focus being put on the Contestibility period issue. The proof of fraud in most, if not all, of these suits continues to be argued.
Thank you!
In response to that email I wrote:
Are you aware of any states that do not permit fraud to be added as an exclusion to the 2 year contestability period?
Are you aware of any states that require fraud to be added as an exclusion to the 2 year contestability period?
When you talk about Stranger Owned Life Insurance (STOLI), it appears to me that there are two separate ways that a stranger can enter the picture and purchase a policy:
1. The insured/owner of the policy, who originally bought the policy for a specific purpose, no longer needs the policy and decides much later to sell the policy to a third party. The reason for the sale is that the purchaser is willing to give the insured more money than what the company will pay the insured by way of cash surrender values.
Question:
Do you see any of these death claims being challenged after the 2 year contestability period?
2. The insured/owner of the pollicy was induced to buy the policy by a third party, with the understanding that after a period of time the policy would be transferred to the third party.
I assume (hope) that these are the policies being contested for fraud, and not those in the case of number 1.
Questions:
Are you seeing policies in category number 2 being contested where there were no questions fraudulently answered on the application.
For example, I assume life insurance companies are now asking questions related to this issue, on their applications. Is that true?
Do all companies ask such questions on their applications?
Can you give me an example of a question, asked on an application form, that addresses this issue?
Are you seeing policies being challenged where such questions have not been asked?
Beyond STOLI, are you seeing life insurance claims beyond the two year contestability period being denied for "fraud"?
For example, a person makes a misstatement about their health, such as not having smoked tobacco when they in fact had smoked tobacco. Have you encountered a claim denial for a reason like that (beyond the 2 year contestability period)?
I have added your comments and this response to my report:
http://www.compulife.com/US_bulletins/claimdenials.php
and will be happy to added further responses if you would be so kind as to provide them. I sense that this may be a growing problem in both Canada and the U.S.
In that regard I had asked:
Have you had occasion to act on behalf of Canadian life insurance consumers, or any information about what is going on in Canada regarding this issue?
Once again, many thanks for your help with this.
I will provide further details, and post them here, as I receive them.
And just when you thought it couldn't get more interesting, this turned up, highly relevant to the comments from Center for Life Insurance Disputes:
The article says:
then goes on to say:
My view is that it sounds like a Canadian company using fraud as an excuse to get out of its obligations on a life insurance policy, 2 years after the contestability period. This time, it's an American company that is fighting back. We'll have to keep a close eye on this one.