Articles Tagged with misrepresentation cases

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Under Tennessee law, all life and disability insurance policies must include an “incontestability provision” stating that, after a period of no more than two years, the policy “shall be incontestable.”  In essence, an incontestability provision prohibits an insurance company from voiding the policy because of misrepresentation in the policy application (other than an intentional or fraudulent one). Although Tennessee law requires the incontestability period to begin no more than two years after the issuance of the policy, insurers may allow for shorter periods in their policies.

Why are incontestability provisions required under law? Tennessee courts have explained that the purpose of an incontestability provision is to provide a “statute of limitations in favor of the insured” by setting out a limited period for the insurer to examine the validity of the policy.  An incontestability provision gives an insurer an incentive to scrutinize an application carefully on the front end, before it begins accepting premiums.  Without incontestability provisions, an insurer could overlook questionable statements on an application for coverage knowing that, years later, if the insured makes a claim for benefits, it could rely on any misstatements to deny coverage.

Even with an incontestability provision, an insurer may be able to void a policy and deny coverage based on any intentional misstatement in an application for insurance. For insurers, however, it can be difficult to prove that the person who completed the application intentionally provided incorrect information, as is necessary to establish fraud.  Often, claimants and beneficiaries will be able to argue successfully that any misrepresentations made on an application for life insurance were oversights or misunderstandings.

An incontestability provision can make a critical difference in a claim for benefits. Say, for example, the owner of a life insurance policy incorrectly states in the application that the person whose life is insured by the policy has not been diagnosed with hypertension. Until the incontestability provision is triggered, the insurance company may be able to withhold death benefits on the basis that the owner’s misrepresentation voids the policy.  Once the incontestability provision is in effect, however, the insurance company cannot use the owner’s misrepresentation as a reason to deny benefits, unless they can show that the misrepresentation is covered under an exception to the incontestability provision for fraud.

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Under Tennessee law, a life insurance company can deny a claim for benefits if the insured individual was less than honest in his or her insurance application. Specifically, Tennessee Code Annotated § 56–7–103 provides that a misrepresentation in an application for an insurance policy can void the policy if the misrepresentation “increases the risk of loss.”

So what exactly does that mean?

Let’s take an easy example: If the applicant fails to disclose a known heart condition on his or her application, and then dies of a heart attack, the life insurance company likely will be able to deny any claim for the proceeds.

What happens, however, if the applicant dies of a heart attack after failing to disclose a DUI conviction? The Tennessee Court of Appeals dealt with these same facts in Smith v. Tenn. Farmers Life Reassurance Co. (2006) and held that the insurance company’s refusal to pay benefits under the policy was allowed under Tennessee law.  As the court noted, the misrepresentation in that case did not need to involve a “hazard that actually produced the loss in question.” Rather, the issue was whether the misrepresentation would have increased the risk of loss.  In Smith, the court determined that the insured’s misrepresentation influenced the insurance company’s decision to issue the policy and, therefore, increased its risk of loss.

It may seem like, based on the ruling in Smith, that it is fairly easy for life insurance companies to use a supposed misrepresentation on an application as a reason to deny benefits.  Another Tennessee Court of Appeals decision, however, indicates that life insurance companies will have to support their misrepresentation claims with direct evidence, and cannot simply ask the court to infer that the applicant was less than forthcoming on his or her application.

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