Incontestability Clause

A provision in a life or Health Insurance policy that precludes the insurer from alleging that the policy, after it has been in effect for a stated period (typically two or three years), is void because of misrepresentations made by the insured in the application for it.

An incontestability clause prevents an insurer from denying benefits on the ground of Misrepresentation in the application. The clause applies only when the policy has been in effect for a specified period of time. This time period, the contestability period, is usually two or three years.

Most states maintain statutes that require an incontestability clause in life and health insurance contracts. The incontestability clause strikes a balance between providing predictable coverage and protecting the right of insurers to select the precise risks they seek to insure.

Most incontestability clauses are limited by a provision stating that the contestability period must be completed within the lifetime of the insured. With this nuance the insurer is able to contest a claim for benefits after the contestability period has lapsed if the insured dies before the end of that period. This protects insurers from providing benefits to someone who was already so ill at the inception of the policy that he or she died less than two years later. It means that the insurer may contest the flow of insurance benefits to the insured's heirs.

Another common caveat to incontestability clauses limits the period of disability. Under this provision any disability that begins prior to the expiration of the contestability period will toll the period. In other words, if an insured becomes physically disabled before the end of the contestability period, the clock stops ticking and the insurer may challenge claims during the illness and beyond. Without such language, an insured could always avoid contestability by waiting until the contestability period has expired before filing a claim.

Finally, some incontestability clauses contain a Fraud exception. Such a clause might read, "After two years from the date of issue of this policy, only fraudulent misstatements made by the applicant may be used to void the policy or deny a claim that commences after the expiration of the two-year period." Generally, fraud is a false representation calculated to deceive another into acting against her or his legal interest. Statements that are inaccurate but made without the intent to deceive are not fraudulent.

The difference between fraud and simple misstatement can only be found in the facts of a particular case. In Paul Revere Life Insurance Co. v. Haas, 137 N.J. 190, 644 A.2d 1098 (1994), the Paul Revere Company brought an action against Gilbert K. Haas, when it discovered that Haas had made false statements in his insurance application. Haas had received a policy on March 5, 1987, and on December 1, 1990, started a claim for disability payments related to a progressive eye disease. The company sought to rescind the policy or to secure a Declaratory Judgment from the court that the policy did not cover Haas's disease.

The New Jersey law on incontestability clauses gave insurers two options: one reserving contestability in case of fraud, the other reserving contestability if the insured became disabled within the contestability period (N.J. Stat. Ann. § 17B:26-5 [West]). The Paul Revere Company chose to bring action under the disability provision.

The facts indicated that Haas had made false statements on his policy application. He had declared that he had not had "any surgical operation, treatment, special diet, or any illness, ailment, abnormality, or injury … within the past five years." Investigations by the insurance company revealed that Haas had been diagnosed and treated for retinitis pigmentosa as much as four years prior to applying for the policy. According to the New Jersey Supreme Court, neither incontestability option mandated in section 17:B-26-5 of the New Jersey Statutes Annotated could be construed to allow coverage for disabilities that an insured knew existed but concealed on the policy application. The court held that Haas's policy continued in effect because the insurer had not proved its case under the disability provision, but that the incontestability clause did not prevent the insurer from contesting Haas's claims under the fraud provision.

Further readings

Postel, Theodore. 2001. "Insurance Incontestability Clause." Chicago Daily Law Bulletin 147 (August 28): 1.

Schuman, Gary. 1995. "Health and Life Insurance Applications: Their Role in the Claims Review Process." Defense Counsel Journal 62.

Yu, Kay Kyungsun. 1999. "The Incontestability Clause and the Battle Against Insurance Fraud." For the Defense 41 (September): 38.