Disability Insurance Claim Advice
Pre-Existing, Prudent Man, Incontestability and Fraud Clauses
Health Insurance Underwriters (N.A.H.U), August 2005
By Art Fries
Individual disability policies have various clauses that often have serious legal implications. The clauses can favor either the insurance company or the insured. Sometimes the state in which the insured resides can influence how the clause is interpreted. This article should provide you with a better understanding of these clauses. However, because the laws vary in different states, an attorney should be contacted for a definitive opinion that relates to rescission of a disability contract or denial/termination of a disability claim.
Pre-existing Condition: This relates to the applicant “telling a big lie” or withholding pertinent medical information at the time of application on Part I or, if examined, on Part II. This clause can relate to information one, two or five years prior, or is “open-ended” (from the day you were born). One, two or five years are the typical time frames in disability contracts. You may not see a year shown and, in most cases, that would be a policy that in open-ended. Example: Your client withheld medical information that was applicable five year prior to applying for coverage but there was no treatment or medication taken within three years prior to the application being taken/examined. If the policy was written with a two-year “pre-X” clause, your client would be home free and the “big lie” would not count. In contrast, an open-ended pre-X clause would certainly apply in this example.
Prudent Man: These policies don’t use the word “man”, but for many years this was terminology used by both marketing departments of insurance companies as well as those selling them. Not much different from policies that used the words he instead of he/she or you. Sexist, yes, and I was as guilty as most of you old-timers who go back to the ‘60s and the ‘70s selling DI. The wording in this clause relates to an applicant having a medical condition in which it was prudent to seek medical advice but the applicant didn’t. Some policies have the same time frame as the pre-X clause, some have a shorter time period, and some do not even contain this clause. For an insurance company to raise this clause as a defense at claim time might be quite a challenge after, say 20 years, but it is an opportunity to further investigate the prior medical history, or “non-history,” of the claimant.
Incontestability: Almost all individual disability policies have an incontestability clause. Often it is for a period of two years but I have seen it for a three-year period. This is wording to the effect that after two years the insurance company can use as a defense that you told a big lie or withheld information when you applied or were examined for the policy except if you have a “fraud clause.”
Fraud:This is one of the least understood of all the clauses. You or your client thought your were home free because of the incontestability clause; however, with additional wording related to “fraudulent misstatements,” this causes the policy to become open-ended. Thus, with a fraud clause if you told a big lie or withheld information, even if the policy has been in force for 25 years, the lie can come back to haunt you or your client. The insurance company can deny the claim, ask for money back, and terminate if it paid the initial claim. It can also rescind the policy.
Rescission: With a fraud clause, not only can the insurance company deny/terminate the claim, but it can seek to get the policy back from the insured and refund all prior premiums paid, in addition to not paying the claim. You might say to the insurance company, “The ‘big lie’ doesn’t relate to the medical condition for which I am making claim so it doesn’t count.” Yeah … I didn’t tell you about my low back problem but that has nothing to do with my anxiety/ depression claim. I’ll be receptive to you putting on a waiver related to my low back but now pay the anxiety/ depression claim.
That might work in some states but not in others. In some states, omission or a big lie about a medical condition or failure to seek medical advice when it was prudent to do so (prior to applying for the policy) can be a basis for the insurance company to deny or rescind even if the medical condition for which a claim is made has nothing to do with the lie or omission on the policy application or part II (exam). In other states, a waiver of the prior condition might be appropriate.
Older policies with badly designed questions can sometimes favor the insured who has told a big lie. The question “Have you seen a physician in the last five years?” is quite different from the question “Have you seen a physician, practitioner, psychologist, etc.?” When reviewing policies and doing an audit, I always read carefully the copy of the original application related to the questions asked not only with respect to medical information, but also as it relates to financial information, who paid the premium, and any other information provided that is pertinent from a claim standpoint.
How an agent/broker completes an application can also come into play with respect to an insurance company’s position when using any of the above clauses as a defense. Completion of the application should be taken seriously. You never know when an incomplete or improperly completed application will come back to bite you in the a__.