No Contest: The Trouble with Contestable Claims
By Eli Wahby (Published in Advisor's Edge Report April 2011)
Handling contestable death claims is not a straightforward exercise where you can use a cookie-cutter or one-size-fits-all approach. Each company has its own claims philosophy and claims handling requirements.
In addition to a company's own claims-handling criteria, a member company of the Canadian Life and Health Insurance Association (CLHIA) whose membership accounts for 99% of the life and health insurance in force in Canada will abide by the code of ethics of the CLHIA, 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 as a condition of membership requires every company to agree to adhere to a statement of principles that includes the following:
- Every claimant is entitled to prompt investigation of all facts, an objective evaluation and the fair and equitable settlement of his claim as soon as liability has become reasonably clear.
- Claimants shall not be compelled to institute unnecessary litigation in order to recover amounts due, nor shall the failure to settle a claim under one policy or one portion of a policy be used to influence settlement under another policy or portion of a policy.
- Recognizing the obligation to pay promptly all just claims, there is an equal obligation to protect the insurance-buying public from increased costs due to fraudulent or non-meritorious claims.
Before insurers can begin reviewing a claim, they need to have the beneficiary 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 can only begin 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 either or both of the APS and death certificate.
While some companies automatically conduct a contestable claim investigation, others do so only on an as-needed basis: claims where it appears the insured's health condition predates the policy issue, policy delivery or policy application dates. Regardless of how a company decides to handle contestable-claim investigations, the purpose of the investigation is first to verify the life insured by the policy is the person shown as deceased in the claim documents submitted. Second, the purpose is to 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, whether it's a stock or mutual company, is to pay valid claims as quickly as possible and deny claims that don't fall within the coverage issued. Although statistics on this are not published, my experience is that well over 95% of death claims are paid.
Why so many questions on the claimant's statement?
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.
As indicated earlier, in some circumstances like a motor vehicle accident with no extenuating circumstances some insurers do not require an extensive claim investigation and will pay the claim promptly.
An insurer will typically conduct a contestable claim investigation if the cause of death is such that there's some indication in the APS or elsewhere that the insured may have been aware of the condition during the application process. This is sometimes the case in instances of death from diseases like cancer. In such cases, it is incumbent upon the claims professional to determine the true facts surrounding the 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 the records from the attending physician are not sufficient to confirm to the insurer when the medical diagnosis was made and when the life insured was advised of this condition or first sought treatment.
An insurer may find they require medical records from other physicians, specialists, the provincial health ministry, hospitals, clinics, etc. These additional records are not easily obtained some have their own authorization forms and in each case, including for the life insured's attending physician, providing medical records to insurers is not a priority. This is why some insurers contract with 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 now reveal a new source an additional physician, specialist, hospital or clinic that provided relevant treatment to the life insured. The insurer may find they need to obtain the relevant records in order to form a more complete view.
Misrepresentation
Life insurance contracts are unlike other kinds of contracts where the parties are in an equal position as far as determining material matters. 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 and are usually not as readily available to the insurer.
Life insurance contracts are prime 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 true and 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 the representations made by the life to be insured. This applies in the 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 are not facts and therefore need not be disclosed to the insurer.
In regard to state of health, 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 own belief as to their importance or 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 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, and any supplemental questions, to the information contained in the APS obtained at claim time as well as any medical records the insurer has subsequently 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 done so.
For an insurer to rescind or void the insurance contract based on misrepresentation, the misrepresentation has to be considered material. Traditionally, misrepresentation of certain facts, such as the age of the life to be insured, have 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). It is important to confirm that the test of materiality is objective: an insurer has to show that its underwriting rules have reasonable conformity with ordinary standards for measuring insurable risks. Materiality is therefore 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 will determine whether or not the insurer's underwriting rules and standards 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 such 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 must be made deliberately without belief in its truth or made with reckless disregard for the truth, and
- The insurer actually relied upon the deception to its detriment.
Application questions
As mentioned earlier, typically it's the insurer that develops the application for insurance and the questions contained therein. The questions must be unambiguous: any ambiguities will be construed in favour of the insured or life insured and against the insurer.
An insurer should avoid asking broad, speculative questions such as "re you presently in good health?" Insurers have been getting better at avoiding questions that use general categories, or that group together dissimilar symptoms, making application questions far less ambiguous.
Every insurability question must be answered completely and in such a manner as not to give a false impression. Partial disclosure does not excuse the insured or life insured. In cases where the agent mis-records the answers given by the insured and life insured, recent decisions have held the agent and insurer responsible.
Decision to deny claim
Insurers do not take the decision to deny a claim lightly. It is a deliberate decision that has to take all facts into account, including relevant case law. If there is any 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 there's no room for planning the defence after a claim denial decision.
Eli Wahby is a claims expert currently consulting at LOGiQ3 Corp. He has been in claims for 20+ years doing life, waiver, critical illness and ADB claims. This article expresses the opinion of the author and is not intended as a source on how to handle contestable claims.