| 8/2005
HEALTH INSURANCE UNDERWRITER (N.A.H.U.)
Pre-Existing,
Prudent Man, Incontestability and Fraud Clauses
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__.
_____________________________________________________________
Art
Fries is a longtime NAHU member, a DI producer and a professional
disability claim consultant providing advice nationwide.
Art sold his first DI policy to himself in 1963. He provides
advice on a national basis and welcomes questions or comments
to his column. He can be reached at 800-567-1911 or through
www.afries.com
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