Did You Know

Policies may be voided after the contestable period has expired.  There is a common myth that once a policy’s contestable period has expired, there is nothing an insurance company can do to void the policy if fraud is found.  While it is certainly true that the threshold of proof required to void a policy outside the contestable period is higher than rescinding a policy for material misrepresentation, the expiration of the contestable period does not bar action against fraudulent activity.

An insurance policy is, at its core, a contract.  Under contract law, a contract is generally voidable by the victim and the terms of the contract cannot be enforced upon them.  Voiding an insurance policy due to fraud is often referred to as voiding the policy ab initio, or at inception.  If the policy never was valid, then the terms of the policy, including the Incontestable Clause, are also not valid or enforceable.

Thresholds for voiding policies and the definition of fraud vary by state, so it is important to verify the applicable state’s laws and regulations prior to acting.  In general, however, the insurer must prove that the policy was purchased with fraudulent intent and that the insurer relied on fraudulent misrepresentations when issuing the policy.   As an example, a policy purchased by an imposter using the insured’s stolen identity and the insured had no knowledge of the purchase will most likely be voidable with the appropriate proof.

Perpetrators often do not commit single acts of fraud; rather, an insurer may have multiple policies purchased under the same fraud scheme.  In these cases, showing a pattern of deceit with multiple policies may help to strengthen the case of fraud against the perpetrator.  It is therefore important to review policies that may be associated with a policy suspected of being fraudulently procured.
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Investigating a policy to rule out fraud can be a challenge after the contestability period, especially if a claim has been filed, but if there is predication to investigate a policy outside of the contestable period, then it may be advisable to follow through with such an investigation (after checking the legal environment first).