Robert and Maria are both 45. They apply for a $250,000 life insurance policy on Robert’s life so that Maria will not have to work after her planned retirement at age 65. They consult a life insurance agent. When Robert dies prematurely at age 60, the life insurance company denies Maria’s claim. It turns out that Robert did not disclose that he was a regular smoker. The insurer claims, “If we had known that fact, we would not have taken on the insurance risk on Robert’s life.” Maria is devastated. She must stay at her work long past age 65 or face financial hardship.
If the denial is valid, what happens then?
Sometimes the life insurer has good reason to refuse to pay a death benefit claim. In those cases, it has a choice. It can honour the claim even if it does not have to do so. Or it can refund all the premiums. There is no other choice. What happens if the insurer does neither?
Let’s assume that the insurer has refused to make good on a life insurance claim for valid reasons. Why should it keep the money paid? The insurer says that it was duped into selling the policy by lies made in the policy application. If the beneficiary does not want to challenge the insurer’s position, what then?
In some cases, the misrepresentation appears to be obvious. For example, Robert smoked all his adult life. However, he claimed to be a non-smoker when he applied for life insurance. This is an obvious and significant misrepresentation. When the insurer learns of this lie, it still has legal options. It can declare that the policy was void from the time of its creation. In effect the policy never existed.
When it voids the policy, the insurer still has a legal obligation. It has received money over the years for no purpose. The insurer is not entitled to keep this windfall. It is the property of the estate of the deceased. In some cases, the insurer does not return this money. It does not advise the estate that they are entitled to this money. The insurer is acting in its own interest – it neither pays the claim nor returns the premiums paid.
Think of it this way. If you put money down to buy a house and then the seller refuses to sell it to you, you have a choice. You can demand the house, or you can demand your money back. If the seller did not sell you anything, then you get your money back. The same is true with life insurance. If Robert, in our example, had lived to his expected age, then the life insurance company would have received enough premiums to make a profit even with paying the death benefit. How could it be in a better position if it refuses to honour the policy?
If an insurer refuses to honour the policy, demand a refund of all the premiums paid. If the insurer refuses to refund this money, take legal action.
Seek the advice of a lawyer who knows about the specifics of life insurance claims. Such a lawyer can also assess the cost-benefit of pursuing the death benefit. The fallback position is to claim the total of all the premiums paid on the policy plus interest on those premiums. Almost all such claims are resolved once the insurance company takes the time to truly consider the facts and law.
If you have a claim for a death benefit denied by a life insurance company, contact the experienced lawyers of the Financial Loss Advisory Group of MBC Law Professional Corp. for more information, visit www.lifeclaimdenied.ca.
Harold Geller is a founding member of the FLAG, the Financial Loss Advisory Group of MBC Law Professional Corporation. He is often consulted by regulators and consumers organization about life insurance industry issues.