Sunday, May 12, 2013


I have 40+ years experience as a life insurance agent. I have never had a problem getting a life claim paid. I have had a few clients die within 3 years of issue, and in each case the insurer warned me they would take a close look at the claim – but they were paid within two months.

From my experience with my own book of experience, I might conclude there are no issues with claim payments.

However, I am frequently retained by lawyers attempting to get claims paid for their clients. I have worked on about 50 such files and can see a clear pattern.

Life companies expect clients to live a fairly long time. If someone dies within 10 years of issue, the claim gets some scrutiny. If they die within 5 years some companies just flat out don’t want to pay and will grasp at straws to get off the claim.
The claims examiners use three techniques to avoid the claim:
They look for inaccuracies or incompleteness in the application and claim fraud.

They look for inaccuracies or incompleteness in the application and deny the claim because the application required that answers had to be “complete and accurate”. The phrase “…to the best of my knowledge” was not included.

They look for any change in insurability between the time the policy was issued and the time it was delivered. A material change in insurability would mean the policy never became a binding contract. No two year limit on this issue.

I have no idea of how many claims do not get paid. The annual reports to the Superintendent of Insurance do not include this information. However, I think it must be fairly common because I have seen claims as small as $25,000 denied for details as small as undisclosed hemorrhoids two years previously.

Agents should pay close attention to this issue for two reasons. First, they are trying to help and advise their clients. I suggest this should include suggesting companies that pay claims and avoiding those that don’t. That service alone would justify their commission. Secondly, when a claim is not paid the agent is usually included in the resulting lawsuit.


If an applicant fails to disclose that he was treated for cancer last year or that he is a sky diver I agree the non-disclosure is probably fraudulent in the normal sense of the word. However, in all the alleged fraud situations I have worked on (I have lost count of how many there have been) only one case involved what might have been a deliberate withholding of information that might have been material.

The problem is that there is a second definition of fraud, as written by David Norwood in an insurance text book. He defines fraud as including “…the statement must be …. made with such reckless disregard for the truth”.

Unfortunately many applications include answers that are grossly incomplete or inaccurate. The agents get blamed for this because they did not adequately brief the client on the need for full and accurate disclosure and because they blithely record answers, without investigation, that are obviously inaccurate.

I have such a case on my desk at the moment. The preamble question on the medical history asks “have you been treated for, tested for, or ever had any known indication of…” followed by all the usual medical issues and body parts.

The question includes “tested for”. Parsing all the questions, we get “Have you ever been tested for disorder of the eyes, ears, high blood pressure, heart murmur, high cholesterol, blood, protein or sugar in the urine, any disorder of the cervix or prostate, elevated blood sugar, or cancer?” The applicant answered “no” to all these questions. The agent recorded and submitted the answers, without comment.

The 40 year old life insured died seven years later and the claim was denied for fraud. The insurance company believes that the application was “made with such reckless disregard for the truth” that it was fraudulent.

I have seen many similar applications and denials. I have no doubt that the applicant was answering the questions with a focus on “Have you ever been treated for or diagnosed with…?” and completely overlooked the “tested for?” part of the question. I can understand the applicant making the mistake, but the agent, in my opinion, is supposed to be administering an application form and is quite capable of making the appropriate follow up question to each “yes” and “no” question. E.g. “Yes, I was diagnosed and tread for a stomach ulcer.” Agent question: “When was that? How bad was it? How was it treated? Who was the doctor” Did you make a full recovery? Is there any affect on you now? Modified diet? Taking drugs?”

For over half the medical questions on the form, the agent should not accept a “no” answer without a follow up. A “no” answer would mean that this 40 year old Canadian has never seen a doctor other than her current family doctor and never been admitted to hospital. She has a child. Can the agent believe the child was not delivered in a hospital and there was no other doctor involved? Can he believe she has never had a urine test? Never had a blood test? No doctor has ever listened to her heart or used that little flashlight thingy to look in her eyes and ears?

I have seen fraud allegations where only one such non-disclosure was made. A woman did not disclose she had hemorrhoids during her pregnancy, two years previous. My wife tells me that about 50% of pregnant women develop hemorrhoids.

In another case a fellow disclosed his family genetic health history as best he could, but did not mention that his brother had had a heart attack. This was because his estranged brother lived in South Africa and they had not spoken in 20 years. The argument was that he could not disclose what he did not know. The insurance company argued that the application required that answers had to be “complete and accurate”. A heart attack of a younger brother was certainly material information, and since it was not disclosed, they claimed the application was invalid.

Why would an agent use applications that required information to be 100% “accurate and complete”? In my opinion, that standard is impossible, and represents a “Get Out of Jail (off claim) Free” card to the insurer. The word “ever” on an application means since the day you were born. What applicant knows all that information? What’s worse, the claims are denied when the doctors’ notes show information that was not shared with the applicant. I have seen claims denied because the doctor’s notes showed high blood pressure one medical. The doctor did not say anything and subsequent visits were normal readings. The applicant claimed he had never had any known indication of high blood pressure but the claim was denied because this answer was not 100% “accurate and complete”.

There was a time when applications with missing information or implausible answers were returned by underwriters to the agents. Not any more. Many companies now issue the policy knowing that if the insured person dies they can contest the claim.

Companies will tell you they deny very few claims. They may be right. Not paying a claim and denying a claim are not synonymous. Almost all the unpaid claim situations I see involve voiding the contract for fraud. If there is no contract, there cannot be a claim, and if there is no claim, there cannot be a claim denial.
The Americans saw this problem over a hundred years ago and put a stop to it. After two years, claims must be paid. As a result, applications are thoroughly underwritten before a policy is issued. An American company would not accept an application with “no” answers that are improbable.

The course required to obtain a life insurance license is about to be replaced. I am waiting to see if there is a requirement for prospective agents to learn how to administer an application form. Probably not. And the insurance companies do not provide agents with any training on what they are expecting on forms, either.

by Jim Bullock
From For Advisors only


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