|
|
|
« Back to Articles |
Next Article » |
Article 12 of 15 in Sample Disability Insurance Policy and Provisions Review |
Disability income insurance contract review |
 |
General Provisions
Every insurance contract has what are called general provisions. In this sample policy, they come under the heading of The Contract. Many of these provisions are required by state law and describe basic legal concepts that characterize the relationship between the insurance company and the owner and insured. Some provisions relate to the specific type of insurance contract or to some unique aspect of that contract, but many could apply to any contract issued by the insurance company.
THE CONTRACT
ENTIRE CONTRACT
The policy, the attached application, and any attached riders or endorsements make up the entire contract. |
COMMENT:
All life, health and disability income policies are required to have an “entire contract” provision, but the language in these provisions varies by state. Some states consider the application to be part of the policy only if it is attached to the policy. The wording of this sample policy says that the entire contract consists of the policy, the attached application, and attached riders or endorsements. In this case, if the application or any riders or endorsements are not attached, they are not a part of the insurance contract.
The entire contract provision was designed to prevent insurance companies from incorporating provisions from other documents into their policies, a form of abuse practiced by some companies. When this was done, policy owners had no way of knowing about the added provisions, which were sometimes harmful to their interests. The entire contract provision guarantees the owner that the policy and attached application, riders, and endorsements contain all of the contractual provisions and there are no hidden provisions. This ensures that the policy owner has full knowledge of all documents that affect the coverage.
The entire contract provision also ensures that the policy owner receives a copy of the completed policy application. Then, if the policy owner discovers incorrect information in the application, the insurance company can be notified. This also prevents the policy owner from later claiming no knowledge of any application misstatements. Attaching the application benefits both parties. Insurance companies usually attach a copy of the application to the policy and are ordinarily barred from using misstatements in the application to rescind (cancel) coverage if the application was not attached.
ALTERATIONS
Only our corporate officers may modify or waive anything in, or approve adjustments to, the policy. The change must be attached to the policy. No one else, including the agent, may change the policy or waive any provision. |
COMMENT:
This is a simple, but important concept. Any change in the policy is not valid unless the change is made in writing and signed by a corporate officer of the insurance company – not by an officer of your agent’s agency. And, as with the entire contract provision, the written and signed change must be attached to the policy.
Incontestability provisions
The incontestable provision in insurance contracts has proven to be one of the most challenging areas of insurance law, leading to much litigation over the meaning and the application of these provisions.
THE CONTRACT
INCONTESTABLE
We will not use any misstatement except fraudulent misstatements in the application to void this policy or deny a claim after this policy has been in force for 2 years during your lifetime, excluding any period you are Disabled. We will not use any misstatement except fraudulent misstatements in an adjustment application to void that adjustment, or deny or reduce a claim after that adjustment has been in effect for 2 years during your lifetime, excluding any period you are Disabled.
We will not deny or reduce a claim for a loss incurred or Disability starting after 2 years from the Policy Date or Adjustment Date on the grounds a sickness or physical condition existed before the Policy Date or Adjustment Date (unless excluded from coverage by name or specific description). Disability from a sickness or physical condition fully disclosed on the application for this policy or any adjustment application will be covered (unless excluded by name or specific description). |
COMMENT:
A claims examiner who discovers evidence of misrepresentation in the insurance application usually looks at the incontestable clause to see if the validity of the policy may be contested.
Insurance companies voluntarily began to include an incontestable clause in the mid-1800s in response to concerns that policy owners might pay premiums for years only to have the insurance company rescind coverage when a claim was submitted because of an inaccuracy in the application. At that time, applicants warranted that their answers to questions in the application were correct. When statements are considered warranties, even a small inaccuracy could provide a basis for rescission years later. That practice has changed, and applicants now represent, rather than warrant, that their answers are true and correct. When statements are considered to be representations, only misstatements that are material to the risk are sufficient to void the policy. If the policy does not state the exception for fraudulent misrepresentation, the insurance company cannot rescind a policy for fraud after two years.
The provision in this sample policy states that the insurance company will not use misstatements in the application to void the policy or deny a claim after the policy has been in force for two years. The same 2 year rule applies to misstatements made in an adjustment application to modify the policy. The one exception is fraud. Because of that exception, the insurance company can void the policy at any time for fraudulent statements in the application. Fraud requires the insurance company to prove intent to defraud, which is a difficult standard of proof. During the first two years, the standard of proof is not quite as difficult, although it is not easy. The insurance company must show three things: that there was an actual misrepresentation; that the insurance company relied on that misrepresentation in making its decision to issue the policy; and that the misrepresentation was material.
A misrepresentation is a false statement made on the application for insurance. In order for the insurance company to use the false statement as a basis to rescind the policy, the application must be attached to the issued policy. Misrepresentations are normally discovered at the time of claim when an adjuster is reviewing medical records of the insured.
A second necessary component to a successful contest to rescind is reliance by the insurance company. If the insurance company reasonably relied on statements made by the applicant and did not have other information that should have warned that the representations were false, the reliance component has been met.
As the third component, the matter misrepresented must have been material to the insurance company’s acceptance of the risk. For purposes of underwriting, a material fact is one that, if the insurance company had known it at the time of application, would have caused the company to refuse to enter into the contract or to issue the insurance policy at a higher premium, wait for a period of time to see if the condition improved, exclude certain risks, or take some action other than issuance of the policy.
MISSTATEMENT OF AGE
The issue age shown on the Data Page should be your age on your birthday on or prior to the Policy Date. If your issue age is not correct, we will adjust the benefit amount. This adjustment will be based on the amount of benefit the premium would have purchased at the correct issue age. If coverage should have ended, no policy should have been issued or no adjustment made at the correct age, coverage is void retroactively for the periods affected. We will refund premiums paid for the periods coverage is void. |
COMMENT:
The misstatement of age provision in a life or health insurance policy requires an equitable adjustment of premiums, of benefits, or of both, if the age of the person insured has been misstated. In other words, the provision attempts to provide a fair solution to a mistake made at the time of application. Of course, this provision only applies in the absence of fraud or collusion, in which case the insurance company may be able to void the policy.
This provision was included in life and health insurance policies many years before the incontestable clause became a standard provision. With the advent of the incontestable clause, the question of whether the misstatement of age provision could be asserted after the incontestable period (usually two years) had run became an issue. The majority of courts have concluded that the two provisions do not conflict and that the misstatement of age provision can be asserted and enforced after the contestable period has expired. More recently, the provision has been expanded to include misstatement of sex (even though that circumstance is rare) and age – although not in this sample policy.
This misstatement provision comes into play when the policyowner misstated the age of the insured at the time of application. The typical misstatement provision states that benefits will be based on what the premium paid would have purchased at the insured’s correct age, since premiums are partly based on the age of the insured. The general rule is the older you are, the more of a health risk you present. Therefore, the older you are, the higher your premium will be since premiums are based on risk.
If you did understate your age and have been paying a smaller premium than you should have paid and the insurance company, when the insurance company learns of the age misstatement (usually at time of claim when it is reviewing medical and other records in connection with your claim), it has several choices. It can ask you to make up the premium deficiency or it can pay you a reduced benefit based on the premium you actually paid. Whatever it does, it must be expressed in the policy provision. This sample policy provision allows for a reduction in the benefit amount. It also states that the insurance company can void the coverage under certain circumstances – if, because of correct age, coverage should have already ended, if no policy should have been issued, or if no policy adjustment should have been made.
DIVIDENDS
Your policy is eligible to share in the divisible surplus. We will determine its share and credit it as a dividend at the end of each contract year. Dividends may be applied to reduce your premium or paid to you in cash. Unless you advise us otherwise in writing, we will pay dividends, if any, in cash. We do not expect any dividends will be paid under this policy. |
COMMENT:
The term “dividends’ in this context refers to a distribution from the insurer’s surplus earnings and represents a partial return of premium. In non-participating policies the premium is fixed, and the insurer’s actuaries are careful to assess the proper premium. In participating policies, dividends may be paid and represent an adjustment of premium. The base premium in participating policies includes a cushion to cover any extraordinary experience because actuaries knew that any excess premium would be returned as a dividend.
Insurance dividends are different from those paid to stockholders. An insurance dividend is based upon the experience of a class of insurance. Any dividend, and its amount, is paid at the discretion of the insurance company. Dividends paid to stockholders are paid out of the corporation’s accumulated earnings and are declared by the corporation’s board of directors. Statutes in most states mandate that insurance dividends be paid proportionately to members of a particular class of insurance to make certain that any dividends are paid fairly. Insurance companies may determine the composition of the class so long as the determination is made fairly.
A dividend represents the experience of the members of the class. If the experience (low claims rate) is good, the dividend is higher than it would be if the class had only average experience. If the experience for a particular year is poor, no dividend may be paid.
Because a dividend represents a return of premium, it is not considered income and is not subject to federal income tax. Dividends are important policy rights and are assignable.
Note that this sample policy allows for the possibility of dividends but then clearly states that the insurance company does not expect to pay dividends under the policy. This could be for several reasons. One reason is the volatile nature of disability income insurance where the experience may be very good one year, warranting a dividend, but so bad the next year that not paying a dividend does not make up for the bad experience. Too, not paying a dividend when the experience was good provides a cushion for a bad experience another year. It is also possible that, for competitive reasons, the actuaries priced this product with a low premium and no built in cushion to allow for distribution of dividends.
CHANGE OF OWNER OR LOSS PAYEE
The Owner may name a new Owner or Loss Payee by a request in writing. Our approval is needed. The change is not effective until we approve it. Once approved, the change is effective on the date it was signed. We have the right to require the policy so we can record the change. |
COMMENT:
The policyowner has the right to do various things with his policy: reinstate the policy if it has lapsed for non-payment of premium; assign some or all of the benefits of policy ownership to another person or entity; change the loss payee on the policy. If the policyowner assigns all of the benefits of policy ownership to someone else, he has effectively changed the owner to that other person or entity.
This sample policy makes it clear, as do virtually all insurance policies that a change in the owner or loss payee must be done in writing, must be approved by the insurance company and, if requested, must be done on the policy itself. The insurance company requires you to provide them with the policy in order to effectuate the change because this change is very significant. As the owner, either you are relinquishing control of the policy or you are changing the person or entity to whom benefits will be paid. The best way to make absolutely clear to all parties involved that the change has been made is to have the change reflected as an addendum to the policy. The policy is, after all, the legal document representing the terms of the agreement between the parties.
STATE LAW CONFORMITY
Any part of this policy that, on the Policy Date, conflicts with the laws of the state in which this policy is issued is changed to meet the minimum requirements of those laws. |
COMMENT:
An insurance policy is governed by the laws and supporting regulations of the state in which the policy is issued. Years ago, a federal law and several court cases determined that regulation of insurance by the states, and not the federal government, was in the public interest, but that when state law did not cover a given situation, federal law would prevail. With clear authority to govern insurance company activities, states have enacted numerous laws to govern insurance transactions. State legislatures have delegated to their state insurance departments, headed by insurance commissioners, the power to create the rules and regulations that interpret and support the laws. The states have worked together, through the National Association of Insurance Commissioners (NAIC), to develop and adopt model uniform laws and regulations so that there is some degree consistency.
The State Law Conformity provision of the sample policy is a standard policy provision required by almost every state. This is one of the model policy provisions promulgated by the NAIC. Before an insurance company can sell a policy, the policy must be filed with, reviewed and approved by the state insurance department to be sure nothing was overlooked by the insurance company reviewer. If the policy is approved with a provision that conflicts with state law, this policy provision automatically corrects that provision to comply with state law that existed at the time the policy was issued. If the law or a regulation changes after the policy is issued, the new law or regulation applies only to policies issued after the effective date of the law or regulation.
ASSIGNMENT
We are not bound by an assignment until received in written form at our home office. We assume no responsibility for any assignment’s validity. An assignment does not change the ownership of this policy. |
COMMENT:
The ability to transfer all or part of the ownership rights is one of the policy owner’s most important rights. The owner may transfer rights as security for a loan, as a gift, or as a sale to someone else.
There are two types of assignments. An absolute assignment is a transfer of all of the policy owner’s right in the policy. In this sample policy, the assignment is referred to as a change of ownership, as is clear in the Assignment provision that states that an assignment does not change the ownership of the policy.
This means that the Assignment provision is referring to the other type of assignment – a collateral assignment, which is the temporary transfer of some, but not all, of the policyowner’s rights as security for a loan. A collateral assignment is more common with a life insurance policy where death benefits and/or cash values, if available, are assigned as security for a loan. But assigning disability benefits as security for a loan is becoming a more common practice.
Note that, because of the significance of the transaction, the policy provision makes it clear that the insurance company is not bound by the transaction unless it has received a written copy of the assignment. Even then, the insurance company distances itself from any argument between the policyowner and the person or entity to whom the assignment was made, basically saying: “You two determine the validity of the assignment and then let us know.”
CANCELLATION BY INSURED
You may cancel this policy at any time by written notice delivered or mailed to our home office, effective on receipt of the notice or on a later date you specify in the notice. In the event of cancellation or your death, we will promptly return the unearned portion of any premium paid. The unearned premium will be computed on a pro rata basis. Cancellation will not affect any claim which originated prior to the effective date of cancellation. |
COMMENT:
A voluntary cancellation of the policy will be honored if the insurance company receives notice in writing. Cancellation will be effective on the date notice is received, or on a later date if that is requested. If you cancel the policy or it cancels itself by death, the insurance company will return, pro rata, any unearned premium. Any claim that originated before cancellation will be honored since the policy was in force at the time of claim. |
« Back to Articles |
Next Article » |
|
|
|
|
|
|
|
|
|
Disability Insurance Center
Auto | Homeowners/Renters | Health | Life | Insurance Agents & Quotes | Site Map | Privacy Policy | Media | About Us | Contact Us