Many life insurers will be familiar with the concept of a contestability period. Typically, for two to three years after a policy is issued, an insurer can investigate and deny a claim if it turns out disclosed at application – material information that would have led to substandard underwriting terms.
Once the contestable period has expired, claims can usually only be challenged if there is evidence of fraud.
The governance of contestability periods varies. In some countries, local legislation oversees its application while in others it falls into the hands of the industry regulator, or is established by industry practice in the market. Either way, the essence of the contestability clause must strike a balance between protecting the insurer against anti-selection or predictable claims while at the same time offering consumers assurance that their claims will be paid.
Illustrated below are two sample contestability clause wordings:
“The company will not contest the policy because of any incorrect declaration or statement made in connection with it after it has been in force for two years from the date of the policy issue.”
“The Policy shall be incontestable, except for non-payment of full premium, or for fraud, after it has been in force during the lifetime of the Insured for a period of two (2) years from the Effective Date.”
Both of the above examples state in effect that the contestable period ends two years after the policy’s inception. A claim submitted during this time frame will usually trigger an investigation by the insurer to ensure that the correct information was provided at application stage. Omission of material information may result in the policy being cancelled from inception and consequently the claim being denied. Although this viewpoint may reflect the intent of contestable periods, a recent RGA review of the Asian market found that contestability clauses are not quite as watertight as we may think.
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