Insurers Must Make Prompt Payments of Claims Regardless of Whether a Policyholder Dies Within the Two-Year Contestable Period
Governor Andrew M. Cuomo today announced that the Department of Financial Services is taking action to remind life insurance companies of their legal obligations when settling beneficiary claims. The guidance issued by DFS today informs life insurers that they must make prompt payments to beneficiaries within the two-year period after a policyholder dies.
"Insurers are on notice of their obligations and that this administration has zero tolerance for those who seek to sidestep their responsibilities," Governor Cuomo said. “With this action, we are holding insurance companies accountable, helping to ensure beneficiaries receive what they are entitled to, and are working to create a more fair and more just New York for all.”
Through examinations and targeted investigations, DFS has identified disturbing practices among some insurers, in connection with small face value life insurance policies marketed to low- and middle-income consumers for funeral, burial and other final expenses. The guidance issued today follows a recent DFS enforcement action taken against an insurance company that improperly denied coverage and unilaterally rescinded life insurance policies for hundreds of deceased insured policyholders, leaving beneficiaries without payments due them.
“A life insurance company cannot require a beneficiary to produce a deceased policyholder’s medical records to pursue an alleged misrepresentation investigation or use illegal and unfair tactics to withhold and deny claim payments when those payments are due and most needed upon the insured’s death,” said Superintendent Maria T. Vullo. “The unlawful practices identified in DFS’s examinations and investigations have deprived New Yorkers of their rights under their life insurance policies, drained the value of their policies, and unfairly denied insurance payments to their beneficiaries. DFS will hold all insurers accountable for making prompt, fair and equitable settlements as required by law.”
Under New York Insurance Law, an insurance company may contest a life insurance claim made during the “two-year contestable period” only if the insurer establishes that there was a material misrepresentation on an application for life insurance to induce the insurer to issue the life insurance policy. Life insurers may not contest claims filed by beneficiaries within the two-year contestability period without actual evidence of misrepresentation, nor may they require beneficiaries to bear the burden of providing proof regarding an alleged misrepresentation simply because the covered policyholder dies within the two-year contestable period. If the insurer proves a material misrepresentation following an insured’s death, the insurer may obtain a rescission of the policy only in a court action or by agreement of all fully informed beneficiaries.
The DFS investigation has found that some insurers have asserted a right to contest a life insurance claim based solely on the fact that a covered policyholder’s death occurred within two years of the policy’s date of issue. Some insurers also have asserted a unilateral right to rescind the life insurance policy after the covered policyholder’s death when the insurer is unable to obtain the deceased’s medical records. These insurers have improperly attempted to shift the burden of proof regarding misrepresentation to beneficiaries by requiring them to produce the medical records of the covered policyholder, and have unilaterally rescinded policies where beneficiaries have not provided requested medical documentation. DFS will continue to take appropriate action against insurers that are not in compliance with New York Insurance Law through regular examinations and targeted investigations.
Helpful Information for Life Insurance Policyholders and Their Beneficiaries
1. A life insurer may only challenge a beneficiary’s claim for benefits on the basis of material misrepresentations on an application for life insurance within a two-year contestable period from the policy’s date of issue. After the two-year contestable period, an insurer cannot claim material misrepresentation on an application as a basis for denying a beneficiary’s claim.
2. Following the death of the insured during the two-year contestable period, when an insurer investigates potential misrepresentation on the application for insurance, beneficiaries may assist the insurer with its investigation and provide medical records, but they are not required to do so.
3. If an insurer has actual evidence of a material misrepresentation, the insurer may obtain a rescission of the policy through a court action and return premiums to the covered policyholder’s estate. Alternatively, if the parties wish to avoid litigation, an insurer may reach a settlement providing for rescission with all beneficiaries who are fully informed of their rights to challenge the insurer’s claims in court.
4. Although beneficiaries are not required by law to provide medical records of the deceased to the insurer, persons who obtain benefits under life insurance policies through fraud or misrepresentation on claims forms may be investigated and prosecuted for insurance fraud.
Life insurance policyholders and beneficiaries who have questions or wish to file a complaint, can call DFS's Consumer Help Line at (800) 342-3736 or log onto www.dfs.ny.gov for information and assistance.