Incontestability: Overview, definition, and example
What is incontestability?
Incontestability is a legal concept primarily used in the context of insurance contracts. It refers to a provision in insurance policies that prevents the insurer from disputing or canceling the policy after a specified period, typically two years, as long as the policyholder has paid premiums and adhered to the terms of the contract. Once the incontestability period has passed, the insurer can no longer deny claims or void the policy due to misstatements, errors, or omissions in the application, unless there is evidence of fraud.
This provision is designed to provide certainty and stability for policyholders, ensuring that after the incontestability period, they will not lose coverage due to mistakes or misunderstandings that occurred at the time the policy was issued.
Why is incontestability important?
Incontestability is important because it protects policyholders from having their claims denied or policies canceled after the policyholder has been paying premiums for a long time. Without this provision, an insurer could potentially void a policy or deny a claim years after the policyholder has relied on the coverage.
For businesses and individuals, the incontestability clause provides peace of mind, knowing that once the policy has been in force for the specified period, they can rely on the insurance coverage without the risk of unexpected disputes over the validity of the policy. For insurers, the provision also helps establish clear time limits for contesting claims and managing risk.
Understanding incontestability through an example
Imagine a person, Jane, who purchases a life insurance policy with a two-year incontestability period. Two years after purchasing the policy, Jane passes away, and her beneficiary files a claim for the death benefit. During the claims process, the insurer reviews Jane’s application and notices that she failed to disclose a minor health condition that she had at the time of applying for the policy.
However, because the policy has been in force for more than two years, the insurer cannot contest the claim based on this omission, as the incontestability period has expired. The insurer must pay the death benefit, ensuring that Jane’s beneficiary receives the benefits as expected.
In another example, a business purchases disability insurance to cover employees in case of an accident. After two years, one of the employees, John, files a claim for disability benefits after suffering an injury. The insurer tries to dispute the claim based on information in John’s application, but because the policy has passed the incontestability period, the insurer is unable to deny the claim for errors or omissions that occurred when the policy was issued.
An example of an incontestability clause
Here’s how an incontestability clause might look in an insurance policy:
“After this policy has been in force for two years from the date of issue, it will become incontestable, except for non-payment of premiums. No misstatements made by the policyholder in the application will affect the validity of this policy after the two-year period, unless such misstatements are found to be fraudulent.”
Conclusion
Incontestability is an important concept in insurance that ensures policyholders are protected from the risk of having their claims denied or their policies canceled after a specified period of time. By including an incontestability clause in a contract, insurers provide clarity and stability, allowing policyholders to rely on their coverage once the designated time period has passed. This concept is vital for maintaining trust and fairness in insurance agreements, ensuring that both parties have clear expectations for coverage and claims.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.