The incontestability clause in a life insurance policy makes it impossible for the company after a period of time (usually two years) to contest any statements made in the application or any concealment of material facts in order to avoid payment of the proceeds. The clause is usually a simple statement announcing that, except for nonpayment of premium, the policy is incontestable after a specified period of time. Thus, after the contestable period, the company cannot seek to set aside the policy on the grounds that it was obtained by misrepresentation or concealment.
The incontestability clause as found in life insurance contracts is an anomaly among contract provisions. The law of contracts holds that a contract involving fraud is voidable at the option of the aggrieved party. The innocent party may rescind the contract any time within the statute of limitations. The time limit allowed by the statute begins when the fraud is discovered and not when the contract is made. Further, the law usually holds that an agreement to disregard fraud is a violation of public policy and hence void (When the clause makes the policy incontestable from the beginning, the courts will usually honor it in cases of simple misrepresentation and concealments but not in cases of fraud). Although it was not the intention of the incontestability clause to protect the beneficiary from fraud on the part of the insured, but to protect him only against innocent material misreprentations (some of the earlier incontestability clauses included the phrase, except for fraud.), the courts have interpreted the clause more broadly than expected. They have allowed it to become an agreement to disregard fraud in the life insurance contract after a specified period. The clause has been in use since the 1860’s, is required by many states, and has been held to apply in the most flagrant cases of fraud. Although there is social and economic justification for incontestability in life insurance, there is no generally accepted legal explanation for the incontestability provision or for the decisions upholding it. It is a clause peculiar to life insurance contracts.
The incontestability clause is designed to protect the policy owner and beneficiary against any attempt to set the policy aside. However, it does not prevent a claim from being contested on the grounds that it is excluded from coverage under the terms of the contract. A defense against a claim is a suit to enforce contract provisions, not to set the contract aside. Similarly, it does not prohibit suits over construction of the policy or over its terms; nor does it bar a defense that the policy never went into force.
Since the incontestability clause is a provision of the contract, it has no force until there is a contract. If the contract legally never goes into effect, the clause is inoperative. For example, if an impersonator makes the application and takes the physical exam, or answers the health statements, the policy can be set-aside even after the contestable period. In such circumstances it is held that because there was never mutual assent, as required for a valid contract, no contract ever existed.
As the clause itself is an anomaly among contract provisions, so is the inclusion of the wording, “except for nonpayment of premiums.” The incontestability clause prevents setting aside the policy as of the beginning of the contract. Nonpayment of premiums does not set aside the policy from the beginning. The lapsing insured still has rights under the policy: reinstatement and no forfeiture, for example. The wording seems to be a remnant of earlier days when some policies provided that in the event the premium was not paid, the policy would become void, thus voiding the policy from its beginning. The inclusion of the wording is now so well established that its omission might be looked upon by some courts as something different, and therefore subject to new rules of interpretation.
As has been pointed out, a defense against a claim on the grounds that it is improper or not covered is not a suit to avoid the policy but to enforce the conditions of the contract. However, enough courts have mistakenly held otherwise in the case of the disability and double indemnity provisions that the usual wording of some incontestability clauses has been altered to state an exception in the case of those provisions. Such a clause might read:
This policy shall be incontestable after it has been in force during the lifetime of the insured for two years except for nonpayment of premiums and except for the restrictions and provisions applying to the double indemnity and disability benefits provided.
Other policies will seek to meet the problem by providing, in the riders adding disability and double indemnity that the incontestability provisions of the policy do not apply to these riders.
The incontestability clause has undergone several changes in wording in order to improve the probability that the courts will interpret the clause as intended by the insurer. The original incontestability clause stated that the policy should by incontestable after two years from the date of issue. In interpreting this clause the majority court opinion in early cases held that if the insured should die during the contestable period, the incontestable period continues for two years. The reasoning seemed to be that since the clause is for the protection of the beneficiary as well as the insured, all terms of it also should apply to the beneficiary. For beneficiaries who feared the existence of evidence that might give grounds for contesting the policy, this ruling gave encouragement to postpone filing claims until the expiration of the two-year contestable period. These beneficiaries could then expect to be successful in their efforts to collect life insurance proceeds.
This interpretation led some companies to change the wording of the incontestability clause on new policies to read that the policy should be incontestable after having been in force for a given period. This attempt to prevent beneficiaries from obtaining the protection of the incontestability clause by withholding claim until the expiry of two years did not work after the death of the insured because the policy is for the benefit of the beneficiary.
In another and successful attempt to clarify their intentions insurers have reworded the clause to provide that the policy shall be incontestable after having been in force for the period specified during the lifetime of the insured. This wording has been held by virtually all courts to mean that upon the death of the insured during the contestable period, the policy can never become incontestable. This latter wording is the most common among incontestability causes and has been adopted as part of the required policy provision laws in a number of states.
The practice of allowing parties to a life insurance contracts to fix by stipulation the length of time after which fraud can be used as a defense is justified. The impracticability of assembling evidence and witnesses many years after issuance of the policy is clear. Defense against fraud is especially difficult if a beneficiary must make it after the death of the accused insured. The incontestability clause is particularly valuable to the beneficiary in preventing delayed settlement resulting from long, tedious, and costly court action. While it is true that the clause may allow some unscrupulous people to take unfair advantage of the insurer, the protection it gives the rank-and-file policyholder outweighs this limitation.