Legal Definitions - contestability clause

A contestability clause is a standard provision found in many insurance policies, particularly life and disability insurance. It specifies a limited timeframe, typically two years from the policy's issue date, during which the insurance company has the right to investigate the accuracy of the information provided by the policyholder in their application.

During this period, if the insurer discovers that the policyholder made a material misrepresentation (a significant lie) or omitted crucial information when applying for the policy, the company may have grounds to deny a claim or even cancel the policy altogether. After this contestability period expires, the insurer generally loses the right to challenge the policy's validity based on such initial application errors, assuming no fraud was involved.

Here are some examples to illustrate how a contestability clause works:

• Example 1: Life Insurance Application

  Sarah applies for a life insurance policy. On her application, she states that she is a non-smoker, even though she regularly smokes cigarettes. The policy is issued. Eighteen months later, Sarah passes away due to a smoking-related illness. Because her death occurred within the two-year contestability period, the insurance company investigates and discovers her misrepresentation about smoking. Due to this significant omission of fact that would have affected the policy's terms or even its issuance, the insurer may invoke the contestability clause to deny the death benefit claim to her beneficiaries.

• Example 2: Disability Income Insurance

  David applies for a disability income insurance policy. To secure a lower premium, he inaccurately states his annual income as significantly higher than it actually is, knowing that higher income can sometimes lead to more favorable rates or coverage limits. One year after the policy is issued, David suffers an injury that leaves him unable to work. When he files a claim for disability benefits, the insurance company reviews his application and discovers the discrepancy in his reported income. Because this happened within the contestability period, the insurer could use the contestability clause to adjust the benefit amount to reflect his true income, or potentially void the policy if the misrepresentation was deemed severe enough to have fundamentally altered the insurer's decision to provide coverage.