Damages from Insurance Companies that Fail to Defend their Policy Holders

Disability insurance policies have long been subject to a statutory two year incontestability clause. The statutory provisions are designed to protect policy holders from a reopening of the underwriting process after the policy has been in place for 2 years. Upon receiving a claim more than two years after issuance of the policy some carriers have sometimes attempted to circumvent the incontestability clause through a variety of arguments.

In a case involving disability arising from HIV, Justice Kathryn Werdegar, writing for the court, in Galanty vs. Paul Revere Life Insurance Co., (June 2000) 23 Cal.4th 368, 1 P.3d 658, 97 Cal.Rptr.2d 67 said the incontestability clause policy language required by the state Insurance Code takes precedence. Werdegar’s opinion, citing a prior case, held that an incontestability clause “does not condone fraud but merely establishes a time limit within which it must be raised.” (Amex Life Assur. Co. v. Superior Court, supra, 14 Cal.4th at p. 1237, 60 Cal.Rptr.2d 898, 930 P.2d 1264.) Incontestability clauses thus function as ” ‘ “statute [s] of limitations upon the right to maintain certain actions or certain defenses….” ‘ ” (Ibid.) Such clauses reflect the legislative policy judgment that it is reasonable and proper to give the insured ” ‘ ” ‘a guaranty against possible expensive litigation to defeat his claim after the lapse of many years’ ” ‘ ” while, at the same time, ” ‘ ” ‘giv[ing] the company time and opportunity for investigation, to ascertain whether the contract should remain in force.’ ” ‘ ” (Id. at p. 1238, 60 Cal.Rptr.2d 898, 930 P.2d 1264.) Disability insurance companies can not simply refuse benefits on the grounds that the policyholder had a preexisting condition.

The ruling applies to all conditions, not just HIV. Policy holders seeking disability payments for mental illnesses and back problems have been frequent targets of post claim investigation because of notations in medical records that evidenced that the problems existed before the purchase of insurance.

Lee S. Harris is a partner at Goldstein, Gellman, Melbostad, Harris & McSparran based in San Francisco including the North and South Bay Areas. He has represented injury and insurance clients in numerous disaster claims. He has also served as chair of the American Association for Justice, Insurance and Bad Faith Litigation groups and serves on the board of Consumer Attorneys of California.