Imposter fraud and incontestability clauses in life insurance policies.

• Author: Alonso, Cristina
• Position: Florida

Life insurance policies contain incontestability clauses that limit the time in which an insurer may contest the validity of an insurance policy based on material misrepresentations made by the insured during the application process. Such incontestability clauses, required under Florida law, set a two-year time limit on an insurer's right to challenge the validity or enforceability of insurance policies. (1) A claim of fraudulent misrepresentations by the insured in the policy application falls within the terms of incontestability provisions. As such, a claim that a policy is not enforceable because it was procured by fraudulent misrepresentations is barred two years from the policy's date of issue under Florida's incontestability clause. (2)

The legislative purpose behind incontestability clauses is laudable--to protect beneficiaries from an insurer's refusal to honor policies, thereby initiating costly litigation. Insurers began voluntarily including incontestability clauses in policies in the middle of the 19th century to "address the perception that insurers tended to avoid paying benefits because of minor misstatements in applications for insurance" and promote sales to a public that was "generally distrustful of insurers." (3) States began to require that life insurance policies contain incontestability clauses in the early 1900s. (4) Florida's statute was first passed in 1955 and was then numbered [section] 625.211(1)(c).

Recently, however, there has been a resurgence of what has become known as "imposter fraud," which has resulted in litigation between life insurers and the beneficiaries of life insurance policies. Imposter fraud occurs during the life insurance application process when someone other than the named insured appears for the medical examination that is a prerequisite to obtaining the policy. For example, while Carlos Smith may fill out an application for life insurance, someone other than Carlos Smith is medically examined.

Such fraud is employed so that policies may be obtained on the life of a person who is ill, thereby allowing beneficiaries to recover on a policy that may not have otherwise been obtained or that would have been obtained at a much higher premium. The imposter fraud schemes may be complex, involving not only the insured but also the beneficiaries who either procure the imposters or "buy into" the policy by paying the premiums. Imposter fraud presents a challenge to insurers because such fraud is difficult to detect, especially during a policy's contestability period. This type of fraud goes to the very heart of the steps insurers take to avoid fraudulent misrepresentations about a potential insured's health.

It cannot be overly emphasized that in cases dealing with an imposter undergoing the medical examination, "imposter" refers to impersonation of the insured--not merely a false representation about the insured. The distinction is significant because while a claim of false representation is generally barred by incontestability clauses, the majority of courts considering the issue recognize that claims to void a life insurance policy on the basis of imposter fraud at the medical examination are not barred by incontestability clauses. (5)

The 11th Circuit recently determined, however, that Florida would not follow this weight of authority. (6) To understand the impact of this decision, it is important to understand the history of imposter fraud.

The Imposter Exception to Incontestability Clauses

Historically, courts have allowed insurers to contest the enforceability of a policy, even after expiration of the contestability period, in cases where an imposter appears for the requisite medical examination, thereby recognizing what is commonly referred to as the "imposter defense" to incontestability. These courts recognize the insurer intended to insure the life of the person appearing for the medical examination, not the life of the person whose name appears on the application form. This precludes contract formation in the first place and renders the insurance contract void ab initio. Under traditional principles of contract law, there was never a "meeting of the minds" between the insurer and the insured on an essential element of the contract--the insured's true identity. These courts conclude that if the insurer contracted with anyone, it was with the person who underwent the medical exam. (7)

The imposter defense was first articulated in Maslin v. Columbian National Life Insurance Co., 3 F. Supp. 368 (S.D.N.Y. 1932). In that case, the insurer issued two life insurance policies to the plaintiff's son, Samuel Maslin, naming the plaintiff as the beneficiary. (8) After the contestability period in the policies expired, the insurer discovered that an imposter had signed the insurance application and posed as the insured during the medical examination. (9) The beneficiary moved for summary judgment, arguing the incontestability clause barred the insurer from raising any defense. (10)

The New York court recognized the general rule that "after passage of the stipulated time the insurance company is precluded from contesting the policy on the ground of false representations by the insured, even those made fraudulently." (11) The court nevertheless determined the defense of an alleged impersonation of the insured by another at the physical examination was not barred by the incontestability clause. (12) The court relied upon contract law principles: "It is a rule applicable to contracts generally that where a man, pretending to be someone else, goes in person to another and induces him to make a contract, the resulting contract is with the...