Your client has signed an application for insurance or policy reinstatement, and the medicals are arranged. Now, the insurer has requested he sign a "Good Health Declaration" form or, as it’s sometimes called, "Evidence of Continuing Good Health" on delivery of the policy or for completion of the reinstatement. How does this additional request factor in if your client dies within the contestable period?
The declaration’s purpose
The good health declaration provides the insurer with a written document stating the risk it underwrote and the health questions the insured answered remain unchanged. The insurer relies on this additional declaration to put the contract in force. It becomes part of the policy so the insurer can defend itself in the event of a material misrepresentation.
The claims adjudicator reviewing the medical history of the life insured is also going to review and rely on the good health declaration. Any misrepresentation in the declaration may be sufficient for the insurer to deny payment of the claim, even if there is no misrepresentation in the policy application or application for reinstatement.
Even if an insured answers all the health questions accurately at the time of application, a material health change could occur between the application date and the time the insured signed the good health declaration. So it’s vital the declaration be completed accurately and with the same diligence used in completing the application.
A material change in health will impact the insurer. As the insurer’s claims personnel review the insured’s medical records, they will undoubtedly find reference to the changed condition and obtain the pertinent medical records.
Say a persistent cough turns out to be a symptom of lung cancer. The good health declaration may be the difference between whether a claim is paid or denied. It would depend on when the insured first learned of the lung cancer, or when the insured’s physician stated suspicion of lung cancer, and when the insured signed the good health declaration.
Where the declaration fits
If the death of the insured occurs well beyond the policy’s contestable period, the claim will likely be paid and no reference is needed to either the good health declaration, the medical records provided during underwriting, or the answers the insured provided to the questions in the application.
However, if the death occurs within the policy’s contestable period, everything becomes reviewable, including the good health declaration. As the insurer reviews the insured’s medical and/or financial history, it will want to know what the insured knew, and when.
If the insured finds out about the lung cancer after completing the application but before signing the good health declaration, the insurer may determine the claim is not payable. The critical determination will factor in the wording of the good health declaration, what the insurer asked, and the nature of the misrepresentation.
Some agents aren’t present for the completion of the declaration. They either mail the document or have the insured come into the office to sign it with the agent’s office employee as witness.
I strongly recommend the agent be present not only for the signature but also for the completion of the questions, as well as to answer the insured’s questions and to determine whether his health has changed. The insurer considers it the agent’s duty and obligation to ensure this part of the process is completed with diligence.
I use the lung cancer example because I know of an agent who was about to deliver a policy, but noticed the insured was coughing profusely. He didn’t deliver the policy, choosing to defer delivery until the insured’s health improved.
Unfortunately, the insured was diagnosed with lung cancer and died six months later. Had the agent delivered the policy, there would have likely been a claim denial and perhaps even lawsuits. It would have been messy and costly.
If the agent fails to ensure the good health declaration is completed properly, the insurer may be liable and ultimately have to pay the claim. But the insurer will likely pursue the agent’s E&O carrier to get reimbursed for a claim it would otherwise not have had to pay. I understand insurers are starting to pursue this line of recovery.
If the producer carries E&O
When the agent fails to ensure her client accurately completes the good health declaration, causing the insurer to have to pay the claim, the agent may be taken "off the hook" by her E&O carrier, which will reimburse the insurer. The agent will have to show this to be an instance where there truly was an error or omission.
What if the E&O carrier determines the agent has a history of not completing these types of documents personally, or of being lax in the handling of these documents? That would likely lead the E&O carrier to assert the agent is not covered, as this wouldn’t be an "error" or "oversight" but rather a persistent practice and therefore not insurable. This may put the agent out of business for good, as it’s likely she won’t be able to get E&O coverage from anyone.
Agents should take the time to pay extra attention to these seemingly innocuous documents. It may earn them more in the long run.
You’ve got a yes
What if the declaration contains a "yes" answer? The agent may be concerned that any "yes" answers to questions about health issues will cause the insurer to not issue the policy or defer issuing. The end result may be not only the loss of the sale but also of future sales or the network of other potential clients that one insured represents. That’s the worst-case scenario.
An advisor colleague of mine mentioned he always made sure he was present when dealing with these situations, and realized doing the right thing meant two things.
First, he was often pleasantly surprised to see the insurer either accept the risk despite the answer, or come up with a policy rated +50 for one year. This is palatable to both the insured and agent, and easily explained. The impact on the premium is minimal. The insured gets the coverage, there’s no misrepresentation and the insurer is insuring a known risk.
Second, the agent noted even where the coverage was being deferred and the explanation given to the applicant, the agent didn’t lose the confidence of his client. In fact, confidence was enhanced in most cases and the relationship was not severed.
The good health declaration is an important element of the process of putting insurance in place. Agents should do all they can to ensure their clients have an insurance policy that will pay the benefits promised. Ignoring this due diligence may ultimately put the agent out of business.