Required Provisions Of The Insurance Contract

No policy of life insurance shall be issued or delivered in this State, or be issued by a life insurance company organized under the laws of this State, unless the same shall contain provisions substantially as follows. . . .

The wording of this clause illustrates the typical situation in which the state does not specify the precise wording of the provisions to be included in the policy but instead directs companies to conform to the spirit of the legislation. A number of those provisions are outlined in the following discussion. Grace period. Most states require that at least one month’s grace period be granted for the payment of premiums. This protects the policyholder who inadvertently forgets to pay his premium on time and in effect gives the lapsing insured a month’s free insurance. Most laws allow interest charges on late premiums, but competitive pressures usually preclude insurers from making such a charge.

Entire contract

This provision states that only the policy or the policy and the application constitute the entire contract. One of the reasons suggested for a requirement of this nature is to prevent an insurer from making its bylaws, charter, or other legal documents a part of the policy. However, in reality, other factors do become a part of the contract. For example, statutes and case law are as much a part of the contract as are its printed provisions. The entire contract provision is not intended to prevent the addition of riders benefitting the insured or to prevent a change of beneficiaries.

Incontestable clause

Unique to the law of contracts is the incontestable provision which precludes an insurer, usually after a period of two years from the inception of the contract, from denying payment of a claim based on a misrepresentation or concealment by the insured. In fact, this clause can force the insurer to accept a fraudulently obtained contract as a valid contract.

The incontestable clause usually contains the statement “except for the nonpayment of premiums.” Such wording is considered necessary since without it courts would very likely require the insurer to provide insurance for someone who paid premiums for only two years.

Many states now require that the contract shall be incontestable “after it has been in force during the lifetime of the insured” for two years from its inception. This wording becomes significant if an insured dies before the end of the contestable period. His death stops the running of the clause and effectively renders the policy permanently open to contest. In other words, the beneficiary of the insured who obtained his insurance fraudulently would not receive benefits if the insurance company could prove the fraud. Without such wording, the beneficiary could wait until two years after the policy was purchased to file a claim and would collect since the contestable period would have expired. This provision does not prevent an insurer from denying a claim based on the grounds that the claim is improper or not covered by the policy. Actually such a denial would not be a contest of the policy but an attempt to enforce its provisions. Representations vs. warranties. In early insurance contracts, statements made by the insured were deemed to be warranties