Contract Clauses and Contestability

The Entire Contract Provision and Producer Authority

The entire contract provision establishes the boundaries of an accident and health insurance agreement. It states that the policy, attached endorsements, and the attached application constitute the complete agreement between the parties. Documents or verbal statements outside the policy are not policy terms unless they are made part of the contract as required by the policy and applicable law. This provision protects you and your clients by preventing insurers from incorporating unseen internal guidelines into the policy to deny claims.

State law determines when an application must be attached to or otherwise included with a policy for the insurer to use it in a dispute, and electronic policy delivery may satisfy applicable requirements. When state law requires an application to be included with the policy, an insurer generally cannot rely on statements in an omitted application to void the policy or deny a claim. Whether an insurer may use statements in an application that was not included with the policy depends on applicable state law and the policy; omission does not eliminate every possible basis for challenging a claim.

Under the standard uniform provision, a policy change or waiver requires approval by an executive officer of the insurer and must be endorsed on or attached to the policy. An insurance producer or agent does not have the legal authority to alter, amend, or waive any policy provision. Under this standard uniform provision, a policy change is valid only if an executive officer of the insurer approves it and the approval is endorsed on or attached to the policy.

For example, if an applicant asks a producer whether an upcoming scheduled surgery will be covered despite policy wording, the producer cannot verbally approve the coverage or promise to waive a contract exclusion. Under the standard uniform provision, an executive officer must approve a policy change, and the approval must be endorsed on or attached to the policy.

The Insuring and Consideration Clauses

The insuring clause appears near the beginning of many policies, but its location varies by policy. This clause identifies the insurer, the insured, and the basic scope and promise of coverage provided. It outlines the perils covered and establishes the insurer's contractual promise to pay benefits subject to policy terms. The insurer's promise to pay applies to covered losses, subject to the policy's terms, including its premium and grace-period provisions.

A legally binding insurance contract requires mutual consideration from both the applicant and the insurer. The consideration clause specifies the exchange of value required to make the insurance contract legally enforceable. The consideration clause also frequently specifies the premium payment frequency and schedule agreed upon by the policyowner.

The exchange of consideration is divided between the two parties. The applicant's consideration generally consists of the application statements and payment of the initial premium; when that premium must be paid depends on the application, receipt, and policy terms. The insurer's consideration consists of its contractual promise to pay benefits for covered losses according to policy provisions. Without this two-way exchange of value, the contract cannot take legal effect.

Applicant Statements, Effective Dates, and the Free-Look Period

Statements made by an applicant on a health insurance application are legally considered representations, not warranties. A representation is a statement believed to be true to the best of the applicant's knowledge and belief. In contrast, a warranty is a statement guaranteed to be strictly and literally true in every detail. A misrepresentation is an untrue statement made by the applicant during the application process. A misrepresentation may be material if the true facts would have led the insurer to reject the application, charge a different premium, or issue coverage on different terms, subject to applicable law.

When coverage begins depends on the policy's effective-date terms and any receipt issued with the application. If an applicant pays the initial premium with the application and receives a conditional receipt, coverage may begin earlier depending on underwriting approval. A conditional receipt may provide coverage before the policy is issued if its conditions are met.

The free-look provision gives the policyowner a specified period to review the issued policy and return it for a full refund. During the free-look period, the policyowner may return the policy for any reason without penalty. If a policy is returned during the free-look period, the contract is treated as void from the beginning. When a policy is returned under the free-look provision, the insurer must issue a full refund of all premiums paid.

When an individual health policy has a free-look right, its length and requirements depend on applicable law and the policy type; do not assume every individual health policy has one. A free-look period generally begins when the policyowner receives the policy, subject to applicable state law. Actual delivery occurs when the policyowner receives the policy. An insurer's release of a policy to an agent for unconditional delivery may matter to other contract questions, but do not treat the agent's receipt as the policyowner's receipt for a free-look period. When the applicable free-look rule starts upon the policyowner's receipt, a signed receipt can help document that date; electronic delivery may be documented differently. State law may set a different free-look period for a policy sold through direct-response methods, such as mail or online solicitation. In addition, Medicare supplement and long-term care policies generally require a mandatory 30-day free-look period under NAIC model regulations.

Time Limit on Certain Defenses and Pre-Existing Conditions

The time limit on certain defenses is a mandatory uniform individual health policy provision required by state laws. This provision protects the insured against indefinite vulnerability to policy rescission based on honest application mistakes. The contestability period, two years under the standard provision used in most states (a few states use three years), begins on the date the policy is issued.

Under the standard time limit on certain defenses, after a policy has been in force for two years, application misstatements generally cannot be used to void the policy or deny a claim for a loss incurred or disability beginning after that period, except for fraudulent misstatements where state law permits the exception. After the two-year period, application misstatements generally cannot be used to void an individual health policy or deny a claim for a loss incurred or disability beginning after that period, except for fraud where state law permits. In many states, fraudulent misstatements can be used to void an individual health policy at any time, even after two years have passed. State law determines whether fraud remains an exception to the two-year limit on contesting an individual health policy.

The standard uniform provision limits certain pre-existing-condition defenses for losses incurred or disabilities beginning after two years, but ACA-compliant individual and group health plans generally cannot impose pre-existing-condition exclusions at all. Under the standard provision, a claim for a loss incurred or disability beginning more than two years after policy issue cannot be denied because a condition existed before coverage began, unless the condition is excluded by name or specific description.

A lawful exclusion stated by name or specific description may remain effective after the standard two-year period, but only for as long as its terms and applicable law allow; ACA-compliant health plans generally cannot exclude pre-existing conditions. Where an impairment rider is permitted, it may exclude a named condition for the period stated in the rider; ACA-compliant individual and group health plans generally cannot use such riders to exclude pre-existing conditions. In coverage where a specific pre-existing-condition exclusion is lawful, the standard two-year provision does not by itself end an exclusion stated by name or specific description; ACA-compliant individual and group health plans generally cannot impose one.