Contestability Period – New Jersey

The two-year contestability period for New Jersey life insurance policies mandates that they cannot be canceled after two years, except for non-payment of premiums. Seeing that this contestability period is required by law, New Jersey life insurance policies contain a clause specifying a two-year contestability period.

The Two-Year Contestability Period was Legislatively Enacted

In New Jersey, the basis for this two-year contestability period is outlined in N.J.S.A. § 17B:25-4. This law indicates:

A policy must include a clause stating that it is incontestable, except for premium nonpayment, after being in effect for two years during the insured’s lifetime from the issuance date.

Are there exceptions in New Jersey law?

No. However, in New Jersey, some life insurance companies argue that exceptions exist, allowing them to deny claims even after two years if there was fraudulent misrepresentation or omission in the application.

Insurers often reference a ruling from the New Jersey Supreme Court, which stated, “Even after the expiration of the contestability period, an insurer may deny a claim if the insured committed fraud in the policy application.” Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 635 (1995). However, we challenge this interpretation, as it contradicts the clear language of the statute providing that the two-year period is absolute.

What prompted the enactment of this two-year contestability period in New Jersey?

The New Jersey legislature established the two-year contestability period in 1971. Beginning much earlier in the 19th century, life insurance applications required extensive disclosures about various conditions and there were sharp practices and aggressive sales tactics in the field of life insurance, leading to frequent misrepresentations in policy applications. Companies would sometimes void policies years later due to perceived inaccuracies, leaving beneficiaries including children without a means of financial support. This prompted investigations into unfair denial practices and the subsequent development of incontestability laws.

Promoting fairness through the two-year contestability period

While insurance companies claim that contestability laws put them at a disadvantage, this perspective doesn’t hold up. The contestability period functions similarly to statutes of limitations in other legal contexts, serving to prevent stale claims.

The two-year contestability period in New Jersey ensures that individuals can rely on their life insurance policies, benefiting society as a whole. In cases of alleged material misrepresentation, the insured is often unavailable to provide testimony, which places beneficiaries at a disadvantage in legal disputes. If insurers could deny coverage at any point post-issuance, it would be challenging for beneficiaries to defend claims based on application processes that occurred years or decades prior which they were not personally involved with.

Moreover, most misrepresentations are usually identifiable by the insurer at or before policy issuance. Insurers can typically obtain necessary medical and financial records and conduct examinations before providing coverage. We believe that when they fail to do this, the burden should be on them.

From a public policy standpoint, incontestability laws encourage insurers to thoroughly review applications before issuing coverage. However, many life insurance companies fail to conduct adequate investigations, often only scrutinizing applications after the insured’s death.

For a free consultation regarding claim denials, please contact New Jersey life insurance attorney Eric Dinnocenzo at (212) 933-1675.