Life Insurance Exclusions – Limits On Exclusions

Exclusions in life insurance policies are common.  The Texas Insurance Code, Section 1101.055 limits the permissible life insurance exclusions to suicide, stated hazardous occupations, and aviation activities.  Courts have construed this list to render void other exclusions, such as one excluding a loss caused by a preexisting condition.

A 1921, Texas Supreme Court case does a good job of explaining limits on exclusions.  The opinion is styled, First Texas State Insurance Company v. Smalley.

As explained in Smalley:  It was formerly usual for policies of life insurance to contain numerous conditions on which the amount or amounts promised to be paid on the death of the insured might be reduced or entirely defeated.  Among common conditions were those relating to the insured’s occupation, habits, residence, and suicide.  Not infrequently the amount of the insurance was stated in bold type, on the face of the policy, while the conditions were inconspicuously put on the back.  Such policies could be used to lead the unwary into the belief that they held enforcible promises of real and substantial benefits, when the promises were so limited and conditioned as to have slight actual value.  In this way premiums could be collected from the insured in exchange for apparent, rather than real, obligations on the part of the insurers.

The above were evils to be remedied by the statute, which was enacted in the interest of the insured.  To accomplish the legislative, intent, the language of the statute must be given such signification as to afford a reasonable remedy for these evils.  The public policy declared is that the amounts promised to be paid on the death of the insured are not to be withheld nor diminished under limitations or conditions except to the extent of subsisting indebtedness to the insurer, including premiums, save in the specially enumerated instances of the insured’s death by suicide or from following specified hazardous occupations.  In this way the contract in this State as to benefits from life insurance is rendered simple and easily understood by all, including those lacking legal or business experience. 

Provisions inconsistent with the statute are void.

In the Smalley case, the insured had died of health conditions.  The conditions were excluded or limited under the policy.  The court found the exclusions violated state law and ruled in favor of the beneficiary to the policy.