Live Insurance Policies – Incontestability Clauses

The Texas Insurance Code requires that life insurance policies contain incontestability clauses.  These are a provision that a policy will be incontestable after it has been in force during the lifetime of the insured for two years from its date, except for nonpayment of premiums.  This is found in Section 1131.104 for individual life insurance policies and Sections 705.101 – 705.105 for group life policies.  The effect of these clauses is to limit defenses so they can apply only during the first and second policy years.

The Texas Supreme Court, in 1972, stated the purpose of an incontestability clause is to protect the insured from a contest as to the validity of the policy after the set period has expired.  The opinion is styled, Minnesota Mutual Life Insurance Company v. Morse.

A problem has arisen from the statutes in that they do not specify whether the policy date or the effective date is considered its date; this creates an ambiguity that must be construed against the insurer.  And an insurer may not place a more onerous incontestability clause in the policy than the one prescribed by statute, although it may provide a shorter period than that prescribed.  This was made clear in the 1982, Houston 14th Court of Appeals opinion styled, Parchman v. United Liberty Life Insurance Co.

In Parchman the policy date in question was October 10, 1977, and the effective date was either July 20, 1977, or August 6, 1977, depending on whether a medical examination was required and completed.  Using the policy date (October 10) as the date that the clause began to run provided for a longer period than using the effective date (July 20 or August 6).  Thus, the policy’s incontestable clause was more onerous than the one prescribed by statute, so the statute prevailed, and the policy date in the incontestability clause was construed to mean the effective date.  In this case, the two year period began running on the earlier effective date rather than on the later policy date.