Suicides and implications for insurance
In a spate of three weeks or so, the country witnessed the unpleasant news of alleged high profile ‘successful’ suicides by two university students. These were likely to be among the many others that may not have gained such media prominence. Indeed, these incidents have become topical news items that have dominated the headlines in both social and mainstream media. It is a truism that hardly a week passes without incidents of suicide. Indeed, except for highly placed personalities in society, several other suicide cases go unreported.
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Though many ‘experts’ have called on the youth to share their problems with parents, relations and friends, whose counsels are likely to prevent such unfortunate incidents, my own perspective this week seeks to throw more light on the implications of suicides on insurance and how they relate.
Reasons for suicide
There is a myriad of reasons an individual may decide to commit suicide. For instance, the possibility of losing a business or contract, job, debt accumulation, and avoiding a morally humiliating situation, among others, may cause a person to become distraught and, therefore, lose the essence of his / her living. While conceiving the idea, such individuals may still be mindful about making provision for their families. Though this may be considered a form of ‘benevolent insanity’, it still has the potential to run down life insurance companies, if permitted.
The aftermath of suicide
Suicide often generates anger, sadness, pain and anguish, depression, etc. In our part of the world, superstitious inclinations may even be given. Though not established, the recent ‘university suicide incidents’ were speculated to have various reasons for the youth whom society may consider as not in that category of people who should be overwhelmed with insurmountable problems to warrant taking their own lives.
In all of this, family members may also have to grapple with the attendant financial issues, even in their grief. Indeed assuming a parent has a funeral policy on a child in the university and a death claim arises as a result of the suicide, there should be proof of death in order to establish the validity of the claim. Once the insurer is convinced about the cause of death, the claimant then has the onus to prove his title.
Meanwhile, deaths resulting from suicide have, lately, become topical in determining death claims payments, and the following two principles are usually invoked in assessing whether or not to pay such claims:
1. The sticky suicide clause
Under this clause, no death benefit will be paid, if the insured commits suicide within two years of taking out a policy. Similarly, whenever the insured replaces an existing life insurance policy with a new one, the policy resets the clock to zero. This is typified by a famous case in the 1970s, in which an Iowa man replaced four small policies with one policy that had a death benefit of about $60,000. The man was found to have committed suicide within two years of the new policy, and the insurer consequently repudiated the claim on the basis of the suicide clause. A lawsuit ensued and four years later, on the eve of trial, the widow of the deceased settled for $23,000, but had to pay substantial legal costs (Wikipedia, December 7, 2014).
2. The ‘incontestability clause’
Under this clause, if the insured person misstates facts on the policy application and dies within two years, the insurance company may decline the claim, after which the policy becomes “incontestable” except in cases of outright fraud. As with the suicide clause, the clock on the incontestability clause is reset, whenever the insured replaces the existing policy with a new one.
Period of contestability
Often, individuals buying life insurance policy tend to be oblivious of the fact that claims arising from their policies could be declined, on basis of some technicalities. Typically, life insurance policies have a provision often referred to as ‘period of contestability,’ which applies, particularly when death is as a result of suicide. Thus the period of contestability is a protection for the insurer against people taking out a large amount of life insurance, only to commit suicide shortly afterwards, mainly to improve their family’s financial position. Though this action may be unthinkable to most people, it does occur in the real world – or at least it used to, before the two-year suicide limitation.
Legal suits vs. life insurance laws
Many examples abound to explain the reason family members sometimes resort to the law courts to claim insurance benefits. The case of Heath Ledger immediately comes to mind. Ledger, who played the Joker in the movie ‘The Dark Knight’, died in 2008, seven months after he took out a $10 million life insurance policy. The New York Medical Examiner’s office ruled that the death was an “accident, resulting from the abuse of prescribed medications”.
This raised questions regarding whether Ledger committed suicide or had a drug habit that wasn’t disclosed on his policy application. Rather than paying out the claim, the insurer delved into investigating the case. In response, lawyers for Ledger’s young daughter Matilda filed a lawsuit. The case was, however, settled for an undisclosed amount, but was stated as less than $10 million.
What we need to know
Prior to the Suicide Act of 1961, suicide committed by anybody of sound mind was considered criminal. Such persons must not benefit from their own criminal acts. In this regard, no legitimate claim can be made by the next of kin of the insured person who dies from suicide.
While the suicide Act of 1961 decriminalised suicide, it failed to relate this to life insurance. Meanwhile, the mention of a post-1961 insurance claim, where death could be by suicide while of sound mind is not entirely free from doubt, if there is no suicide clause in the policy. This, therefore, resonates with the school of thought that since suicide was no longer a crime; claims arising thereon should be paid.
Instructively, by the fundamental principles of insurance, an insured person cannot recover or make a claim if, by his/her own deliberate act, s/he causes the event insured against (e.g. death by suicide).
Were claims on suicide to be ‘open ended’, distraught individuals could take out huge sums of life insurance policies, then kill themselves shortly afterwards, just for their dependants to ‘live well.’ Invariably, insurers must continue to pay particular attention to death claims with suspicion of suicide in order to discourage claims with extortionist motives using suicide as a conduit.