In its simplest form the incontestable clause states that a policy is incontestable from its date of issue, except for nonpayment of premium. The purpose of such a clause is to enhance a life insurance contract�s value by providing assurances that its validity will not be questioned by the insurance company years after it was issued and has possibly given rise to a claim. It is important to understand that the incontestable clause applies to whether the contract is valid, not to whether the terms or conditions of the contract have been fulfilled. The clause was voluntarily adopted by insurance companies partly as a result of competitive pressure to overcome prejudices against the life insurance business created by contests based on technicalities and to give an assurance to "persons doubtful of the utility of insurance, that neither they nor their families, after the lapse of a given time, shall be harassed with lawsuits when the evidence of the original transaction shall have become dim, or difficult of retention, or when, perhaps, the lips of him who best knew the facts are sealed by death."

A typical incontestable clause reads as follows: "We will not contest the validity of this policy, except for nonpayment of premiums, after it has been in force during the insured�s lifetime for two years from the policy date. This provision does not apply to any rider providing accidental death or disability benefits."

The incontestable clause is a manifestation of the belief that a life insurance policy�s beneficiaries should not be made to suffer for mistakes innocently made in the application. As will be shown, therefore the beneficiary may be protected by the incontestable clause even if the error in the application is based on a fraudulent or material misrepresentation by the applicant or by a failure of a condition precedent to the existence of the contract. After the insured�s death, it would be extremely difficult, if not impossible, for the beneficiary to disprove the allegations of the insurance company that irregularities were present in procuring the policy. If there were no time limit on the insurance company�s right to question the accuracy of the information provided in the application, there would be no certainty during the life of the policy that the benefits promised by it would be payable at maturity. The honest policyowner needs assurance that at death the beneficiary will be the "recipient of a check and not of a lawsuit." The incontestable clause provides that assurance. It is based on the theory that after the insurance company has had a reasonable opportunity to investigate the circumstances surrounding issuance of a life insurance policy, it should thereafter relinquish the right to question the validity of the contract.

Originally introduced in New York by voluntary action in 1864, the incontestable clause had become so firmly entrenched and was so obviously beneficial to all parties that the legislation that grew out of the Armstrong investigation in 1906 made the inclusion of the clause mandatory in life insurance policies. Other states followed New York�s example so that, today, the clause is required by statute in all states. The laws of the various states differ as to the form of the clause prescribed, but no state permits a clause that would make the policy in general contestable for more than 2 years.

It is generally agreed that the original purpose of the incontestable clause was to protect the beneficiary of a life insurance policy against the innocent misrepresentations or concealments of the insured. There was considerable doubt in the early years that the incontestable clause could operate to bar the denial of liability on the grounds of fraud. Basic tenets of contract law are that (1) fraud in the formation of a contract renders the contract voidable at the option of the innocent party and (2) in general, parties to a contract are not permitted immunity from the consequences of their fraud. These two rules would seem to limit the applicability of the incontestable clause, therefore, to inadvertent misrepresentations or concealments. Nevertheless, over the years, judicial interpretation has firmly established the principle that the incontestable clause is also effective in cases involving fraud. Even more to the point, since no reputable life insurance company is likely to contest a policy under ordinary circumstances unless there is evidence of an intent to deceive, it may be concluded that the primary function, if not the purpose, of the incontestable clause is to protect the insured and the beneficiaries against the consequences of the insured�s (or the policyowner�s) fraudulent behavior or erroneous charges of fraud by the insurer.

Erroneous insurer charges of fraud are precluded by the clause for any policy in force beyond the contestable period. In holding that the expiration of the contestable period precludes a defense even on the grounds of fraud, the courts have been careful to emphasize that they are not condoning fraud. They justify their action on the grounds that the insurance company has a reasonable period of time in which to discover any fraud involved in procuring the policy and is obligated to seek redress within the permissible period of time. In line with this reasoning, one court stated as follows:

The incontestable clause has been described as a private contractual "statute of limitation" on fraud, prescribing a period shorter than that incorporated in the statutory enactment. This analogy with conventional statutes of limitations has been questioned by some critics, but the basic purpose of the incontestable clause and statutes of limitation is the same: to bar the assertion of legal rights after the evidence concerning the cause of action has grown stale and key witnesses are no longer readily available.

The courts recognize that some unscrupulous persons are permitted to profit by their fraudulent action through the operation of the incontestable clause, but they proceed on the premise that the social advantages of the clause outweigh the undesirable consequences. "The view is that even though dishonest people are given advantages under incontestability clauses which any right-minded man is loath to see them get, still the sense of security given to the great mass of honest policyholders by the presence of the clause in their policies makes it worth the cost."

Despite the courts� general adherence to the doctrine that the incontestable clause is a bar to a defense of fraud, there are some species of fraud so abhorrent that their nullification through the incontestable clause is regarded to be in contravention of public policy. For example, the incontestable clause has been held not to apply when a contract was negotiated with intent to murder the insured, even though the murderer was not the beneficiary. In addition, in cases where the applicant lacks an insurable interest, it is the majority view that the courts will permit the insurer to deny liability beyond the contestable period. Likewise, in cases where someone, presumably a healthier person and usually the beneficiary, has impersonated the applicant for purposes of undergoing the medical examination and answering the questions pertaining to the applicant�s health, the courts have uniformly held the purported contract to be null and void on the grounds that there has been "no real meeting of minds." While the term "no real meeting of minds" has been replaced by the better term "no manifestation of mutual assent," it is nevertheless quite correct to state that the purported contract never came into existence. Since the incontestable clause is a part of the contract, it cannot be enforceable if the contract is void. Finally, in a few cases, the courts have recognized execution for a crime as legitimate grounds for denial of liability, although in other cases, the company has been held liable.

A policy can be prevented from becoming incontestable only by appropriate legal action by the company during the contestable period or, under one type of incontestable clause (to be described later), by the death of the insured during the contestable period. The courts hold that there must be a "contest" during the contestable period, and it becomes a matter of interpretation as to what constitutes a contest within the meaning of the clause.

In some jurisdictions a notice of rescission accompanied by a return of the premium is deemed to constitute a contest. The majority of the courts, however, have held that there must be a court action that challenges the validity of the policy as a contract. Thus under the majority rule, the requirement of a contest can be satisfied only by a suit in equity for rescission before a court of competent jurisdiction or by a defense to a judicial (at law) proceeding seeking to enforce the contract. In the first instance, the company would be seeking rescission by a suit in equity; in the second case, it would be defending against an action at law instituted by the beneficiary in an attempt to collect the proceeds. A suit for rescission is permitted only when there is no adequate remedy at law, and in most jurisdictions, defense against a beneficiary�s action is regarded as an adequate remedy. Equity proceedings, however, are always available to the company while the insured is alive during the contestable period and, as is pointed out below, are usually available after the death of the insured only under certain types of incontestable clause.

Detailed rules of legal procedure have evolved to establish the precise moment at which a contest has materialized. Once the contest has been joined, the contestable period stops running, and regardless of the outcome of the initial contest, the incontestable clause cannot be invoked to forestall any other proceeding. Thus if a contest is initiated with the insured during the contestable period, the beneficiary may be made a party to the proceedings after the expiration of the period specified in the incontestable clause.

The interpretation of the term contest is also important in another respect. Broadly interpreted, the incontestable clause could prohibit the denial of any type of claim after the contestable period has expired. It could force the company to pay a type of claim that was never envisioned under the contract. Fortunately, the majority of the courts do not interpret the clause in that manner. They make a distinction between contests that question the validity or existence of a contract and those that seek to clarify the terms of the contract or to enforce the contract�s terms. In one widely cited case, the court stated as follows:

The significance of this distinction will be brought out in the discussion of the incontestable clause�s application to other contract provisions.

Where the operative date of a life insurance policy coincides with the effective date, there is little question about when the contestable period starts to run. It begins the day following the date on the policy. When the effective date of protection is earlier than the date of the policy, however, some courts have made the beginning of the contestable period coincide with the commencement of insurance coverage, regardless of the date of the policy. This would be the normal case when conditional receipts are used. On the other hand, when the policy has been antedated so that the date of the policy is earlier than the effective date of coverage, the courts, applying the rule of construction most favorable to the insured, have usually held that the contestable period begins with the date of the policy. This would be applicable when a policy has been back-dated to obtain a younger insurable age. This is true whether the clause provides that the policy will be incontestable after a specified period from the "date of the policy" or the "date of issue." When the policy makes it clear that the contestable period starts to run only from the time the policy actually becomes effective, however, there is no reason to apply the rule of construction most favorable to the insured, and the courts will give effect to the contract as written.