35

Table of Contents

35
Policy Provisions
Burke A. Christensen

Chapter Outline

POLICY FACE PAGE

STANDARD POLICY PROVISIONS

REQUIRED PROVISIONS: Grace Period; Policy Loans; Incontestable Clause; Divisible Surplus; Entire Contract; Reinstatement; Misstatement of Age or Sex; Nonforfeiture Provisions; Settlement Options

PROHIBITED PROVISIONS

OPTIONAL PROVISIONS

WAIVER AND ESTOPPEL

ADDITIONAL COMMON PROVISIONS: Accidental Death Benefits; Guaranteed Purchase Option; Waiver of Premium; Policy Filing and Approval

Contract of adhesion: a contract that is not negotiated. It is drafted entirely by one party. The other party to the contract is not permitted to alter the terms of the contract but may only accept or reject the contract. Because the drafting party has the freedom to choose the words of the contract, the law requires that party to abide by the words it has chosen. This means that any ambiguities are interpreted in favor of the other party.

A life insurance contract is a contract of adhesion. This means that the policyowner and the insurer do not negotiate the terms of the contract. The prospective policyowner performs only these two functions in the creation of a life insurance contract:

He or she applies for the policy (the contract) by filling out the application and supplying any medical information required by the insurer. This is not a negotiation. The applicant is merely specifying what type of contract he or she would like to be offered. Based on this information, the insurer will make an offer by issuing a policy.

The applicant is then asked to accept or reject the contract as offered by the insurer. The applicant accepts the offer by paying the initial premium. If a partial premium has been paid and a premium receipt has been issued by the insurer�s agent, only temporary coverage under the terms of the receipt is in effect. The contract is accepted by the applicant and binding on the insurer under the particular terms of the receipt and the policy.The applicant rejects the offered contract by refusing delivery of the policy. Even after the applicant accepts the insurer�s offer of coverage and a contract is binding on the insurer, the policyowner may, in effect, reject the contract and get a full refund based on the 10-day free look provision (which is explained later in this chapter). New York and about half of the other states require this provision, so it is now included in most contracts.

Because the prospective policyowner can only accept or reject the contract offered by the insurer, the contract of adhesion rules provide that all ambiguities in the contract of insurance will be resolved in favor of the policyowner and against the insurer. This rule of law is not entirely fair to insurance companies because there are substantial limitations on the insurer�s freedom to draft the insurance contract as it wishes. Insurers are required by law to include many types of provisions and in some cases are required to use or not use certain words. Thus it is not entirely correct to state that since the insurers are free to select the contract language, they have to give the benefit of ambiguity to the applicant.

Many states require that the contract avoid complex sentences and arcane legal terminology. The goal is to make the contracts easier for the consumer to read and understand. This goal, while laudable, conflicts with the goal of lawyers to be certain that a contract is interpreted exactly as the drafter intended. Over many years, courts have given certain legal terms specific meanings upon which lawyers have come to rely in drafting contracts. This "legalese" may be hard for the uninitiated to understand, but it offers a certainty that lawyers prefer. Nevertheless, it has become the policy of this country to prefer less technical language over the certainty of interpretation. Lawyers will have to rely on current and future cases developing new standard meanings as the simplified language of modern contracts is interpreted by the courts.

There are a number of required, prohibited, and optional provisions that are controlled by state law. Before a policy may be sold in a particular jurisdiction, its provisions must be filed with that state�s insurance department for approval.

Top