Although the state laws are not uniform, most states prohibit insurers from including certain provisions in their policies. For various reasons, courts or state legislatures have determined that these prohibited contract provisions violate public policy. There are five generally prohibited provisions:
- The insurance producer, who is the agent of the insurance company, cannot be made the agent of the insured for purposes of filling out the application for insurance. If the producer could be made the insured�s agent rather than the company�s agent, then the insurance company could not be charged with knowing facts presented to the agent but not communicated to the insurance company by the agent. Note that this restriction against making the producer the agent of the insured is confined to taking the application. As more completely described in chapter 16, the producer is sometimes held to be the agent of the insured for other purposes.
- Nonpayment of a loan cannot cause a forfeiture. The state laws generally provide that so long as the cash value of the policy exceeds the total indebtedness on the policy, the policyowner�s failure to repay the loan or to pay interest on the loan cannot cause a forfeiture of the policy.
- Less value statutes preclude an insurer from promising something on the face of the policy and taking it away in the fine print. These laws are called less value statutes because the insurer is prohibited from providing a settlement option of less value than the death benefit of the policy.
- There are limitations on the time for filing lawsuits against the insurer. All states have statutes of limitation that control how long a person may wait before bringing a lawsuit of any type against another party. These statutes are designed to force people to sue in a timely fashion rather than waiting in the hope that evidence favorable to the other side will be lost. Once the time period specified in the statute has expired, the courts will not hear the lawsuit.
The statutes of limitation have different lengths for different types of lawsuits. Ordinarily, the time period during which a lawsuit based on a contract must be brought is quite long; 10 years is not an unusual length. Sometimes the parties to a contract will agree to a shorter time period for initiating a lawsuit (based on a breach of that contract) than the period prescribed by the state law. The insurance codes of several states prohibit insurers from issuing policies that greatly reduce the length of the statute of limitations on contract actions. These statutes permit insurers to shorten the period to a reasonable length but not to eliminate it entirely. The permissibly shorter periods range from one to 6 years. Some states do not permit insurers to reduce the statute of limitations period at all. These laws protect the interests of the insurers and the public. Insurers are protected because the laws allow them to impose shorter limitation periods than otherwise permitted in the state. This benefits insurers because it requires plaintiffs to sue while information relevant to the insurance policy is still easy to obtain. The public is protected because the statutes do not allow insurers to shorten the limitation period so much that the public does not have sufficient time to determine whether a lawsuit is worthwhile.
- No lengthy backdating to save age is allowed. Backdating a policy means issuing the policy as if it had been purchased when the insured was younger. This practice has an advantage and a disadvantage. The advantage is that the insured will pay lower annual premiums for each increment of the policy because the premium will be based on the younger age. The disadvantage is that the insured must pay the premium applicable to the length of the backdating. This means that the insured will have paid for insurance protection during a period of time before the policy was issued when no coverage was provided. The statutes generally limit backdating to no more than 6 months.
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