Class Action Alleges New York Life Insurance Co. ‘Habitually’ Violates AARP ‘Incontestability’ Clauses to Avoid Payouts

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A proposed class action alleges New York Life Insurance Company has consistently violated the terms of certain AARP-issued life insurance policies by challenging their contractual validity before “unilaterally rescind[ing]” the policies to avoid paying beneficiaries after a policyholder’s death.

The 12-page case alleges that although New York Life insurance policies issued through the company’s AARP Life Insurance Program contain an “incontestability” clause that prohibits the insurer from challenging a policy’s validity after it has been in effect for two years of a policyholder’s life, the defendant “habitually breaches” this provision after the two-year expiration date. The lawsuit claims New York Life, after challenging a policy’s validity, will then rescind the policy to avoid its obligation to pay a policyholder’s beneficiaries.

“Despite its limited upfront diligence, upon information and belief New York Life habitually contests these policies after the death of the policyholder, in violation of its contractual obligations,” the breach-of-contract lawsuit, filed in Pennsylvania’s Eastern District Court, alleges.

According to the suit, New York Life’s rescission of a policy after a policyholder’s death puts the individual’s beneficiaries at a disadvantage as far as challenging the insurer’s apparent conduct in court. The case says beneficiaries, upon finding out that New York Life has rescinded a policy once the two-year window has expired, find themselves in need of a lawyer to litigate “a nominal claim,” often less than $20,000, while still mourning the loss of a loved one and without the knowledge of the policyholder’s dealings with the defendant.

“By designing its denials process to coincide with the simultaneous burden of bereavement on a potential plaintiff and the death of the only other signatory to the contract, New York Life is able to maximize profits, while exposing itself to a minimal risk of litigation,” the complaint scathes.

The plaintiff, a Philadelphia resident, says her grandson obtained in October 2016 a $15,000 New York Life insurance policy through the AARP program and named her as one of two beneficiaries. Upon the plaintiff’s grandson’s death in December 2019, the plaintiff was entitled to a $15,000 payment as a beneficiary of his life insurance policy, the suit says.

When the plaintiff attempted to collect on the policy, however, New York Life, the lawsuit alleges, sent the woman a letter dated May 1, 2020 in which the company claimed it was denying payment because it “had reason to believe that the contract was fraudulently purchased.” In subsequent communications, the insurer informed the plaintiff that it believed she had signed the policy application instead of her grandson, “which is false,” the case alleges. According to the suit, New York Life rescinded the life insurance policy and returned the premiums to the plaintiff, which she declined.

The lawsuit argues that regardless of the alleged merit of New York Life’s argument, the two-year contestability period for the plaintiff’s grandson’s life insurance policy had expired in October 2018.

According to the complaint, New York Life, in violation of the terms of its contracts, “regularly denies payment” to beneficiaries after the contestability period has elapsed. Though the defendant claims it is “rescinding” the policy, the company, the case contests, fails to follow the process outlined in its policies for recission, which includes the filing of a civil lawsuit.

The proposed class action alleges New York Life engages in a “cursory investigation” before determining that a policy was fraudulently obtained. The company then uses the ostensible finding that a policy was “fraudulently obtained” as an excuse to rescind the policy and mail the beneficiaries a refund of the premiums paid, the lawsuit contends.

“New York Life’s denials are in this way a product of the chief assessment tool of the insurance industry—they are an exercise in balancing risk,” the suit says.

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