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ethics and insurance

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Issues of fairness often arise when insurance companies attempt to avoid payment on policies. Policies for life or health insurance commonly include, by statutory requirement, incontestability clauses. An incontestability clause provides that after the policy has been in force for a specified length of time - often two or three years - the insurer cannot contest statements made in the application. In other words, the insurer cannot later avoid paying on the policy on the basis of a material misrepresentation made by the insured on the policy application. Nonetheless, an insurer will sometimes attempt to avoid payment, notwithstanding the passage of the time period specified in an incontestability clause. Consider the following example. "John Doe" applied for a disability policy from New England Mutual life Insurance Company. The application form stated that the policy excluded coverage of preexisting conditions that were not disclosed in the application. The policy also contained an incontestability clause, which stated that after two years, the insurer could no longer contest any statements made in the application. John Doe did not disclose on the application the fact that he had tested positive for HIV (human immunodeficiency virus, the virus that causes AIDS). When he later submitted a claim for benefits under the policy, the insurer argued that it should not be bound by the incontestability clause because the insured knew, at the time that he filled out the application, that he would likely develop AIDS.

A question with ethical implications also arises when an insurance applicant mistakenly makes a misstatement, or misrepresentation, on his or her application for insurance. For example, when Harold Green applied for a health-insurance policy, he answered "no" to a question asking whether, within the last five years, he had, or had been told that he had, "kidney failure." The insurance company had a clause in its application form just above the signature line that read: "The answers given by me are full, true and complete to the best of my knowledge and belief." A year later, Green made a claim against the policy after he had been hospitalized for kidney failure, among other things. The insurance company, after learning from Green's medical records that he had suffered for several years from chronic kidney failure, canceled the policy and returned to Green all of the premiums that he had paid for the policy. Green sued the company to obtain reimbursement for the cost of his hospitalization, contending that his physician had never told him that he had kidney failure and that he had answered the question truthfully on the application. Green's physician testified that it was his regular practice to use layperson's terms, rather than medical terms, when informing patients of their conditions. The physician stated that he probably told Green that he had "some sluggish kidneys" or "slow kidneys."

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In the first instance, ethically it should go in favor of the insurance company since the applicant blatantly lied. However, legally, since the statutory requirement has been met, it will go in favor of the applicant. This may not be ethical but it also puts the burden on ...