Policy exclusions: war, aviation, and dangerous occupation

Three risks the insurer never agreed to cover

A life policy promises to pay on death from any cause. It then takes a short list of causes back, in writing. War, aviation and dangerous work or play are the classic three, and they are exclusions -- risks the insurer deliberately priced out of the contract, not facts it says the applicant got wrong.

That distinction settles most questions on this objective. A contest is an attack on the validity of the policy, and it dies at the end of the contestable period. An exclusion is a term of the policy itself, so it lasts as long as the policy does, and the insurer never has to prove that anyone misrepresented anything.

When an excluded death occurs the insurer does not simply walk away. The standard remedy is a return of the premiums paid, commonly with interest and less any outstanding loan. The beneficiary gets the money back; what is lost is the face amount.

The war exclusion comes in two widths

The status type excludes death occurring while the insured is in military service, whatever the cause. An insured killed in a car crash on weekend leave is excluded, because the clause turns on the insured's status and not on what did the killing.

The results type excludes only death resulting from an act of war or from the conflict itself. That same car crash is covered. Results is the narrower exclusion, and therefore the one more favourable to the insured and the beneficiary -- the usual point of comparison. A shorthand worth keeping: status asks where were you, results asks what killed you.

A war clause is not standard in every contract. It tends to be attached by rider when the applicant is already in the service or conflict is foreseeable, and it may be removable afterwards. Group life often carries none at all.

The aviation exclusion is about which seat you were in

Ordinary commercial air travel is covered. A fare-paying passenger on a regularly scheduled flight is running a risk the mortality tables already contain, so the policy pays.

What is carved out is flying where the insured has a hand on the controls, or is aboard something other than scheduled service: pilot or crew member, student or private pilot, military aviation, test flights, crop dusting, stunt or charter flying.

An insurer has three answers to an aviation risk: accept it without restriction, attach an aviation exclusion rider, or cover it for a flat extra premium. The third point matters -- a policy rated for aviation pays the full face amount on an aviation death, because the extra premium bought exactly that risk.

Dangerous occupations are an underwriting decision

Hazardous occupations -- roofing, commercial fishing, logging, explosives, high steel -- and hazardous avocations -- skydiving, scuba, auto racing, mountaineering, hang gliding -- are handled the same three ways: decline the application, rate up with a flat extra premium per thousand of face amount, or issue with an exclusion rider naming the activity, so that death from that cause alone is excluded.

A flat extra can often be removed later if the insured gives the activity up and the insurer is satisfied. An exclusion rider has effect only if it is attached to and made part of the contract.

The application asks about occupation and avocation for exactly this reason. An applicant who conceals dangerous work has made a material misrepresentation -- but that is a contest, and it is available only inside the contestable period. The exclusion rider is the more durable protection, which is why insurers reach for it.

Life classifies at issue; health and disability follow the insured

A life policy fixes the insured's classification when it is issued. If the insured later leaves an office for a logging crew, the policy is unaffected: there is no reduction of benefit and no contest, because nothing said at application was untrue when it was said.

Health and disability contracts handle the same fact differently, through the standard optional change of occupation provision. If the insured is injured or falls sick after changing to an occupation the insurer classifies as more hazardous, the insurer pays only the portion of the indemnity the premium already paid would have purchased at the rates for that more hazardous class. The provision runs both ways: on proof of a change to a less hazardous occupation, the insurer reduces the premium rate and returns the excess unearned premium pro rata.

What this means at the point of sale

Every exclusion the policy carries must be disclosed to the applicant when it is sold, and any exclusion rider must be signed for and attached. A producer who lets a client believe an excluded loss will be paid has created the worst kind of claim -- one denied years later, at the very moment the family expected the contract to work.