Clean Sheeting

What Is Clean Sheeting?

Clean sheeting is the fraudulent act of purchasing a life insurance policy without disclosing a pre-existing terminal illness or disease. This type of fraud is often done with the knowledge of the purchaser and the agent.

Understanding Clean Sheeting

In cases of clean sheeting, the policy is often sold shortly after it is purchased in a viatical settlement, but the money received is a lot less than what a legitimate settlement would yield. This is because there is a higher chance that the fraudulent policy will be rescinded. This type of fraud provides huge gains for the person who buys out the purchaser because they are able to buy the policy at a large discount, somewhere around 10% of the policy's face value.

To Tell the Truth

Life insurance companies go to great lengths to make sure they are charging enough for the risks of each client. Thus, when applying for a life policy, a series of questions must be completed, usually online or by mail, that ask about smoking, blood pressure, dangerous hobbies, and family history, to name a few areas of inquiry.

A follow-up phone call asks the same questions then usually adds dozens of others, often with the language "have you" or "have you ever been." It's easy to forget (or lie) about an old injury or some other health problem, but the insurer will remember. Any omissions or inconsistencies with medical or other records may result in a denied claim or the return of the premiums paid.

An unscrupulous agent may suggest that there's no harm in telling a few white lies in this process. The agent will collect their commissions and move on. Meanwhile, those inaccuracies will remain and if you make a claim in the contestable period, the records will be gone over with a fine-tooth comb.

In insurance, an incontestability clause is a clause in most life insurance policies that prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed. A typical incontestability clause specifies that a contract will not be voidable after two or three years due to a misstatement.

Some states allow insurance companies to include a provision, stating that a one- or two-year contestability period must be completed within the lifetime of the insured. In this scenario, a life insurance company can refuse to pay benefits if a policyholder was so unwell when they applied for coverage that they died before the contestability period was over. Some states also allow the insurance company to void a policy if deliberate fraud is proven.

Example of Clean Sheeting

In 2001, a California couple was sentenced to 40 months in jail for clean sheeting. Lonnie Harwell and Penni Alexander-Harwell recruited terminally ill patients, primarily those that suffered from HIV/AIDS, to buy insurance policies without disclosing vital facts related to their health. The policies had low values, ranging from between $25,000 to $150,000, and were issued to individuals between 15-50 years of age. Most importantly, they did not require physical examination or bloodwork as prior conditions for issue.

The Harwells paid a percentage of the claimed amount as well as the premiums. The patients benefited from receiving the lump sum payments. After the patient's death, the Harwells claimed the insurance amount. They benefited from "stacking" several such policies together.

The Harwells had established a network for referrals of such patients with a $1,000 referral benefit. The California Department of Insurance (CDI) alleged that insurance companies issued more than $11.6 million worth of policies to such individuals.