A New York and New Jersey Lawyer Who Represents Policyholders and Beneficiaries in Life Insurance Denial Cases

A heartwarming story comes out of Bloomfield Hills, Michigan about a jury verdict that awarded a $2 million policy to an elderly widow after the life insurance company, United of Omaha, declared the policy to have lapsed when she and her husband failed to make a timely premium payment while he was dying in the hospital.

The insured was a physician who had invested $350,000 in premiums in the policy (roughly $4,000 per month), issued in 2001, in order to provide for his aging wife and their blind and disabled son. Because she did not receive the policy value, the widow actually ended up losing her home.

Apparently, the agent notified the insurer in August 2008 that the insured was seriously ill. The December 2008 premium notice was purportedly mailed out, but the widow said she never received it. Shortly after her husband died on January 23, 2009, she noticed the oversight and sent in two payments that were rejected. According to the widow’s attorney, United of Omaha returned the payments, saying the policy was paid in full. Then, strangely, it returned them and said it was not honoring the death claim. United of Omaha claimed that it sent multiple premium notices and would have accepted the late payments if the husband had not passed away.

Indeed, it is heartwarming that the widow eventually was paid, although she did suffer great hardship by losing her home and undoubtedly also endured much emotional distress. In my opinion, in a case such as this, the insured should receive damages above the face value of the policy with interest, in order to provide just compensation and deter this type of conduct. This is especially warranted in this case where the insurance company was on notice that the insured was seriously ill. It could have reached out to the family to make sure that payments were timely made and the policy remained in force. Of course, it did not do so.

It is important to realize from this case that insureds frequently, when they are very ill and on their deathbeds, neglect to pay their premiums. Naturally, paying them is not first and foremost on their minds when they are struggling for their lives, and may be incapacitated or in severe pain. An insured, therefore, should investigate purchasing a policy rider that covers premiums in the event of a disability.

It is also important to note that insurance companies regularly earn profits from this type of situation. It’s not just a fluke that happens once in a while, but rather, life insurance companies know this is a significant source of revenue. Insureds will invest considerable sums in life insurance policies only to have their coverage lapse during their final days because they missed one premium payment. It is unfortunate that this occurs, and in my view a shameful way to consciously earn profits year after year, but it happens all the time.

A life insurance policy is designed to protect beneficiaries in the event of the death of the insured. It is of course known that insureds may be incapacitated prior to death and therefore may miss premium payments. You would think a feature that safeguards this from happening would be built into each and every policy, but unfortunately it is not.

 

 

I apologize for being a little late out of the starting gate on this one, but here goes …

In January 2012, the First Department, Appellate Division, did something rather significant in the field of New York insurance law by overruling a decision from eight years earlier in 2004, DiGuglielmo v. Travelers Prop. Cas. (6 AD3d 344 [2004]).

That decision did not require an insurance company to disclaim based on lack of timeliness until it had investigated other possible reasons for disclaimer. The insurer could sit back holding its cards and wait until it had dotted all of its i’s and crossed its t’s to issue a disclaimer letter.

But not so anymore.

In the 2012 decision, George Campbell Painting v. National Union Fire Ins. Co. of Pittsburgh, the court aligned itself with its sister, the Second Department, to hold that Insurance Law section 3420(d) “precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid – here, late notice of the claim – while investigating other possible grounds for disclaiming.”

In the case, the insurer, which issued a disclaimer for late notice on May 17, 2006, was aware of this particular defense four months earlier. Its inaction over that time period rendered the disclaimer ineffective as a matter of law. New York courts have routinely decided that an insurance company must issue a disclaimer within approximately 30 days after the grounds become known to it.

The 2012 decision has a profound impact on how insurers must address denials of coverage based on insured’s providing a late notice of the claim or incident. It also wipes away the hypocrisy of an insurance company denying coverage to its insured because of late notice–potentially resulting in financial ruin tot he insured — yet itself dawdle in issuing a disclaimer letter on those grounds.

The decision also makes clear that this principle applies to all reasons for a disclaimer. In other words, if the insurance company knows of any valid reason to disclaim coverage, late notice or other, it should do so immediately.

As for its rationale, the court found that the DiGuglielmo rule was inconsistent with the language of Insurance Law section 3420(d) which states that a disclaimer must be made “as soon as is reasonably possible.” Further, it observed that as a policy matter, if the insurance company is going to step away from providing coverage, it should do so as soon as possible so that the insured can pursue other avenues to protect him or herself.

This was a good decision for New York insurance policyholders.

The New York Times reports that MetLife, the largest life insurance company in America, is now the third major insurer to settle claims that it failed to properly track the deaths of its insureds, keeping millions in premiums for its own financial gain.

MetLife has agreed to pay a number of states a total amount of $40 million, without formally admitting any wrongdoing.

The settlement is the culmination of an effort by a majority of states to pressure life insurance companies to take steps to pay unclaimed life insurance benefits to beneficiaries. Insurers have been vigorously criticized for having utilized social security death records to stop annuity and retirement benefits for deceased individuals, but not using those same records to determine if they held unclaimed life insurance policies. Meanwhile, the companies either retained the premiums received as pure profit, or retained the money so that it could earn investment income.

New York officials say that under the recent push, it has recovered $272 million for life insurance beneficiaries.

Under the settlement, policy benefits that are still not matched to beneficiaries are to be paid to state unclaimed property funds. Two other life insurance companies, Prudential and John Hancock, have already reached settlements with state insurance regulators.

The settlement is a positive development, although the fine agreed to by MetLife is only a small percentage of the total life insurance benefits it has withheld over the years.

 

A recent case from the Fourth Department shows how difficult it can be in New York to win a lawsuit against an insurance broker for failing to procure appropriate insurance coverage. (Radford v. Peerless Ins. Co., 2012 NY Slip Op 02244 (Mar. 23, 2012).

This situation often arises when the broker does not get high enough coverage limits or obtains a policy that has exclusions that do not cover a loss. The policyholder, in such as a case, is left holding the bag and is without insurance coverage to compensate him or her for the loss.

Here, the case does not set forth the underlying facts that gave rise to the claim. Rather, it focused on the legal claims asserted by the plaintiff and why they could not succeed.

Those claims were for (1)negligence, (2) breach of contract, (3) negligent misrepresentation, and (4) breach of fiduciary duty.

With regard to the first two, the court held that they were properly dismissed because there was no special relationship between the parties. In other words, the relationship did not go above and beyond the typical broker-customer relationship that involves the purchase of an insurance product. Furthermore, the plaintiff did not make a specific request for coverage that was breached by the broker.

As for the last two claims of negligent misrepresentation and breach of fiduciary duty, the court similarly held that no cause of action existed because of the lack of a special relationship. It went further to discuss how for there to be a valid negligent misrepresentation claim, the broker must “possess unique or specialized expertise, or [be] in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.”

While the decision makes passing reference to the plaintiff’s claim that it made a general request for additional coverage, we don’t know further details. The thrust of the decision is that without something more, such as an extended course of dealing, or additional compensation to provide financial advice, or the failure to obtain specifically requested coverage, an insurance broker will not be liable for failing to procure appropriate insurance.

The decision also shows how litigants often bring both contract (2 & 4)and tort (1 & 3) claims, yet the legal analysis is similar for both.

Advice for insureds: make your request for coverage in writing and be as specific as possible, and read your policy when you receive it instead of just filing it away.

This month a panel of the Appellate Division, Third Department, upheld a rule promulgated by the New York State Department of Financial Services that requires New York insurance brokers and agents to disclose to consumers whether they receive incentives or other compensation from insurance companies.

The decision is matter of Sullivan Financial Group. v. Wrynn.

The court was faced with the task of determining the scope of authority that the Department of Financial Services has to regulate the field of insurance. In doing so, it had to explore the contours of legislative action and administrative rule-making, since it was argued that the rule was inappropriate as it was not legislatively-enacted.

The court also observed that the rule did not contravene the common law, which imposes few duties on insurers to insureds. In other words, nothing in the common law forbids the enforcement of the rule.

The rule was enacted after an investigation revealed bid-rigging and steering schemes between insurers and agents and brokers. This occurs, for instance, where an agent or broker is provided with compensation or incentives from a particular insurer, while the customer is under the mistaken impression that the agent or broker is selling a product without an allegiance to a particular company. There needs to be transparency and disclosure in these transactions.

I read an article about STOLI policies that provides an interesting perspective on the secondary life insurance market.

To the uninitiated, Stranger Originated Life Insurance (STOLI) policies are those where investors approach people (usually the elderly) to purchase life insurance policies. The investors pay the insured a sum of money to take ownership of the policy and either keep it or sell it to others. The end result is that a person or entity without an insurable interest in the insured pays the premiums and becomes the beneficiary. A variation on this is when investors simply purchase an existing policy from an insured.

This is essentially a form of investing in, or wagering on, the life and death of a person. I have written that it is a shady practice because it devalues human life. Don Corleone famously said about the sale of drugs that, “It’s a dirty business.” Well, it’s not a stretch to say that the same applies to STOLI policies.

I still believe this, but my perspective has opened up a little. An article in Tallahassee.com got me thinking about these arrangements in a different way.

It points out how a life insurance company voided a policy after the death of the insured simply because it claimed that he had entertained the idea of selling the policy, even though he never actually sold it. This, of course, did not stop the insurance company from pocketing premiums for two-and-a-half years.

The article explains that being able to sell a life insurance policy on the open market may not be a bad thing, after all. What if a terminally ill person cannot afford to pay premiums? Or what if a parent obtains a policy to protect his or her children and years later that same need no longer exists? Should the policy terminate with the insurance company gaining a windfall?

Life insurance companies actually count on earning money from premium payments for policies that will never pay out. Did you know that? But if you have paid premiums year after year, and no longer can afford to do so, or no longer need coverage, why should the money you have paid go into the insurer’s pockets with no return to you? Florida law allows an insured to sell a life insurance policy after it has been in existence for two years. Because the secondary market puts money in insured’s pockets, and ultimately takes it out of the insurance company’s bottom line, they rail against it.

I think the Florida law makes sense. It protects insureds who are in financial need and provides more financial and estate planning options. But I remain cynical about true STOLI policies that are procured with the intent of selling them directly to investors.

While these types of STOLI policies can be useful to people who need money, and the financial arrangement is really no different for the insurance company than if the insured intended to keep the policy–in either case, the insurance company collects premiums and pays a benefit upon the insured’s death–they do tend to devalue human life. I’ve not yet heard of an insured for a STOLI policy being knocked off, but if it happened, would it really be a surprise?

 

The Wall Street Journal recently reported that two of the largest life insurance companies in the U.S., MetLife and Prudential, have been sued for over $1 billion due to unclaimed life insurance policies they avoided handing over to the Illinois abandoned-property department.

The plaintiff is Total Asset Recovery Services LLC of Auburn Hills, Michigan, a firm that specializes in unclaimed property searches. The suit, alleging fraud, claims that from 1988 to 2010, the two life insurance companies failed to transfer to Illinois 4,766 policies with an estimated $524.3 million.

The issue of unclaimed policies has followed the life insurance industry in recent months, blemishing its reputation, as they have been alleged to have failed to turn over unclaimed policies to states, or pay them to beneficiaries, even though they had knowledge that the insureds had passed away and no claim had been made. Some investigative firms have contracted with states to locate unclaimed policies for a percentage of their value. The controversy arose because insurance companies routinely track down deaths through Social Security records in order to cut off retirement checks.

As the lawsuit has been brought as a whistleblower action, the Illinois Attorney General has indicated that it wants to join the case, as it has a right to do. If it does intervene, the plaintiff may receive 15% to 25%, while if it does not, that amount would increase to 25% to 30%. The over $1 billion sought in damages represents damages of three times the $524.3 million value of the withheld policies. The insurance companies dispute the validity of these figures.

A widow who tried to collect twice on the same life insurance policy was shut down by a federal district court in Manhattan.

The case is Dillon v. Metropolitan Life Insurance Company, 09-civ-7958 (SDNY Dec. 28, 2011).

The plaintiff’s husband, when he contracted cancer, was insured under a group life insurance policy with his employer administered by MetLife. The plan allowed that if an employee stopped working due to illness or disability, the employee had the option of converting the policy into an individual policy. The employer made a mistake by prematurely ending the group coverage, and the insured-husband purchased a conversion policy, then died three days later.

MetLife paid the group policy in the amount of $837,000, but denied the widow’s claim under the conversion policy for the same amount. It did so after determining that the group policy had been wrongfully terminated. Litigation ensued with the plaintiff claiming she was entitled to the death benefit of the conversion policy because she had paid its premium. The court ultimately agreed with the insurer. Here’s a synopsis of some of the key legal points:

The plaintiff filed a breach of contract action in state court that was removed to federal court on the grounds that there was ERISA preemption. The court held that the breach of contract claim did not apply and instead the claim should have been brought as a wrongful denial of benefits under ERISA. Nevertheless, the court allowed the plaintiff’s claim to survive, only to reject it for a different reason. But this is a reminder to life insurance attorneys that ERISA cases must be analyzed differently.

In any case, an “arbitrary and capricious standard,” which applies when the plan administrator is granted discretion to award or deny benefits under the plan, was determined to be the governing standard. The court held that this standard was not satisfied because the plan did not base its denial of the claim on substantial evidence. Nonetheless, the court held that the plaintiff’s claim must fail because it was clear under the plan that an employee was not permitted to simultaneously hold two policies, in that a conversion policy was supposed to be in place of, and not in addition to, a group policy. Plan participants were only entitled to have an individual policy once their group coverage expired. They were not intended to have both.

As a post-script, it’s interesting that the case was brought in the first place. In my experience, courts are most reluctant to award a windfall to a plaintiff based on an administrative error made by an insurance company. (However, they often do not hesitate to penalize plaintiffs for their own procedural errors – but, alas, I digress).

The court likely saw that an award of twice the policy amount would be a windfall to the widow in the sense that it was twice the amount contemplated under the insurance contract. From another perspective, other widows in similar circumstances, whose spouses did not have their group coverage wrongfully terminated, would only receive a single death benefit. Of course, no death benefit, no matter how large, can compensate fully for the death of a loved one, and so no windfall could really be had by the widow in this case, but still, at least in my opinion, the result was a predictable one.

 

The Third Circuit Court of Appeals in Mendez v. American General Life Insurance Company has upheld a New Jersey District Court’s denial of a $1.2 million life insurance policy to a widow because her husband failed to disclose a cancerous brain tumor in his reinstatement application.

The policy was initially issued in December 2006. Due to a failure to make premium payments, the policy lapsed in April 2007. On April 20, 2007, the insured submitted a reinstatement form, representing that he had no serious illness, along with the owed premium payments. Commonly, as in this case, if a policy lapses the life insurance company will request that the insured confirm if he is in the same health as before and thus still insurable.

However, the insured failed to answer a question that asked about the date of his last medical treatment and the findings therefrom. American General sent the form back to him and he answered it saying his last treatment was with his personal physician in February 2006 with normal results. The written answer to this question was submitted in May 2007. The actual facts were different. The insured had just recently visited a neurologist and an MRI revealed that he had a large mass on his frontal lobe that was an aggressive form of cancer.

The plaintiff-widow argued that there had been a binding contract when the reinstatement application was sent to American General and it accepted the premium payments. This occurred after the misrepresentation was made. In effect, she was avoiding the misrepresentation argument and focusing solely on contract principles. The issue of whether or not there was a material misrepresentation was one that she clearly would not win.

The Third Circuit held that the rules concerning material misrepresentations voiding a policy equally apply to reinstatement applications. Principles of contract law do not override this analysis.

As a post-script, American General filed a counterclaim against the widow for insurance fraud under New Jersey Law pursuant to N.J. Stat. Ann. 17:33A-1 for “knowingly assisting [or] conspiring” to defraud an insurance company. This was an aggressive move by the insurance company, which really only had an interest in having her claim denied. Without doing the research, it appears at first glance that this law was probably the result of lobbying efforts by the insurance industry. Why else would it have a special protection carved out of the law? In any event, the Third Circuit upheld the dismissal of this counterclaim.

 

As I’ve previously reported, life insurance companies have been getting heat for not paying death benefits on unclaimed life insurance policies after the insured has become deceased. This has been a large-scale problem that involves an estimated $1 billion in total benefits.

The Wall Street Journal reports that insurers, feeling pressure from regulators and negative publicity, have recently begun paying death benefits on these policies. In New York there have been 1,209 persons who have received a total of $16.9 million in payments in recent months. The article describes how life insurance companies are now searching their customer databases and cross-matching them with Social Security death records, then reaching out to surviving family members for policies where a claim has not been made.

Insurance companies came under heavy criticism because they routinely searched death records to stop retirement and annuity benefits, but did not likewise conduct searches to determine if there were unpaid life insurance policies.

According to the article, fewer than 1% of policies are unclaimed after the insured dies. The unpaid policies disproportionately involve low and middle-income people who often purchase small value policies and do not use estate planning professionals to keep their affairs in order. While the largest payout has been in the amount of $673,485, the average in New York was about $14,000. Still, the money adds up.

After New York insurance regulators began to investigate insurance company procedures, they stepped up their efforts to locate beneficiaries of unclaimed policies. Benjamin Lawsky, superintendent of the New York Department of Financial Services, was quoted as saying:

The burden on the companies for running a computer match does not seem that great, and the benefit to consumers is significant.

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