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

A brief article posted on abcactionnews.com highlights a problem that I see quite regularly as a life insurance attorney who represents policyholders and beneficiaries — the phenomenon of universal life insurance policies that prematurely run out of cash value and lapse.

People invest thousands of dollars in these policies, believing they will serve as both an investment vehicle with the accumulation of a cash value, and provide protection for their loved ones after they die.

Then all that money goes right down the drain, or, more accurately, into the accounts of the life insurance company. And, you guessed it, life insurance companies don’t mind this one bit. In fact, I have had life insurance company attorneys explain to me that their clients expect to, and depend on, generating revenue from policyholders who make substantial premium payments and then, for one reason or another, whether it is a late payment, illness, or lack of affordability, have their policies lapse without any value.

This occurs in the context of universal life policies because, unlike term and whole life policies, universal life policies’ performance fluctuates based on insurance rates and the cost of insurance, two variables that can change over the course of the policy’s life. This means that policyholders who purchased universal policies back when interest rates were high have suffered over recent years.

The policy’s fine print may (or may not) warn of this course of events, but the disclosure, even if made, is seldom actually read and understood by consumers, and is also usually not a complete disclosure — that is, it does not fully and adequately inform the consumer in plain English of what exactly might happen in the future.

Frequently, I interview prospective clients who are shocked and dumbfounded that their policy has lapsed, or is about to lapse. What they were told by their agent or broker when purchasing the policy was quite different than what actually transpired.

Those considering purchasing universal life policies should ask questions to their agent or broker to determine if it is the right policy for them. Two questions that immediately come to mind are: (1) Why is a universal life policy a better option for me than a term or whole life policy? and (2) What is the worst performance that this policy could have in the future, in which case, what payments would be required to keep it in force until the end of my life?

I’m always on the lookout for good book recommendations. If you haven’t already, I suggest you pick up a copy of Justice by Professor Michael Sandel of Harvard University. He’s a renowned political philosopher with a communitarian bent, and the book emerged from his extremely popular undergraduate course at Harvard of the same name.

Justice provides an accessible overview of the theories of social and political philosophers such as Aristotle and Kant whom you may have studied in your undergraduate days, but if you’re like me, only hazily recall, applying them to current phenomena ranging from wealth inequality to affirmative action to abortion.

A recent article in The Daily Princetonian reports on a talk that Professor Sandel gave at Princeton University that touched upon — you guessed it — the subject of life insurance, focusing on it in the wider context of how some financial investment and activity can have the effect of devaluing the importance of human life.

He gives examples of how some life insurance arrangements amount to wagering on life. For instance, Walmart took out a $300,000 life insurance policy on a janitor it employed, without his knowledge, and the result was that the janitor was worth more dead than alive to the company. Of note, these arrangements, Professor Sandel pointed out, do not exactly promote workplace safety. Are they moral? Should companies make money off line employees when they die? How about when their families may receive nothing?

Another example is that in recent years, it has been common for investors to purchase life insurance policies from individuals who have a high mortality risk for immediate cash payments. (I have blogged about the life-settlement industry in previous posts). Professor Sandel notes how these arrangements directly link profit with death. If the insured dies, the investor makes a handsome profit. Of course, investors argue that these are not coerced transactions and they are providing a financial benefit to a person in her final days. Even assuming that is true, and it is a point that can be challenged because the transactions often occur when the insured is in a desperate state and may be without funds to pay for health care, the question arises about whether they are good for society? What moral values do they promote?

While life insurance certainly plays an important role in society of protecting the welfare of individuals and families when a loved one dies, there is a darker aspect to it that has come to fruition. As Sandel suggests, we should think about how these arrangements impact our social fabric. ““Would you want to make a living betting that people will die sooner rather than later?” he asked the audience.

In the wake of Hurricane Sandy approximately 3,000 complaints have been made to the New York State Department of Financial Services, the administrative agency that oversees the business of insurance in the state.

Addressing members of the State Assembly in Albany, Superintendent Benjamin Lawsky, the top insurance regulator in New York, conveyed that this indicates a problem with the way insurance companies have dealt with the catastrophic damage caused by the storm.

Mr. Lawsky recommended that there should be an effort to make property and homeowner insurance policies more uniform in their terms and easily understandable to the general public. He even mentioned that it would not be surprising if many Assembly members did not completely understand their own insurance policies. In fact, 50 percent of affected homeowners in flood areas did not have flood insurance. Certainly, many nevertheless thought they would be covered in the event of a storm like Sandy.

Mr. Lawsky noted that the top complaints that the Department feels are legitimate concern speed and response time, mortgage-holders retaining payments for too long of a time period, and the utilization of anti-concurrent causation clauses.

For those unfamiliar with those clauses, they allow insurance companies to deny a claim where it was caused by an event that falls under a coverage exclusion, no matter if the predominant cause of the damage is covered under the policy. For instance, if flooding is not covered, but wind damage is, the insurer can deny coverage even if flooding was a minor cause of the damage.

Assembly Speaker Sheldon Silver, commenting on these clauses, noted that “there is something inherently unfair” with their application and inquired about whether regulations could be implemented to eliminate their inclusion in policies. In response, Lawsky said he had to check, and sounded caution about implementing changes in the wake of Hurricane Sandy that might not be suitable for other situations.

One hopes that regulations will be implemented. These clauses are nothing more than insurers limiting their responsibility to policyholders. Policyholders do not get an opportunity to negotiate terms of coverage with their insurers, and that aside, most are not aware of the impact of these clauses not to mention that they are even contained in the policy. However, when they suffer from property damage and make a claim, they can be in for a rude awakening when it is denied on this basis. Anti-concurrent causation clauses are sinister and should be eliminated.

The Washington Post reports that three life insurance companies issued policies for total amount of over $500,000 on the life of a 15-month-old who was allegedly drowned by his father. One policy issued by Mass Mutual was reportedly for $443,000.

The police have asserted that father obtained the policies as part of a horrific scheme to collect money.

From an insurance standpoint, it is shocking that there would be this high amount of coverage for a toddler. Children do not need life insurance, generally, unless they are child movie stars or there is some other unusual situation where there would be a financial fall out in the event of the child’s death.

This unfortunate incident will hopefully serve as a reminder to insurance companies to implement better underwriting practices when evaluating applications and issuing policies. Unless there is other undisclosed information, it would seem that Mass Mutual should not have issued such a large policy in this instance.

The irony is that when insureds die within the two-year contestability period, insurance companies scour the initial application with a fine-tooth comb in order to uncover material misrepresentations, in order to disclaim coverage. Though the criminal case against the father has not yet been decided, this sad incident reinforces that insurers should do a better job evaluating applications prior to issuing policies. In this case, doing so might have been the difference between life and death.

A New Jersey bill that would require insurance companies to provide consumers with a single-page summary of their homeowner policies has moved out of committee to be put to a vote before the full Assembly, reports the Property Casualty 360 blog.

The reason for the bill is the confusion that property owners experienced in the wake of Hurricane Sandy concerning what events are and are not covered under their homeowner policies, with many specifically unaware that flooding was excluded.

The bill was apparently sent out of the Financial Institutions and Insurance Committee after language was inserted that insurers “can live with,” says the article.

Indeed, the homeowners who I speak to on a regular basis are confused, and even bewildered, about what exactly is and is not covered under their policies. Most expected that, if damage occurred, it would be covered, in light of the fact that they made substantial premium payments for months, if not years. But that is often not the case.

Homeowner policies are dense, written in legalese, and most people simply do not have the time or inclination to pore over every page. Hopefully, this legislation, if passed, will clear up much of the confusion that has hitherto existed. Unfortunately, however, a good deal of that confusion has been addressed by Hurricane Sandy and the resulting denial of claims.

In the wake of Hurricane Sandy, the conversation has shifted more and more to the legal issues that will arise in the upcoming litigation over denied claims. In other words, homeowners who have suffered damage, and unfortunately had their insurance claims denied, are wondering if they will ultimately be paid for their losses.

Unfortunately, there is no general answer, because the determination is highly fact-sensitive, hinging on what type of damage was suffered and the particular language in an individual policy.

As a condition for getting a mortgage, some lenders required homeowners in flood areas to purchase flood insurance. However, not all homeowners in these areas have flood insurance. As a result, they are left to see if their homeowner policies will provide coverage. Often, this determination will turn on whether the damage was caused by wind or water. If the latter, the policyholder will in most cases be out of luck.

In fact, the standard homeowner policy contains a lengthy exclusionary clause that bars coverage for a whole host of flood and water conditions. It is extremely important in these cases to have the home inspected by a qualified expert engineer – and not one working for the insurance company – to determine how the damage was caused. There are undoubtedly many cases where what at first blush appeared to be flood damage was the result at least in part of wind damage.

Many commercial property owners are filing claims for business interruption, if available under their policies. This type of coverage extends beyond compensation for purely physical damage to the premises to cover the loss of income that results from the property damage caused by a covered event. Furthermore, contingent business interruption coverage typically provides coverage for loss of income in business operations caused by physical damage to a customer’s or supplier’s business due to a covered event. Some insurers also provide insurance coverage for business interruption loss caused by a loss of utilities or orders of a civil authority.

Many insurance consumers who are business owners are unaware of this type of coverage.

No doubt after the mass devastation inflicted by Hurricane Sandy, never before seen in this part of the country, many homeowners and business owners will reconsider their decision to go without flood insurance. Now is an opportune time to review your insurance policy and see if you are properly covered for the future.

 

 

 

 

Bloomberg reports that the House has passed a relief measure to aid victims of Hurricane Sandy, raising the borrowing power of the federal flood insurance program by $9.7 billion, and consequently, continuing to pay damage claims to 120,000 policyholders.

House Speaker John Boehner came under immense fire for preventing a vote on the bill from both sides of the aisle, most notably New Jersey Governor Chris Christie. The measure was passed by all House members, except for 67 Republicans who opposed it.

On January 15 the House is scheduled to vote on another measure that would raise the total amount of aid to $60 billion.

Meanwhile, persons who suffered damage as a result of Hurricane Sandy should be advised that there are other sources of relief than flood insurance, such as aid from FEMA and the Small Business Administration.

Today the New York Law Journal published “Businesses Damaged by Sandy Face Knotty Insurance Issues,” an article by Christine Simmons which explores business interruption claims, as its title indicates, and also gives an overview of the coverage issues for homeowner claims that have arisen in the aftermath of Hurricane Sandy.

A number of New York insurance lawyers are quoted in the article about the types of problems they have personally observed in the past weeks. The consensus among them is that the fight between insurers and policyholders has been and will continue to be over whether damage was caused by flood or wind, or a combination of both.

A problem for policyholders will be anti-concurrent causation clauses, which say that if damage is caused by both a covered and non-covered peril, the latter dominates and there is no coverage. If damage is caused by wind and flooding, with the former being covered, these clauses will serve as the basis for insurance company disclaimers. There has been talk about New York possibly banning these clauses which would be a fantastic development in the state’s insurance law.

To all readers – send a letter to your Senator, Congressman, state senator and state assemblyman asking them to support a ban on these anti-consumer clauses.

For policyholders who have suffered damage, it is critical that it is not considered to be due to flooding, which will prove fatal to any claim made under a typical homeowner’s policy. Only flood insurance covers flood damage, and about 70% of New Yorkers in flood zones are without that coverage.

Finally, regarding business interruption coverage, the article notes that commercial policies may provide coverage where there is a loss of business income due to governmental orders, such as curfews or evacuations, and that “contingent business interruption” coverage may provide a benefit for loss of business due to a physical loss to the property of a customer or supplier.

In Amer. Bldg. Supply Corp. v. Petrocelli, decided by the New York Court of Appeals on November 19, 2012, the plaintiff claimed against its insurance broker that it requested bodily injury coverage for its employees at its Bronx facility, in the event an injury occurred, that the broker failed to procure. This type of coverage was expressly required under the lease agreement with the landlord. As can easily be surmised, an employee was ultimately injured at the premises.

The plaintiff brought forth claims of breach of contract and negligence. The lower court found for the broker on the grounds that the insured was presumed to have received and read the policy.

The court restated the familiar principle that: “Insurance agents have a common law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage.”

It went on to hold that the “presumed” reading of a policy, when delivered, does not apply: “That plaintiff requested specific coverage and upon receipt of the policy did not read it and lodged no complaint, should not bar plaintiff from pursuing this action … The failure to read the policy, at most, may give rise to a defense of comparative negligence but should not bar, altogether, an action against a broker.”

This is an important development for policyholders in New York insurance law. If a policyholder requests specific coverage, and it is not provided, the policyholder may be able to survive a summary judgment motion. As a caveat, however, it should be observed that the court seemed to place importance on the fact that the subject policy had a personal injury exclusion for employees, which it said “hardly made sense,” since only employees and no customers entered the premises. Therefore, if a policyholder is to succeed in this type of claim, it would help greatly if there is other evidence, beyond uncorroborated testimoney and “he said, she said” accounts, showing that the requested insurance was in fact requested.

There were a couple items in this last week’s New York Law Journal that merit being mentioned, and I have boiled them down and summarized them for you, the reader.

The first is an article entitled “Residency Requirement[s] Under Homeowners Insurance.” It reviews a number of cases for the redundant proposition that in order to successfully file a claim under one’s homeowners insurance, one needs to actually reside at the premises. This is a pretty strict requirement, and so if you don’t reside at the subject premises and a loss occurs, your claim may be denied and the policy rescinded.

That said, an exception was carved out by the Court of Appeals in Dean v. Tower Ins. Co. of N.Y. held that where the insured was in the process of repairing the subject premises, with the intent of making it her residence, it raises an “issue of fact” about whether she meets the residency requirement under the policy. The lesson to learn is that if you purchase homeowners insurance, and do not reside at the premises, you should notify your broker and insurance company immediately so that further steps can be taken to protect you.

The second item is a decision from Judge Baer in the Southern District in Maclaren Europe Limited v. Ace American Insurance Company. It discussed how New York Insurance Law section 2121 provides that an insurance company that delivers a policy to an insurance broker, who is acting on behalf of an insured, is deemed to have authorized the broker to receive a premium payment on its behalf that is due at the time of issuance. The Court held: “The rule can be stated as follows: For receipt of a premium by a broker to establish an enforceable policy, there will be an overlapping period of time during which the broker simultaneously acts as a fiduciary for the insured and as an agent of the insurer for the specific policy in question.”

In the insurance context, the concept of who is a fiduciary for whom can become rather fuzzy, i.e. is the attorney for the insured acting on behalf of the insured or the insurance company who pays her bills? I always caution policyholders to be extremely careful in situations where the question of who is a fiduciary to whom is unclear, and to cover their tracks by assiduously documenting events and sending correspondence and other notices to all interested parties.

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