life insurance – Seattle Insurance and ERISA Blog

Court of Appeals Confirms Insured Can Reform Policy Language to Provide The Coverage The Insured Purchased

The Washington Court of Appeals recently answered an important question for policyholders: what if your agent sells you coverage but the insurance policy fine print fails to reflect the coverage you thought you purchased?

On November 4, 2019, the Washington Court of Appeals decided Digitalalchemy, LLC v. John Hancock Insurance Company (USA). The court held Digitalalchemy could sue John Hancock for denying coverage under a life insurance policy because, even though the policy language supported John Hancock’s denial, Digitalalchemy had purchased broader coverage than the policy reflected.

Digitalalchemy bought John Hancock’s life insurance policy to cover its key executives. When buying the policy, John Hancock’s agent agreed to backdate the insurance coverage’s start date. That means the policy would effectively begin providing coverage before the date Digitalalchemy purchased the policy. However, due to a mistake, the policy language failed to reflect the backdated start date.

One of the covered executives died by suicide, and Digitalalchemy made a claim under the policy. John Hancock denied coverage under the policy’s suicide exclusion. The policy excluded coverage if the insured died by suicide within two days of the “issue date.” Because the parties agreed to backdate the policy start date, the insured died after the two-year exclusion period, and John Hancock should have paid the claim. But because the policy failed to reflect the backdating, John Hancock denied coverage under the suicide exclusion.

The court agreed with John Hancock that the policy language did not backdate the start date. However, the court also found that Digitalalchemy sufficiently alleged the parties had agreed to backdate the policy and that the failure to reflect the backdating in the policy was a mistake. Accordingly, the court agreed Ditigalalchemy could argue the policy should be reformed to reflect the backdated start date because that was what both parties had intended.

That ruling is important because it is another recent case confirming insureds can still obtain recourse if they purchase coverage but the insurer writes a policy failing to accurately reflect the purchased coverage.

MetLife Pays Over $200 Million in Regulatory Investigation Over Pension Benefits

A common issue with life insurance benefits is a deceptively simple one: what if the beneficiary doesn’t know that they are named in the life insurance policy? In such cases, life insurers are typically obligated to advise the unknowing beneficiary of the insured’s death and their entitlement to death benefits under the insurance policy. But since the insurer doesn’t have to pay out death benefits if the beneficiary cannot be found, insurers have an incentive to shirk this responsibility.

That was the issue in a January 28, 2019 announcement by the New York Department of Financial Services that it had entered into a consent order with MetLife Insurance Company, under which MetLife agreed to pay over $200 million in fines and restitution. The New York regulator found MetLife had failed to adequately locate insureds and beneficiaries who would have been entitled to benefits under MetLife life insurance policies or pensions. The regulator found violations going back to 1992.

In addition to paying a fine to the New York state regulator, MetLife agreed to retroactively pay benefits to policyholders it failed to properly locate. Further, the consent order requires MetLife to utilize the Social Security Death Master File to identify life insurance an annuity contract holders who have died but whose beneficiaries may be unaware they are entitled to benefits.

Medical Proof Required to Deny ERISA Claims Based on Intoxication Exclusion Says Fifth Circuit

Many ERISA plans and insurance policies contain provisions excluding coverage for losses caused by the insured’s intoxication. In cases where the plan or insurer asserts such an exclusion, the question becomes what evidence must the insurer put forward in order to prove the insured was intoxicated and the exclusion applies?

The U.S. Court of Appeals for the Fifth Circuit recently answered that question in White v. Life Insurance Company of North America. Life Insurance Company of North America (“LINA”) issued an ERISA-governed life insurance policy insuring Mr. White with Mrs. White as the beneficiary. Mr. White was killed in a horrible car crash in which his vehicle crossed the center line and struck an oncoming 18-wheeler head-on.

LINA denied coverage asserting the policy’s intoxication exclusion precluded coverage because Mr. White was drunk at the time of the crash. Weather and road conditions were clear at the time of the crash, Mr. White’s vehicle appeared to function properly, and paramedics reported smelling alcohol on Mr. White’s breath. Hospital staff took blood and urine samples from Mr. White that tested negative for alcohol but contained undefined amounts of amphetamines, cocaine, opiates, benzodiazepine, and cannabinoids. The tests were preliminary and only indicated the presence, not the amount, of controlled substances.

The Court agreed with Mrs. White. The LINA life insurance policies excluded coverage for death “caused” by Mr. White’s intoxication. The policy (borrowing from Arkansas law) defined intoxication to mean “influenced or affected by the ingestion of alcohol [or] a controlled substance…to such a degree that the driver’s reactions, motor skills, and judgment are substantially altered and the driver, therefore, constitutes a clear and substantial danger or physical injury to himself or herself or another person.”

The Court found LINA’s evidence failed to meet the policy definition of intoxication. LINA relied on the opinion of a toxicologist who opined it was impossible to estimate the level of Mr. White’s impairment at the time of the crash based on the preliminary test results. The toxicologist opined only that “in the absence of any other cause of the collision, the drugs in [Mr. White’s] system could explain his level of impairment that resulted in his crash.”

Accordingly, the Court entered judgment in favor of Mrs. White. The White case is an important reminder that ERISA plans and insurers cannot deny claims by asserting exclusions that lack tangible factual support.

State Laws Automatically Revoking Spousal Life Insurance Benefits Upon Divorce Upheld By U.S. Supreme Court

An important dispute when a person dies is often who gets the life insurance policy death benefit. The life insurance policy may have been purchased decades ago and name the insured’s former spouse, from whom the insured was divorced long ago. The insured’s children or other alternate beneficiaries often argue the insured really intended the death benefit go to them, not to the spouse they divorced decades before their death.

To avoid this uncertainty, Washington State, like many states, has a law providing that life insurance beneficiary designations to spouses are automatically void upon divorce. Thus, if a married person buys a life insurance policy providing the insurer pays her husband upon her death, and subsequently divorces her husband, the husband is automatically removed as the beneficiary upon the divorce. This avoids a potential probate court fight when the insured dies.

On June 11, 2018, the U.S. Supreme Court decided Sveen v. Melin, upholding a similar law in Minnesota. The Supreme Court confirmed states like Washington may provide that life insurance beneficiary designations to spouses automatically terminate upon divorce.

In Sveen, Mark Sveen was married to Kaye Melin in 1997. Sveen purchased a life insurance policy naming Melin as the primary beneficiary and his two children from a prior marriage as contingent beneficiaries. Sveen and Melin divorced in 2007, but their divorce failed to address the life insurance policy. Sven never amended the policy’s beneficiary designation. After Sveen died, his children and Melin made competing claims for the life insurance policy death benefit.

Under Minnesota law, the divorce automatically revoked Sveen’s designation of Melin as his primary beneficiary, resulting in Sveen’s children receiving the life insurance policy death benefit. Melin argued the law violated the U.S. Constitution’s “contracts clause” because the law was enacted after the policy was purchased.

The court upheld the law. Reviewing the long history of state laws presuming “that the average Joe does not want his ex inheriting what he leaves behind,” the court observed these laws have utility in simplifying probate litigation by giving certainty about decades-old life insurance policy benefits. The court noted Minnesota’s law allowed Sveen to re-designate Melin as his beneficiary after the divorce if he desired, so it imposed only a minimal burden on existing contracts.

The court’s decision to uphold Minnesota’s law provides additional certainty to Washington insureds and their heirs and beneficiaries regarding the treatment of life insurance death benefit proceeds.

Ninth Circuit Decision Shows Life Insurance Pitfalls for Policyholders; Clarifies Jurisdiction in Insurance Disputes

The Ninth Circuit’s recent ruling in Elhouty v. Lincoln Benefit Life, Case No. 15-16740 (March 27, 2018) is notable for two reasons. It illustrates the pitfalls of certain life insurance policies that supposedly pay for themselves, and it clarifies the jurisdictional standard governing when insurance disputes can be litigated in federal as opposed to state courts.

Elhouty purchased a flexible premium adjustable life insurance policy from Lincoln Benefit Life Company with a $2 million face value. Adjustable life policies are often marketed as giving the policyholder all the advantages of death benefit protection, an interest-bearing account for investment purposes, and flexibility as to how premiums are paid. The policies often come with a sales pitch that the policy’s investment component will effectively pay off the future premiums, without mentioning that the investment returns are often inadequate to cover future premium increases.

Elhouty’s case illustrates this pitfall: for years, Elhouty arranged for his premiums to be paid directly out of the policy’s net surrender value, but failed to notice when the net surrender value was exhausted and he was sent a bill for $55,061.49 to keep the policy in force. Since Elhouty never paid the additional premium, Lincoln Benefit claimed the policy lapsed. Elhouty disputed Lincoln Benefit properly notified him of the additional premium he owed, and filed a lawsuit seeking a court declaration that the policy remained in force.

Elhouty sued in state court, and Lincoln Benefit removed the action to federal court (conventional wisdom holds federal courts are more insurer-friendly than state courts). To properly remove the action, Lincoln Benefit was required to establish that the amount of money at issue in the lawsuit exceeded $75,000.00. Lincoln Benefit argued the amount at issue was the full $2 million policy face value; Elhouty claimed it was only the $55,880.08 in premiums he allegedly owed Lincoln Benefit.

On the jurisdictional issue, the Ninth Circuit agreed with Lincoln Benefit. The court determined the unpaid premiums were not in dispute because Lincoln Benefit did not seek to recover them from Elhouty. Elhouty had had the option to pay $55,880.08 to keep the policy in force, but the real dispute in the lawsuit was the policy’s validity. The court clarified that, in cases where the “controversy relates to the validity of the policy and not merely to liability for benefits accrued,” the policy’s face value is the amount in controversy for jurisdictional purposes. Thus, the court ruled the amount in controversy was $2 million and federal courts had jurisdiction.

The court also agreed with Lincoln Benefit on the merits of the dispute. Elhouty argued Lincoln Benefit’s policy termination notice for unpaid premiums was defective because Elhouty never received notice. But the court ruled that the language of the policy and applicable state law required only that the notice be mailed, not that the policyholder actually receive it.

For insurance lawyers, Elhouty is useful for its clarification of the jurisdictional standard. For policyholders, Elhouty is a reminder of the importance of keeping your premium payments up to date and not taking the insurer’s promotional materials at face value.