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Tag Archives: life insurance

By David McClard

recent article in the New York Times financial section described a horror story involving an insurer whose protracted financial meltdown caused the loss of $4.5 billion to its policyholders, including over a million dollars for a little girl with a hospital visit-caused brain injury.  The author made the assurance that such financial fiascos are rare with insurers because of the strict guidance and watchfulness of state insurance regulators. (But this assurance contains no consideration of the limited ability of insureds to collect more than remedial sums in ERISA-governed plans, thanks to O’Connor’s dicta in Pilot Life v. Dedeaux.)

The economic situation is now roundly considered precarious in almost every sector, and life and health  insurance companies do not seem to be the exception. For anyone who is convinced that their insurer is on the brink of a collapse, they are forced into the unenviable position of having to chose whether or not to pull out of a policy prematurely. It’s usually not something an insured ever wants to do (because of tax issues, penalties, paperwork, et al), but if it has to be done, there are some tips on making the next step a safer one:

1)When choosing a new insurer, consult with more than one agency rating. Each have their own criteria for rating insurance companies, so results may vary. The major raters A.M. Best, Fitch Ratings, Moody’s and Standard & Poor’s. 2) When shopping among the top-rated companies, be wary of terms which seem too good to be true, and exotic riders to policies. 3) Be extremely careful of gaps in coverage when switching policies. 4) Spread coverage over two (or three!) policies to hedge against an insurer financially tanking.

This advice is understandably disheartening, since it implies that the life and health insurance industry is now more than ever full of dangerous pitfalls.

By Ian Wasser

 

Public Policy and the Means-End Test

In New York LIfe v. Dodge, the dissent argues that the regulation of insurance is an exercise of state police power.  In determining whether a state can regulate various aspects of a life insurance policy, a means-ends test is applied.  In this case, the subject matter is life insurance, which is regulated by contract.  The specific end or goal is for the state to protect the net value of insurance by regulating forfeiture provisions.  The means used by the state to accomplish this end are non-forfeiture laws, which serve to protect the value of life insurance policies.  In applying this test, the dissent concludes that a state can prevent foreign insurers from abusing the rights of their citizens.

The court in Griffin v. McCoach similarly agrees that a state has the police power to regulate life insurance contracts.  Specifically, the Griffin court held that there must be an insurable interest in all named beneficiaries to a life insurance policy.  In coming to this conclusion, the court suggests that public policy should dictate who can be a beneficiary to a life insurance policy.  Applying the means-ends test of the dissent in Dodge to the the case in Griffin yields a similar result.  The state interest is to prevent members of the public from having life insurance contracts placed upon their heads by strangers.  The means used by the state to accomplish this end are regulation of life insurance.

In reconciling the different holdings in Dodge and Griffin, it is important to consider the prevailing state interest.  In Griffin, the state interest was to prevent potential contracts for murder.  In Dodge, the state interest was to protect the value of life insurance policies against ill-advised contracts.  The Dodge court was also forced to balance the counter-interest in freedom of contract.  Clearly, the state interest in Griffin is far more compelling when compared to the state interest in Dodge.  Thus, Griffin stands in direct opposition to Dodge, simply by application of a means-end test for the regulation of certain aspects of life insurance by states.

By Adrienne Kvello

 

Recently, a representative of Heath Ledger’s daughter sued ReliaStar Insurance Company for breach of good faith and fair dealing.  In addition, the claim alleges that Reliastar caused the plaintiff severe emotional distress.  (how a trust suffers emotional distress is beyond me)  The complaint can be found here: http://www.aolcdn.com/tmz_documents/0929_ledger_1_opt.pdf

 (hat tip to www.tmz.com for the documents). 

 

The Batman star applied for a $10 million life insurance policy with the company in June 2007 and named a trust for the benefit of his 3 year-old daughter as the primary beneficiary.  Six months later, in January 2008, Ledger was found dead in his apartment of an apparent overdose of prescription drugs.  The trustee claims the insurance company has acted in bad faith by failing to pay the claim in a timely manner, by investigating a death that was clearly accidental, and by engaging in “post-claim underwriting” by investigating Ledger’s health after a claim had been filed. 

 

Reliastar has answered, stating that it is entitled to investigate whether the death was a suicide and whether Ledger made material misrepresentations on the application—both of which could relieve it of liability on the policy.  It further claims that it has been impeded in its investigation because the beneficiary has not cooperated in answering questions about Ledger’s health history.  Its answer can be found here: http://www.aolcdn.com/tmz_documents/0929_ledger_2_opt.pdf.  Prior to the suit, Reliastar had not attempted to rescind the policy under California Insurance Code §§ 330-359.  It appears Reliastar has not cross-claimed for rescission yet, but is simply claiming it is still investigating the claim.  (Under California law, insurance companies are entitled to rescind policies based on material misrepresentations even after the death of the insured.  See O’Riordan v. Federal Kemper Life Assur., 114 P.3d 783 (Cal. 2005)). 

 

When the beneficiary is a three year old child, the insured was a beloved young actor, and the death has been ruled an accident, it is easy to jump to the conclusion that the insurance company is wrong for not paying the claim.  But is this right? 

 

Under California law, insurers have a duty of good faith and fair dealing in paying out insurance claims.  Part of this duty is codified in the prohibited acts section of the unfair competition and deceptive trade practices act.  Section 790.003 of the insurance code outlines prohibited acts, which include “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear” and “[f]ailing to affirm or deny coverage of claims whithin a reasonable time after proof of loss requirements have been completed and submitted by the insured.”  

 

The question then becomes, is liability “reasonably clear,” and is seven months an unreasonable amount of time to withhold payment and not affirm or deny the claim?  In my opinion, the answer is “yes” on both accounts.


Post-claim Underwriting

 

Plaintiff cites Hailey v. California Physician’s Service, 69 Cal. Rptr.3d 789 (Cal. Ct. App. 2007) for the proposition that post-claim underwriting is barred by California law.  However, this case involves an interpretation of California Health & Safety Code § 1389.3, which prohibits post-claim medical underwriting for health insurance claims only.  Section 10384 of the insurance code prohibits post-claim underwriting for disability insurance, but no such statutory protection is provided for life insurance policies.  I’m not sure what the plaintiff’s attorney was thinking with this claim, but it’s a clear stinker unless the judge decides to invent statutory protection that doesn’t exist.  Insurance companies retain the right to investigate claims and even rescind policies after a claim has been made.  O’Riordan v. Federal Kemper Life Assur., 114 P.3d 783 (Cal. 2005)). 

 

Material Misrepresentations

 

Reliastar claims that Ledger made two material misrepresentations in his application.  First, it claims he lied about not taking prescription drugs, when he had a prescription for Ambien at the time of the application.  Second, it claims Ledger lied about not taking illegal drugs.  Ledger’s death was reportedly caused by prescription drugs, and it does not appear that Reliastar has any credible evidence that Ledger took illegal drugs.  Therefore, I think they lose on this claim.  Reliastar does, however, appear to have some evidence that Ledger had a prescription for Ambien at the time of the application.  Ledger also had traces of other prescription drugs in his system.  So it must be determined whether lying about the prescription would be a material misrepresentation.  Under California law, “materiality is determined soley by the probably and reasonable effect which truthful answers would have had upon the insurer.”  Thompson v. Occidental Life Ins. Co., 513 P.2d 353 (Cal. 1973).  “The test to determine materiality is a subjective one; the critical question is the effect truthful answers would have had on the particular insurer, not on some “average reasonable insurer.“”  West Coast Life Ins. Co. v. Ward, 133 Cal. App. 4th 181 (Cal. Ct. App. 2006)(internal quotations and citations omitted).  In my opinion, Reliastar would have issued the policy even if Ledger had revealed his prescription for Ambien.  Ambien is a commonly prescribed sleep aid and its use does not connote poor health on the part of one who takes it.  Even if Ledger had prescriptions for a few drugs at the time of the application it is unlikely the company would have denied the policy when the insured was clearly young and in good health.  While it is a close call with the subjective test, I think Reliastar is liable on the policy.     

 

Suicide

 

Because Ledger’s death was within two-years of the issuance of the policy, if Ledger committed suicide, Reliastar would only be liable for the premiums paid.  The New York medical examiner has ruled Ledger’s death an accident.  However, the life insurance company is not bound by this determination.  Under California law, however, Reliastar bears the burden of proving that Ledger had suicidal intent.  Searle v. Allstate Life Ins. Co., 696 P.2d 1308 (Cal. 1985).  In other words, the company has to prove that Ledger intended to commit suicide and appreciated the nature of his actions.  It appears that Reliastar has no evidence that Ledger had suicidal intent, and certainly not enough to meet its burden.  As a young successful actor with a great family and career, the evidence seems to point the other way.  In my opinion, Reliastar’s liability seems “reasonably clear” here.

 

Non-cooperation

 

Finally, Reliastar claims that it has not breached its duty of good faith in paying the claim because the plaintiff has not cooperated in its investigation.  Under California law, “there can be no “unreasonable delay” until the insurer receives adequate information to process the claim and reach an agreement . . .”  Globe Indemnity Co. v. Superior Court, 8 Cal.Rptr.2d 251 (Cal. Ct. app. 1992).  Based on the pleadings alone, it is difficult to determine how much information Reliastar has and how much the plaintiff has cooperated in the investigation.  However, based on the information widely available on Ledger’s life, Reliastar should have enough information to determine if liability is “reasonably clear.”  In my opinion, attempting to depose individuals and search through medical records which plaintiff does not have access to is a fishing expedition and Reliastar is simply hoping it can find something to support its position.  This would be a breach of good faith.    

 

Conclusion

 

In my opinion, liability on Ledger’s policy is reasonably clear and Reliastar should have paid the claim by now.  While seven months is not necessarily an unreasonable amount of time to investigate a claim, given the incredible amount of widely available information on Ledger, Reliastar should have made a determination on the claim by now and at least affirmed or denied coverage.  Failing to do so is a breach of good faith and fair dealing. 

 

Thoughts?

I like insurance law for a lot of reasons. It has profound economic, social and linguistic issues, as well as the starkest depictions of human and organizational greed. It also has THE BEST cases of any of the courses I teach. In part, I think this is because the difficult language of insurance policies becomes this bizarre filter on the social and political events of the day. I have a new entry on my list of favorite insurance cases: Beley v. Pennsylvania Mutual Life Ins. Co., 95 A.2d 202 (Penn. 1953). The case involved a $1,000 life insurance policy that, among other things, provided that “in the event that the Insured engages in military service in time of war, the liability of the Company shall be limited to the return of the premiums paid hereunder ….”  Six years after having procured this policyand having named his mother as beneficiary, the insured, Andrew Beley, died in active combat in Korea. So, the question as it ended up in the Pennsylvania Supreme Court was whether the Korean War was a war. A majority of the court ruled it was NOT. While this might be startling in and of itself given the million plus combatants who died in that multi-year not-war that has somehow been mislabeled in all the history books, what is equally stunning is the court’s rhetoric in disposing of the issue. 

How often does one see phrases this excoriating or this forceful in a judicial opinion? Here are three quotes from the dissent of Justice Chidsey.

“How is it humanly possible to say that the Korean War is not war?” 

“With due regard for my colleagues who differ with me, a holding that under the provisions of this policy the Korean War is not War — in the face of 128,000 American casualties — is so unrealistic and legalistic as to be utterly unjustifiable.” 

“Equally important, how is it possible to ignore or distort those clear, unambiguous words ‘accidental death’? It is instantaneously offensive to our knowledge, our experience and all our senses to say that this was an accidental death.” 

But Justice Chidsey’s deserving excoriation of the majority opinion was an exercise in rhetorical restraint compared to Justice Michael Angelo Musmanno‘s concurrence. There the former Admiral, presiding judge at some of the Nuremberg Trials and witness in Jerusalem against Nazi Adolf Eichmann launches into a multi-page paean to the United Nations intervention– nay, Holy Crusade —  in Korea against the evil Soviet Union as well as a presagement of the Domino Theory of foreign relations. While the relevance of his comments to poor Mrs. Beley’s insurance claim was hardly apparent, the passion with which they were uttered is unmistakeable and seldom matched in judicial opinions. Here are a few excerpts. And, trust me, for everyone listed here, there are two others almost as forceful.

“It [war] may have a locale not ordinarily associated with its gunpowder connotation, as, for instance, Milton speaks of ‘impious war in heaven,’ and in Psalms (lv. 21) we find: ‘The words of his mouth were smoother than butter but war was in his heart.'” (emphasis in original)

“For five thousand years of recorded history the earth has run red with the blood of war. The people of the various nations convulsed by these wars were powerless to resist the orders of kings, queens, kaisers, sultans, emperors, pashas and other absolutists who ordered them into battle in order to achieve land, loot, power or glory or even to satisfy sadistic whim or caprice entirely foreign to the welfare of those who did the fighting.” (note superb use of meter)

“Following the termination of each war the monarchs or chieftains returned to their respective thrones or tribal mansions, leaving the dead to bury their dead and the maimed and crippled to manage their misery as best as they could. No impartial attempt was ever made, by any responsible body, to determine who was right and who was wrong, because both sides in so catastrophic a voluntary enterprise could not have been in the right.” (cf. Jesus Christ, “Let the dead bury their dead.”, Luke 11:60). 

“Humanity had been crucified between the thieves of Arrogance and Greed, and yet there was no adjudication anywhere as to who was guilty for driving the nails.” (theological metaphors continue)

“From time to time mankind pleaded for a cessation of this licentious extermination. Societies of brothers were formed pledged against armed conflict, religious bodies held aloft the holy symbols of peace, but these societies and organizations were scattered and trampled under the galloping hooves of Conquest and Domination when tyrants drew the sword to carve for themselves greater territories and greater power.”

“In the later part of 1950 Andrew Beley sailed from the shores of American under that [the UN] banner. He wore a soldier’s uniform, he bore a soldier’s arms, he was skilled in the art and science or war but his mission was Peace. Never was a sword drawn, a canon fired or a bullet discharged in a worthier cause than that to which Andrew  Beley dedicated himself as he neared the bleak and gnarled land of Korea. And never did one offer a holier tribute to that cause than did Andrew Beley when on March 7, 1951, he gave his life for peace and the preservation of the liberties which every American understands in the word Peace.”

“Americans generally believed in 1945 that the blossomtime of Hope had arrived, and that the Four Horseman of the Apocalypse would never again gallop their martial steeds across the bleeding face of the earth.” (more theological metaphors)

The other remarkable aspect of the case is, in some sense, the skill of the justices in making their points. The opinions evidence a stunning amount of research on issues of history and international law. I doubt the Pennsylvania Supreme Court contained many of the materials cited in the case. Bill Gates, Tim Berners-Lee, and other progenitors of the electronic research revolution had yet even to be born. And, bizarre as at least certain aspects of the Musmanno concurrence may appear to modern eyes, it, and to only a somewhat lesser extent the other opinions are written with a meter and verve seldom seen outside the works of Benjamin Cardozo or, in his own way, Richard Posner. To have done this without the opportunity for continual revisions afforded by word processors induces the same sense of grotesque inferiority as a reading of Shakespeare, Austen or Nabokov.

So, why should we care about this 55 year old opinion? It exemplifies the phenomenon of insurance law turning into crucible for debate over the cares, neuroses, conceptions and misconceptions of public good that tend to prevail at any point in time. At that time, poor Andrew Beley was unlikely to have alternative ways of providing for his family’s support in the event of his premature death in combat. The SGLI program that since 1965 has incentivized the recruitment of soldiers, even children soldiers, by offering highly subsidized life insurance did not exist in the Korean conflict. Moreover, it is possible that the major reason for life insurer’s exclusion of military death — adverse selection — was not actually present in the case given the significant possibility that Beley had purchased the policy at the age of 21 or 22 when his future military service was not yet contemplated. Moreover, insureds who want to take advantage of private information about their life trajectories usually buy policies larger than $1,000, not a huge sum of money even in 1945. And here we had an insurer “chintzing” over a $1,000 to help a family when the country needed, it was perceived, to help servicemen in a life-or-death struggle against communist aggression in Korea. 

Perhaps from today’s perspective, we can view Beley with mixtures of awe, puzzlement or even smug amusement. The rhetoric does seem way, way over the top. And yet, may we not be writing, right now, opinions, that will be similarly regarded 55 years from now. One wonders, for example, what will be made by the law professors of 2063 when they study judicial opinions that take seriously the issue of whether something is a  “flood” when land areas ordinarily dry are submerged by storm surge. Or, perhaps, the readers of this blog can submit other candidates from today that our grandchildren will read with equivalent amazement.

Footnote. If anyone wants an example of an absurd argument made by an insurer in liigation, consider this one. The insurer argued that because Congress had never technically declared World War II over as of March, 1951, the battle against the Axis Powers was, within the meaning of the insurance contract, still going on at the time of Andrew Beley’s death and barred his claim. An interesting reconceptualization of history that did not impress even the dissent.

I know it’s just the cases I read as part of my profession, but it is amazing how many people appear to drop dead within a few days of applying for life insurance. Perhaps agents should have an actionable duty to warn prospective insureds of this phenomenon 😉 Seriously, though, I guess the reason that there does seem to be a disproportionate number of cases is that the insurer is more likely to deny these claims on account of fraud or imperfect contract formation. When you couple the higher denial rate with the confusing state of “temporary life insurance” and the absence of any incontestability barrier to the denial of a life claim, the source of the illusion of a mortality spike becomes clearer.

A lot of computations needed to support the life insurance industry rely on mortality tables. These include computations embedded in accounting rules and various statutes regulating life insurance such as non-forfeiture laws. These mortality tables predict for various groups of people (such as female smokers who have obtained insurance) certain probabilities relating to death. These probabilities can be measured in various ways such as “survival”, the probability that someone will still be alive at time a specified age, ” or the “force of mortality,” the probability that someone alive at a specified age will die the following year.  Those wanting to explore these tables can look here.

But the tables are discrete-valued. They usually give answers only for integer values of age. That creates three issues. First, it does not tell you what the probability that someone alive at 50.5 will be alive at age 57.3. This isn’t too bad of a problem since one can interpolate between function values and make a pretty useful guess. Second, however, discrete-valued functions are often harder to work with mathematically than their continuous counterparts. Regular Issac Newton/Leibniz style calculus is actually often easier than the discrete calculus. Various computations that are useful in life insurance thus become difficult when all one has is a table. And third, the tables don’t tell us much about the physical process of aging and why people die at various rates.

And thus the quest for continuous mortality functions. These are functions like B c^x that predict the force of mortality for any positive value of x (age). There are a variety of these functions that have been developed over a few centuries of actuarial science, including the Gompertz model, the Gompertz-Makeham model, the Penna model, and the Weibull model. Generally, these functions have been derived from a feedback loop in which various theories about how aging might occur are guided by experience from mortality tables. And, usually, they are the solution to a differential equation based on a biological or physical model of aging. All well and good, and quite successful.

Until recently, however, this might have been the only methodology with which to derive useful mortality functions. It occurred to me recently, however, that this might not be the only way, or even the best way to proceed anymore. The key idea is to use “Genetic Programming,” a method developed about 1992 by John Koza in his book Genetic Programming: On the Programming of Computers by Means of Natural Selection 

What’s genetic programming? It’s brute force guided in the same way that nature guides evolution. The idea is to represent mathematical formulas as mathematical objects called “trees.” Here’s an example of a formula you might recall represented as a tree.  

formula for the area of a circle represented as a tree

formula for the area of a circle represented as a tree

Formulas that are “successful” in some way — such as those that are short and/or correctly predict mortality levels — get to mutate and mate (what fun!) with other successful formulas. The picture below attempts to depict the mating ritual of the formulae.

 

gravity with einstein formula substituting for m as a tree

Newtonian gravitation formula mates with Einsteinian mass formula to produce a expression displayed as a tree

The process of natural selection continues until one has a family of formulas that actually do a good job. The process does exercise the CPU of your computer, but it also works remarkably well on a diverse range of problems. My idea is that if one found good formulas that had heretofore been missed, one might then be able to “reverse engineer” information about the process of aging or at least perform more accurate and effective actuarial computations. And, if the best formulas turned out to be the existing ones, that would provide some confirmation that the physical and biological processes that inform them indeed have some validity.

Until very recently, however, doing genetic programming correctly and effectively was extraordinarily difficult. Turns out that while the idea is extraordinarily powerful, the details of implementation are often considerable. We are talking pages and pages of complex code that then has to be integrated with the rest of one’s computing environment. Not a job for a law professor, even a geeky one. In my view, that obstacle is now overcome. There is a product soon to be on the market that I have had the privilege of beta testing called DataModeler that does an unbelievable job of genetic programming and one of its subcategories used in statistical analysis: “Symbolic Regression.” The product is an add-on to Mathematica, my favorite programming language. Mathematica is a natural environment for genetic programming because it already represents mathematical expressions (and everything else) as just the sort of trees demanded by genetic programming. DataModeler is designed right. Its architecture is stunningly clean, leading to just the sort of flexibility and adaptability users will demand; it is beautifully integrated with the rest of Mathematica; it is well documented; and, OMG, it actually works! You don’t need to know a heck of a lot about the details of genetic programming or even Mathematica to get the package to produce remarkable results, often in just a few minutes. I’ve used it on several earlier projects (here and here) and I am once finding the ever-growing versatility of DataModeler as it heads for release to be nothing short of astonishing.

In a future post, I’ll discuss some results of this project, but I think I can disclose that I’ve made some interesting discoveries.

Today, as you know, we are looking at the insurable interest doctrine and at the related issue of the insurer’s liability for having issued life insurance policies that motivate the murder of the insured. One case we did not take a close look at is Life Ins. Co. of Georgia v. Lopez, 443 So. 2d 947 (Fla. 1983). There, the plaintiff alleged not that the insurer should have known about a lack of insurable interest or should have known about the beneficiary’s homicidal intentions towards the insured, but that the insurer DID know and did nothing about it. The Florida Supreme Court shocked few, I imagine, when it held that allegations to this effect stated a claim for relief.

What is perhaps surprising is that there was a dissent. 

“The majority opinion, in holding that the insurer had a duty to investigate, places a tremendous burden on life insurers. They will now be required to launch investigations upon receipt of unsubstantiated reports from their insureds and perhaps also from disinterested and even anonymous persons. Such investigations, by their very nature, pose a danger to insurance companies in that they may become subject to accusations of invasion of privacy and slander. Moreover, if the investigation turns up inaccurate information, the insurer may be led to wrongfully cancel a policy that should be kept in force.”

While ordinarily I am sympathetic to burden arguments and bundling up contracts with all sorts of judge-created ancillary duties, here I think I would prefer ex ante that my life insurer assume such a burden and charge me an appropriate premium for the service. I’d be willing to waive my privacy rights (such as they are) ex ante if someone phoned in and said my wife was plotting to kill me. On the other hand, if I really thought a beneficiary were trying to kill me, I might not wait for the insurance company to agree with me following its investigation. I’d name a new beneficiary or cancel the policy and so advise my prospective assassin. No?

Today’s class addressed regulation of cash surrender values in life insurance policies. As I mentioned, states have developed “nonforfeiture” laws that require certain insurance policies to provide non-zero payments in the event the policy lapses. Since these lapse payments may be less than the difference between (a) the expected present value of future death benefits and (b) the expected present value of future premiums, the insurer may still do better if the policy lapses than if it is held until death. The life settlement market, as discussed in class, can thus be seen as an effort to prevent insurers from profiting in this fashion. I have found an interesting and reasonably clear article on this point. It is Jay M. Jaffe, Rewriting Nonforfeiture Law to Rewrite Whole Life, Contingencies, Sept/Oct. 2003 available here.