A look at the differences between life insurance and accidental-death insurance and insurers’ favorite ways to deny coverage
Life and accidental-death insurance policies are sold through many different channels including directly to insureds by insurers or brokers and agents. Many policies are provided by employers as employee benefits. In addition to the death benefit, life insurance may also include some form of investment or cash value accumulation aspect that affects premium and benefit obligations.
Threshold issues for life insurance and accidental-death insurance coverage
Threshold issues for every life and accidental-death policy are a determination that the policy is in effect, that the insured has in fact died, and determining that the death occurred during the covered policy period.
For accidental-death policies, additional important threshold questions involve the cause of death and whether the death may properly be construed as accidental. The rules for examining these threshold questions vary depending on whether the policy is an individual policy or an employee benefit that is part of an Employee Retirement Income Security Act of 1974 (ERISA) plan or subject to some other government plan regulation such as the California Public Employees’ Retirement System (CalPERS). Claims procedures, deadlines and court jurisdiction differ greatly depending on whether the policy in question is an individual or group plan policy.
It is important, therefore, at the very outset of assisting a life or accidental- death client, for counsel to determine the type of policy including the appropriate forum for review.
Turning down life insurance coverage
Death in foreign territory
While it usually is clear if an insured has, in fact, died, there are some red flag situations that insurers examine carefully. One such situation is when the claimed death occurs outside of the United States. Death certificates from foreign jurisdictions have on occasion been forged or issued pursuant to bribes. Death certificates from countries with questionable legal systems are particularly suspect. Eyewitness testimony, foreign certified hospital records as well as additional documentation of the death may be necessary to secure insurance company sign-off on a benefit payment. Unresolved substantiation of the actual death may trigger the insurer to perform additional investigations into suspected fraud and conspiracy to defraud. This is especially true when the policy owner is someone other than the decedent. In such situations, foreign investigators are often retained to interview relatives and friends in the locale that the claimed death occurred.
Inaccuracies in insurance application
An insurer has the right to rescind a policy when the insured has misrepresented or concealed material information in seeking to obtain insurance. (DuBeck v. California Physicians’ Service (2015) 234 Cal.App.4th 1254, 1264-5, citing Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60; TIG Ins. Co. of Michigan v. Homestore, Inc. (2006) 137 Cal.App.4th 749, 755-756.) Insurance companies often intensively review life insurance policy application forms after receipt of notice of death. Simple inaccuracies unrelated to the actual cause of death have been used as pretext for policy revocations.
In a life insurance case litigated pursuant to California law in a federal district court in New York, the court interpreted California law to hold that materiality exists if the undisclosed fact “would have had a substantial effect on the insurer’s underwriting decision.” (Lin v. Metropolitan Life Insurance Company 2009 WL 806572 (S.D.N.Y. Mar. 30, 2009) affirmed Court of Appeals, (2nd Circuit 2011) see also Burns v. Prudential Insurance Co. of America (1962) 201 Cal.App.2d 868, 875-6.)
Expanding on this standard, the Lin court held that materiality will exist if an undisclosed fact would trigger the insurance company to demand more information or make “substantially different inquiries” if it knew the true facts. The court noted that Mr. Lin died from causes not related to the undisclosed information. The fact that the insured died of a cause unrelated to the withheld information was of no consequence. (Lin, supra.) Under Lin and similar cases, inaccurately listing no tobacco use within the last 10 years could be alleged as a basis for revoking a life insurance policy even after an unrelated cause of death such as an auto accident. The court, in essence, held that the insurer can base its revocation on an internal review concluding that the policy did not meet its underwriting criteria and the policy would not have been issued if the questions had been answered accurately.
A defense to policy revocation for purported inaccuracy is that the insurer did its own pre-issuance investigation and cannot now rely on the inaccuracy. For example, when an insurer obtains medical records that contain blood pressure information, it can be argued that they are limited from revoking due to a misrepresentation of the generic questions on the subject often contained in the application forms.
In rejecting the insurer’s contention that the misrepresentation in the application precluded liability to those injured in an accident unrelated to the alleged misrepresentation, the California Supreme Court has observed: “The rule is well established that the means of knowledge is equivalent to knowledge, and that a party who has the opportunity of knowing the facts constituting the fraud of which he complains cannot be supine and inactive, and afterwards allege a want of knowledge that arose by reason of his own laches or negligence.” (Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659, 669, fn. 7, quoting Shain v. Sresovich (1894) 104 Cal. 402, 405.)
The principle was also recognized in DiPasqua v. California etc. Life Ins. Co. (1951) 106 Cal.App.2d 281, 285 and Rutherford v. Prudential Ins. Co. (1965) 234 Cal.App.2d 719, 733, in which the courts held that an insurer could not rely on misrepresentations in an insurance application to avoid liability where the misrepresentations were contradicted by other information known to the insurer when it issued a policy. (See 106 Cal.App.2d at pp. 284-285; 234 Cal.App.2d at pp. 733-735.) As the court stated in Rutherford, “The [facts known to the insurer] should have put the underwriter on notice that the application form was incomplete and inaccurate in material respects. By failing to request additional information from [the doctors who examined the applicant] the insurance company waived any misstatements or concealments which subsequently appeared to exist in the application.” (234 Cal.App.2d at p. 735; see Ins. Code, § 336 (“The right to information of material facts may be waived ... by neglect [of the insurer] to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated”) and DuBeck, supra at 1268.)
In cases where insurers routinely perform no pre-issuance medical exam or record review, they may open themselves up to examination of their motives. Insurers know that there will be a substantial number of inaccuracies in applications. “[M]ost people are capable of forgetting facts at the time they apply for insurance, especially if those facts relate to a condition or event in the past which is no longer (and perhaps never was) deemed a problem by the applicant.” (Hailey v. Cal. Physicians’ Service (2007) 158 Cal.App.4th 452, 466, as modified on denial of rehearing (Jan. 22, 2008), review denied (Mar. 26, 2008).) When insurers rely upon, in bad faith, an after-the-fact examination to increase profits at the expense of the families of decedents, the practice has been referred to as post-death claim underwriting and can expose the insurer to substantial damages including punitive damages. Such outrageous conduct, if shown with clear and convincing evidence, would fall within California’s oppression, fraud, or malice standard for imposition of punitive damages. (Civ. Code, § 3294.)
To put some outer time limits on this type of after-the-fact examination and its potential for abuse, California enacted Insurance Code section 10113.5. “An individual life insurance policy delivered or issued for delivery in this state shall contain a provision that it is incontestable after it has been in force, during the lifetime of the insured, for a period of not more than two years after its date of issue, except for nonpayment of premiums.”
Lapse in premium payment(s)
Another common reason for denial of individual life insurance benefits involves the lapse of the insurance due to nonpayment of the last premium before death. Often an insured or family who have made every prior premium payment religiously, are distracted by illness and fail to notice the last premium obligation before death. Despite the best of intentions by the policyholder, there is little protection for the beneficiaries from policy lapse if the insurance company has properly followed “the rules.”
As for these “rules,” California sets out statutory prerequisites for insurers to be able to rely on during a policy lapse due to nonpayment. Included in the rules are a designation of the people who must be mailed notice of “the bill” as well as the timing of the notice and the timing of the lapse for nonpayment. This ensures that more than one person is provided notice of the decedent/policyholder’s lapses in payments due to end-of-life, or otherwise, circumstances. There is also a 60-day “grace” period included in the rules. Failure of an insurer to properly follow the rules provides a basis to overturn a lapse due to nonpayment.
Insurers must provide policyholders an option to add an additional person to be notified of an upcoming premium payment obligation. California Insurance Code section 396 provides that insurers who maintain “…a verifiable process that allows a policyholder to designate in writing or by electronic transmission… one additional person to receive notice of lapse, termination, expiration, nonrenewal, or cancellation of a policy for nonpayment of premium…” may rely on the lapse if no payment is timely made. The insurer is required to “…notify the policyholder in writing or by electronic transmission …of this right at the time of the application or within 30 days after the inception date of an individual policy …. and at least every two years thereafter….”
California Insurance Code section 10113.71(b)(1) requires “notice of pending lapse and termination of a life insurance policy…” be mailed to the policy owner and “… a designee … and a known assignee or other person having an interest in the individual life insurance policy, at least 30 days prior to the effective date of termination if termination is for nonpayment of premium.” Part (a) of the same section provides a “…grace period of not less than 60 days from the premium due date…. (and) the policy shall remain in force during the grace period.”
Turning down accidental-death coverage
Policyholders sometimes think that accidental-death policies operate under the same rules as life insurance policies. In fact, California accidental-death policies are regulated pursuant to a different section of the insurance code than life insurance. Life insurance is governed pursuant to Insurance Code section 101 while accidental-death insurance is a form of disability insurance regulated pursuant to Insurance Code section 106, subdivision (a). Careful practitioners will arm themselves with the difference in anticipation of reviewing a potentially inappropriate denial of an accidental-death claim.
As is true in most disability insurance claims, accidental-death claims can become very fact intensive and claims approval can also depend heavily on policy interpretation. These “facts” and policy interpretations are where we often see the insurer’s machinations against finding coverage.
Policy language (mis)interpretation
Insurance companies will often describe the accidental death as not accidental at all and will instead torture the facts and the policy language into fashioning a determination that the death was a suicide or other type of excluded self-inflicted cause. Here, when disputes arise regarding policy language, contract law and insurance rules of interpretation come into play. The key terms are always drafted by the insurance company. If the policy language is clear and explicit, it governs; if the policy terms are ambiguous, they will be interpreted to protect the objectively reasonable expectations of the insured; and if there is an ambiguity, it will be resolved against the insurer as the drafter of the policy. (E.g., Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315.)
Rules of interpretation of disability insurance contracts in ERISA cases are similar. (Miller v. Monumental Life Ins. Co. (10th Cir. 2007) 502 F.3d 1245, 1249 (“[A]pplying federal common law, we determine that the proper inquiry is not what [the insurer] intended a term to signify; rather, we consider the common and ordinary meaning as a reasonable person in the position of the [plan] participant would have understood the words to mean.”) (internal quotation marks and ellipsis omitted; third alteration in original); see also Jones v. Metro. Life Ins. Co. (6th Cir. 2004) 385 F.3d 654, 664 (“[F]ederal common law from pre-Erie diversity cases to present day ERISA cases focuses upon the expectations and intentions of the insured”).) Likewise, the doctrine of contra proferentem, which requires us to construe all ambiguities against the drafter, applies here. (See Miller, 502 F.3d at p. 1253 [adopting rule that contra proferentem applies to de novo review of ERISA plans].)
ERISA plans and insurance policies are to be interpreted “in an ordinary and popular sense” as they would be by “a person of average intelligence and experience.” (Evans v. Safeco Life Ins. Co. (9th Cir, 1990) 916 F.2d 1437.) “Courts will protect the reasonable expectations of *** insureds.” (Saltarelli v. Bob Baker Group Medical Trust (9th Cir. 1994) 35 F.3d 382, 387.) “Where particular provisions, if read literally, would largely nullify the insurance, they will be severely restricted so as to enable fair fulfillment of the stated policy objective.” (Henry v. Home Ins. Co. (CD, Cal., 1995) 907 F.Supp. 1392, 1397.) The purpose of the “reasonable expectations doctrine,” is to protect insureds’ “objectively reasonable expectations of coverage.” (Winters v. Costco (9th Cir. 1995) 49 F.3d 550, 555.) A decision of the Plan, denying or terminating a claim, must be based on a “reasonable interpretation” of the plan’s terms. (See MacDonald v. Pan American World Airways, Inc. (9th Cir. 1988) 859 F.2d 742, 744 (quoting McDaniel v. National Shopmen Pension Fund (9th Cir. 1987) 817 F.2d 1370, 1373).)
Upon review by a federal or a state court, by virtue of California Insurance Code section 11010.6, any question regarding policy interpretation is decided “de novo” by the Federal District Court regardless of any prior opinion of the ERISA plan administrator. In the “de novo” review, the court construes any ambiguity in the policy consistent with the reasonable expectations of the insured. (Firestone Tire and Rubber Co. v. Bruch (2002) 489 U.S. 101, 115.) A court must, “interpret terms in ERISA insurance policies in an ordinary and popular sense as would a person of average intelligence and experience.” (Babikian v. Paul Revere Life Co. (9th Cir. 1983) 63 F.3d 837, 849.)
For example, the Ninth Circuit holds that in the absence of a policy definition of “accident,” the following test for accidental death applies:
A death or injury may be “deemed accidental” under a group accidental insurance policy established under ERISA if the death [or injury] was unexpected or unintentional. 10 Couch On Insurance section 139:16 (3d Ed. 1995 & 2000 Supp.). In determining whether death, or the injury that caused death, was unexpected or unintentional, courts have undertaken an overlapping subjective and objective inquiry. The court first asks whether the insured subjectively lacked an expectation of death or injury. See Wickman v. Northwestern National Insurance Co. (1st Cir. 1990) 908 F.2d 1077, 1088 (“Requiring an analysis from the perspective of the reasonable person in the shoes of the insured fulfills the axiom that accidents should be judged from the perspective of the insured”). If so, the court asks whether the suppositions that underlay the insured’s expectation were reasonable, from the perspective of the insured, allowing the insured a great deal of latitude and taking into account the insured’s personal characteristics and experiences. (See Id.) If the subjective expectation of the insured cannot be ascertained, the court asks whether a reasonable person, with background and characteristics similar to the insured would have viewed the resulting injury or death as substantially certain to result from the insured’s conduct.)
* * * *
Federal courts deciding ERISA claims apply the subjective/objective test discussed above to determine, not only whether a death was accidental, but also whether an injury was intentionally self-inflicted. The district court correctly observed that this case hinges on whether the physical consequences that Mr. Padfield intended were injuries.
(Padfield v. AIG Life Insurance Co. (9th Cir. 2002) 290 F.3d 1121, 1126, 1129.)
The insurer in Padfield argued that the death was not accidental because the decedent died due to autoerotic asphyxiation. As a result, the carrier invoked a suicide exclusion in the policy and denied the claim. The Ninth Circuit looked to the reasonable expectations of the insured and asked whether the conduct at issue was substantially certain to result in death. According to the court the undisputed evidence revealed that autoerotic asphyxiation was intended to heighten sexual arousal and involved behavior engaged in over a period of years. The court found that the individual performing this act did not intend to die. (Padfield, supra at p. 1126-1127.)
The Padfield court reasoned that insurance policies are interpreted according to their plain meaning, and that they are construed strictly against the insurer applying the doctrine of contra proferentem, which requires us to construe all ambiguities against the drafter, “These rules of construction apply equally to ERISA cases governed by federal common law.” (Id. at p. 829, 830.)
In a Tenth Circuit case decided pursuant to California law, the decedent, who had been driving in Merced, California, purportedly stopped at a stop sign at an intersection and then continued on, slamming into a tree at high speed. The driver died after arriving at the hospital. At the time of his death, the driver had detectible levels of five prescription and/or over-the-counter drugs: acetaminophen, bupropion, hydrocodone, propoxyphene, and norpropoxyphene (a major metabolite of the opioid analgesic drug dextropropoxyphene). Toxicology reports after death showed that except for bupropion, the level of all the drugs greatly exceeded therapeutic levels. There was also a witness report of a seizure. The court’s decision highlighted an autopsy report that listed the cause of death as subarachnoid hemorrhage of the brain secondary to traumatic transverse basilar skull fracture. The court reasoned that the death was accidental caused by a skull fracture resulting from the car accident and rejected the insurer’s position that the death was due to seizure or physical illness. Accordingly, the policy’s exclusion for losses caused by physical illness did not apply. (Kellogg v. Metropolitan Life Insurance Co. (10th Cir. 2008) 549 F.3d 818, 832.)
In a case involving pizza, beer, excessive speed and death, the accidental- death policy did not have a specific definition for the term “accident.” Shortly before he died, the decedent helped some neighbors move. Later the same evening came the pizza, beer, and motorcycle riding. Each of the “movers” took turns riding the motorcycle around the neighborhood. At some point, the decedent took his turn riding the motorcycle and did not return. The decedent died because of blunt force trauma from a motorcycle crash near a curve in the road while traveling at an estimated speed of 90 miles per hour. The insurer denied the claim, asserting that the injuries that led to death were not caused by an accident. Rather they were a foreseeable consequence of driving at high speed while intoxicated. They supported their position with a toxicology report. The district court noted that the decedent was familiar with the operation of motorcycles, had no history of driving while intoxicated, and had no moving traffic violations. Relying upon the standards set forth in Padfield, supra, the district court concluded that the decedent’s death was accidental and therefore a covered event within the meaning of the policy. (Brettelle v. Life Insurance Company of North America (S.D. Cal. 2010) 691 F. Supp. 2d 1249, 1253.)
Deaths following medical treatment
Deaths following medical treatment may trigger claims disputes over whether the claim may be denied as death caused by illness as reflected in the medical treatment or is due to an accident. An example is set out by the Seventh Circuit in a Sun Life Insurance case involving a sports injury necessitating surgery followed by pulmonary embolism and death. Jeremy Prather, age 31, had torn his left Achilles tendon playing basketball. He was operated on to repair the torn tendon six days later. The surgery was uneventful, and he was discharged from the hospital the same day. He returned to work and was reported as doing well in a follow-up visit to his surgeon on August 2, but four days later he collapsed at work, went into cardiopulmonary arrest, and died the same day as a result of a deep vein thrombosis. Sun Life denied the accidental-death claim as resulting from illness. The Seventh Circuit stated:
Sun Life argues unpersuasively that its insurance contract with Prather’s employer gave Sun Life “discretion to decide what evidence was sufficient to demonstrate a disability.” But that would amount to the insurer’s having carte blanche to decide whether or not to honor its contract. The company also argues, again unpersuasively, that “the evidence in this matter makes clear that Mr. Prather’s surgical treatment contributed to his death [,] ... indeed, caused the forming of a blood clot in Mr. Prather’s deep veins.” No, the evidence does not make that clear. All the evidence shows is that his death followed both the surgery and the accident that preceded the surgery. Post hoc is not propter hoc.
(Prather v. Sun Life & Health Ins. Co. (U.S.) (7th Cir. 2016) 842 F.3d 733,735.)
Other claims that “trigger” insurer games
Similar reviews involving questions of intention and consequences of conduct are examined by insurers in a whole host of different types of claims. Accidental- death insurers alert their claims people to carefully review death claims involving private aviation, carbon monoxide poisoning, drug overdoses, premise fires, drowning, firearm discharge, scuba diving deaths, falls and vehicle crashes.
Even when death certificates list deaths as accidental, insurers may open a suicide investigation to review policy payment obligations with the bent to cherry-pick facts to the disadvantage of the beneficiary. Despite the good faith obligations of the insurer in handling a death claim, careful re-examination by the policyholder and counsel may uncover significant facts requiring payment of the claim. Caution requires, therefore, that the policyholder and their attorney carefully review the individual facts and circumstances of each specific claim.
Lee S. Harris is a partner at G3MH (Goldstein, Gellman, Melbostad, Harris & McSparran, LLP), San Francisco who assists consumers with insurance problems. He has also served as chair of the American Association for Justice, Insurance and Bad Faith Litigation groups and is a Vice-President of Consumer Attorneys of California. He was recently appointed by the State Bar of California to the Commission for the Revision of the Rules of Professional Conduct. Martindale-Hubbell® awarded him their prestigious AV-Preeminent rating and he has been identified as one of Northern California’s Super Lawyers.
Adrian Hern is a senior litigation associate at G3MH (Goldstein, Gellman, Melbostad, Harris & McSparran, LLP), San Francisco who assists consumers with insurance problems. She has extensive experience litigating complex insurance bad faith actions involving automobile and other vehicle policies, homeowner and other property policies and long-term disability policies. Her clients have included plaintiffs with catastrophic personal injuries, catastrophic property losses and wrongful death claims. Martindale-Hubbell® awarded her their prestigious AV-Preeminent rating.
2020 by the author.
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