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Life Insurance Odds & Ends – Recent Court Actions

Following is my periodic Odds & Ends post. If you care to review expanded background, facts, results or relevance regarding any of these recent cases, please contact my team and we’ll be happy to provide this to you.

1. TOPIC: Carrier Improperly Failed to Pay AD&D Benefits

CITE: Ferguson v. United of Omaha Life Ins. Co., et al., No. WMN-12-1035 (D. Md. Mar. 11, 2014).

SUMMARY: A Maryland federal court recently permitted the estate of an insured to recover accidental death insurance benefits under a group policy where the insured, who suffered from epileptic seizures, drowned in a public swimming pool. The group policy terms provided that a claim would only be paid if an injury, independent of sickness and all other causes, occurred as a result of an accident. The carrier initially denied the claim for benefits after concluding that the injury, the insured’s death, was not independent of sickness as the insured must have experienced a seizure that contributed to his death while swimming. The court found that, regardless of whether the insured suffered a seizure prior to drowning, his death was independent of any sickness as it was caused solely by the insured’s accidental drowning and not as the result of a seizure

2. TOPIC: Court Rules “Shock Lapse” Cost-of-Insurance Suit Against Carrier May Proceed

CITE: U.S. Bank National Association v. PHL Variable Ins. Co., Nos. 12-CV-6811 & 13-CV-1580 (S.D.NY Mar. 14, 2014).

SUMMARY: A recent decision by a New York federal court on a motion to dismiss has narrowed the issues in an interesting cost-of-insurance (“COI”) row between U.S. Bank and PHL Variable (“Phoenix”) arising out of Phoenix’s efforts to raise COI rates on premium-adjustable, universal life (“PAUL”) policies. U.S. Bank alleged that Phoenix breached the terms of the policies by improperly raising COI rates in order to induce “shock lapses.” Specifically, it alleged that Phoenix raised COI rates to make the “policies so expensive that policyholders . . . would have no economically rational choice but to lapse or surrender their policies.” While the court granted Phoenix’s motion in part and dismissed certain counts brought by U.S. Bank, the key counts addressing Phoenix’s conduct in raising COI rates remains at issue and will be litigated between the parties going forward.

3. TOPIC: Age Adjustment Clause Allows Carrier to Reduce Death Benefit to Reflect Insured’s True Age

CITE: : Byrd v. Conseco Life Ins. Co., Nos. 12-CV-2455 (D. Co., Apr. 25, 2014).

SUMMARY: The insured misstated her age on an application. A Colorado federal court granted summary judgment in favor of the insurer on a claim by the insured’s husband, the policy’s beneficiary, that it breached the terms of the policy by adjusting the death benefit to reflect the insured’s true age. Relying on the misstatement of age provision in the policy, the court found that the carrier was entitled to adjust the death benefit to the amount of insurance that the premium collected would have purchased at the correct age.

4. TOPIC: Group Insurance Plan Participant’s Will Does Not Effect Change of Beneficiary

CITE: Jane Marie Hall v. Metropolitan Life Insurance Company, 2014 WL 1813156, (8th Cir., May 8, 2014).

SUMMARY: When a plan participant’s widow did not receive the death proceeds of a group life insurance policy at her husband’s death, she filed a suit in state court under the Employee Retirement Income Security Act of 1974 (“ERISA”). She alleged that the plan’s administrator abused its discretion in denying her claim.

The case was removed to federal court and the United States District Court for the District of Minnesota entered summary judgment in favor of the plan administrator. This case is the result of the widow’s appeal.

The Court of Appeals for the Eighth Circuit held that the administrator did not abuse its discretion in determining that provisions in the plan participant’s will changing the beneficiary of the group insurance to name the widow did not effect a change of policy beneficiary. It also concluded that the administrator did not abuse its discretion in refusing to give effect to a change-of-beneficiary form that was submitted to the insurer more than 30 days after participant signed it. The court further ruled that the doctrine of “substantial compliance” would not deprive administrator of power to require strict compliance with plan’s terms.

5. TOPIC: Insurer Not Bound By Conditional Receipt Where Insured Did Not Accurately Disclose Information Affecting Carrier’s Risk

CITE: Alfa Life Insurance Corp., et al. v. Colza, No. 1111415 (Ala. May 9, 2014).

SUMMARY: The Alabama Supreme Court reversed a trial court jury verdict and held that no coverage existed under the terms of a conditional receipt because risks affecting pricing and insurability were not accurately stated in the application.

6. TOPIC: Death Proceeds of Wife’s Policy Received During Bankruptcy Available to Husband’s Creditors

CITE: In Re: White, No. 09-83098-JAC-13 (U.S. Bankruptcy Ct. N Dist. AL, May 16, 2014), ALA. CODE § 6–10–8(a), (b) and § 27–14–29(a), (b).

SUMMARY: An Alabama federal bankruptcy court ruled that the $50,000 in life insurance death proceeds received by husband at his wife’s death were available to his Chapter 13 bankruptcy creditors.

7. TOPIC: IRS Announces New Program to Audit 409A Compliance

CITE: Internal Revenue Code Section 409A, Treas. Reg. Section 1.409A

SUMMARY: The IRS is getting ready to ramp up enforcement of Section 409A compliance with respect to non-qualified deferred compensation arrangements. This new compliance initiative project (“CIP”) for Section 409A will focus on fifty large companies. However, this foreshadows a much broader Section 409A enforcement initiative.
The Service plans to issue Information Document Requests (“IDRs”) to about 50 large employers. These initial IDRs will request documents regarding deferred compensation elections and payouts. The IRS informally indicated that these will focus on three issues: 1) initial deferral elections, 2) subsequent changes in deferral elections and, 3) timing of payouts. Requested data will initially be limited to the top 10 highest paid employees in each company. Information gained from the first 50 audits will be used by the IRS to target future 409A audit and enforcement activity.

8. TOPIC: Life Insurance Beneficiary Designation Survives Parties’ Divorce

CITE: West Coast Life v. Clark, 2014 WL 2468350 (C. Dist. CA 2014); California Probate Code Section 5600(e).

SUMMARY: Jeffrey Clark purchased insurance on his life from West Coast Life and named his wife as beneficiary. When the parties divorced, Jeffrey completed paperwork to change the beneficiary to his sister. But the change of beneficiary paperwork was not submitted to West Coast until after Jeffrey’s death. The U.S. District Court decided that the original beneficiary, the decedent’s ex-wife, was entitled to receive the policy’s death benefit.

9. TOPIC: STOLI Agents Indicted for Fraud

CITE: Indictment of Daniel Carpenter of Simsbury, Connecticut and Wayne Bursey of Bloomfield, Connecticut; U.S. v. Daniel E. Carpenter, No. 11-231, (U.S. Ct. Appeals 1st Cir. 2013).

SUMMARY: The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has announced the indictment of two men for a scheme to defraud insurance companies, including Lincoln National, into issuing stranger-originated life insurance (STOLI) policies.

 

Reprinted with permission by the AALU

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