Blog - Page 28 of 110 - McKennon Law Group

In the October 23, 2020 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon. The article addresses a recent case by the California Court of Appeals, Dones v. Life Ins. Co. of N. Am., which reversed the trial court’s ruling sustaining demurrers without leave to amend based upon an agency theory due to the employer county’s errors administering the life insurance policy on behalf of the insurance company. These errors were imputed to the insurance company, rendering it liable for the employer’s mistakes under the equitable remedies of waiver and estoppel. The Dones case will surely be read to further expand liability against non-governmental employers and insurers and assist employees and their beneficiaries in receiving their much needed plan benefits.

Ruling demonstrates when employers are agents of insurers

A recent 9th Circuit decision affirms that in the context of employer-sponsored benefits, the employer is the agent of the insurer with regard to the administration of the policy.

By Robert J. McKennon

People are often drawn to job opportunities because of the employee benefits offered to them and their families. A generous benefit package that includes several types of insurance such as medical, short-term and long-term disability, and life coverage could be the deciding factor for a prospective employee. They are not experts in the enrollment process. They often rely on their employer’s human resources department to help them understand their coverage options, pay their premiums, understand what forms they must submit and help them solve any problems that may arise. However, if the employer fails to accurately explain coverage requirements, and if the forms are not correctly completed to an insurer’s satisfaction, insurers can and will deny claims, blaming the employees or their employers. California law protects employees in some circumstances. For example, under an agency theory, an employee can impute legal responsibility to the insurer for the employer’s errors in administering an employee benefit plan, thus rendering the insurer liable for the employer’s mistakes or negligence under equitable remedies of waiver and estoppel.

The recent case of Dones v. Life Ins. Co. of N. Am., 2020 DJDAR 10896 (Oct. 7, 2020) further expands protection for employees and their beneficiaries. In Dones, an employee of the County of Alameda (County), Trina Johnson, enrolled in supplemental life insurance coverage with the Life Insurance Company of North America (LINA). She was a County employee but on a medical leave of absence. While on her medical leave, she received information regarding her benefit eligibility for the supplemental life insurance. She made her election online, selecting $230,000 in supplemental life coverage and naming Michael Dones as her primary beneficiary.

The master policy stated, “If an Employee is not actively at work due to Injury or Sickness, coverage will not become effective for an Employee on the date his or her coverage would otherwise become effective under this Policy. [¶] Coverage will become effective on the date the Employee returns to Active Service.” The master policy defined “Active Service” as follows:

An Employee will be considered in Active Service with the Employer on a day which is one of the Employer’s scheduled work days if either of the following conditions are met: [¶] 1. He or she is actively at work. This means the Employee is performing his or her regular occupation for the Employer on a full-time basis, either at one of the Employer’s usual places of business or at some location to which the Employer’s business requires the Employee to travel. [¶] 2. The day is a scheduled holiday, vacation day or period of Employer approved paid leave of absence, other than disability or sick leave after 7 days.

After her cancer diagnosis, Johnson received confirmation that she had successfully elected her benefits and that her coverage would become effective on January 1, 2017. The County deducted premiums for her benefits which were sent to and accepted by LINA. Johnson remained on leave and died six months later without having returned to work.

After Johnson’s death, a County employee informed Dones that Johnson’s life insurance coverage never became effective because she had not returned to “active service.”

Dones sued both LINA and the County. In his second amended complaint, he asserted causes of action for breach of contract, breach of implied contract and breach of the implied covenant of good faith and fair dealing (against LINA only). Dones asserted that both defendants waived and were estopped from asserting the active service requirement. The second amended complaint alleged that if an employee who elected the supplemental insurance benefit while on leave returned to work for even one day after the January 1, 2017, effective date, the supplemental benefit would become active. But Johnson did not understand the requirement and reasonably believed that the policy covered her automatically after the effective date.

Defendants filed demurrers to Dones’ amended complaint. The trial court sustained the demurrers without leave to amend. It rejected Dones’ argument that LINA and the County waived, or were estopped from enforcing, the active service requirement. The trial court relied on case law holding that waiver and estoppel arguments cannot be used to create insurance coverage that does not exist in the plan documents. Dones appealed.

In reversing the trial court’s order, the California Court of Appeals considered several cases, including most importantly the 9th U.S. Circuit Court of Appeals decision in Salyers v. Met. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), a case involving employee benefits subject to the Employee Retirement Income Security Act of 1974 (ERISA). The Salyers court found a waiver where the insurer accepted premium payments but later denied a death benefit because the plan participant failed to provide a “Statement of Health” as required for eligibility. The court held, “The deductions of premiums, [the insurer] and [employer’s] failure to ask for a statement of health over a period of months, and [the employer’s] representation to Salyers that she had $250,000 in coverage were collectively ‘so inconsistent with an intent to enforce’ the evidence of insurability requirement as to ‘induce a reasonable belief that [it] ha[d] been relinquished.’”

While insurers and plan administrators often argue that waiver cannot be used to create coverage beyond that actually provided in an employee benefit plan, Salyers noted the distinction created by the acceptance of premiums. The Salyers court held that where premium payments have been accepted despite the plan participant’s alleged noncompliance with policy terms, giving effect to the waiver does not expand the scope of the plan, but rather, provides the plaintiff with an available benefit for which he paid.

The Dones court noted further that waiver and estoppel are normally questions of fact. It declined to hold that these principles cannot establish the existence of an effective contract of insurance as a matter of law.

It then turned to whether the County’s conduct could support causes of action for breach of contract against LINA. The court considered the California Supreme Court’s decision in Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503, 512 (1967), which held as a matter of law that the employer is the agent of the insurer in performing the duties of administering group insurance policies. The California Supreme Court based its reasoning on the fact that the employee has no knowledge or control over the employer’s actions in handling the policy or its administration. The Dones court found that Dones’ allegations (that the County was acting as an agent for LINA in the administration of the life insurance policy as well as informing Johnson of available benefit options, communicating with her about and confirming her selections, deducting premium payments and transmitting them to LINA) were sufficient to allege agency under Elfstrom. It determined that the County acted as LINA’s agent in administering the life insurance policy (for purposes of determining LINA’s liability). But it held that the County could not be held responsible, relying on law that makes it difficult to pin liability on governmental entities.

This decision affirms that in the context of employer-sponsored benefits, the employer is the agent of the insurer with regard to the administration of the policy. This can be very important to tie an employer’s errors in administration to the insurer and thus provide an avenue of recourse for a beneficiary such as Dones who would otherwise be without recourse.

Plan administrators must carefully and accurately communicate coverage options and policy terms to employees like Johnson. If they do not, they and the insurer may be exposed to litigation and potential liability for their misconduct. As was the case with Salyers, this often occurs with a “proof of good health” requirement that the plan administrator and insurer fails to enforce, leading the unsuspecting employees to believe they are fully covered. Recent expansion of breach of fiduciary duty liability, waiver, estoppel and agency theories in federal ERISA cases have been a welcome development for employees who obtain insurance coverage from their employers. While the Dones case did not find liability against the County, when read in conjunction with Salyers, it will surely be read to further expand liability against non-governmental employers and insurers outside of the ERISA context and will thus assist employees and plan beneficiaries to secure their much needed plan benefits. Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith and ERISA litigation. He can be reached at (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at mslawllp.com/news-blog/.

On July 24, 2020, McKennon Law Group PC’s client, Julie Hodgson, filed a 52-page Complaint against the administrator of her disability benefits, Lincoln Life Assurance Company of Boston (“Lincoln”), on the basis that Ms. Hodgson could no longer perform her job duties or those of any occupation because she suffered from chronic pain syndrome, connective tissue disease and fibromyalgia. Initially Lincoln had approved Ms. Hodgson’s short-term disability benefits, but after a transition and claim for LTD benefits, Lincoln improperly denied her long-term disability benefits, based on Lincoln’s reasoning that Ms. Hodgson no longer met the definition of disability.

The Complaint in detail attacked Lincoln’s examination and analysis of Ms. Hodgson’s claim and appeal for LTD benefits. First, the Complaint alleged that Lincoln contracted biased medical consultants who although agreed that Ms. Hodgson suffered from her impairing diagnoses, simply concluded that Ms. Hodgson was able to perform her job duties. The Complaint alleged that Lincoln’s reliance on these medical consultants was unreasonable since all of their reports were cursory, without adequate analysis and the paper reviewers did not clearly state the basis for disagreeing with Ms. Hodgson’s multiple examining doctors. Carrier v. Aetna Life, 116 F.Supp.3d 1067 (C.D. Cal. 2015).

Second, the Complaint alleged that Lincoln’s medical consultants did not examine Ms. Hodgson, though its Policy permitted it. This raised questions about the credibility of their opinions and the appropriateness of Lincoln’s benefits denial. Shaw v. AT&T, 795 F.3d 538 (6th Cir. 2015). This is to be contrasted with her treating providers who have regularly treated her for years and consequently gained great insight into her work limits. Therefore, their opinions were based purely on a “cold file review” of Ms. Hodgson’s medical records and therefore carried far less weight and did not have the benefit of the insight gained through personal observation. Sullivan v. Prudential, 2014 WL 3529974 (E.D. Cal. Jul. 15, 2014). A in person examination is especially important in cases involving subjective diagnoses, such as pain and fibromyalgia.

Third, Ms. Hodgson alleged that Lincoln and its consultants ignored Ms. Hodgson’s medical records that frequently referred to her numerous tender points in multiple exams, which courts have consistently recognized that such findings are significant in cases involving fibromyalgia. In Wulf v. Astrue, 773 F. Supp. 2d 984 (D. Kan. 2011), the court noted “as the Eighth Circuit said in [Brosnahan v. Barnhart, 336 F.3d 671 (8th Cir.2003)], the ‘objective medical evidence of fibromyalgia’ was the ‘consistent trigger-point findings’ and the plaintiff’s ‘consistent complaint during her relatively frequent physicians’ visits of variable and unpredictable pain, stiffness, fatigue, and ability to function. 336 F.3d at 678. This alone demonstrated that Lincoln’s medical consultant’s review of Ms. Hodgson’s medical records was incomplete and thus, any conclusions made from their review were flawed.

The Complaint concluded by attacking Lincoln’s vocational consultant’s report as incomplete, flawed and conclusory. Lincoln improperly relied on this vocational report which simply concluded that Ms. Hodgson could work in sedentary and light occupations, while failing to list the job duties of those listed occupations and the skills required to perform them. This detail is required by law. Turner v. Life Insurance Co. of North America, 2017 WL 6000099 (W.D. Wash. Dec. 4, 2017). Lincoln’s vocational analysis also failed to consider Ms. Hodgson’s non-exertional limitations, such as cognitive and psychological limitations, including those related to the side effects of her prescription medications and pain, and her limited ability to remain seated for an extended period of time. Such non-exertional limitations are important aspects of vocational capacity and should be considered. Rabuck v. Hartford Life and Accident Ins. Co., 522 F.Supp.2d 844 (W.D.Mich.2007). Finally, we alleged that the vocational consultant never looked at actual job postings or whether those businesses were looking to hire someone now (let alone whether Ms. Hodgson was a realistic candidate in the real-world employment market). Numerous courts have found that a group disability insurer’s failure to confirm that actual jobs are available in an occupation the claimant has the physical ability to perform violates the group policy. For example, in Kennard v. Means Industries, Inc., 555 Fed. Appx. 555, 557–58 (6th Cir. 2014), it was undisputed that, due to his medical condition, the clamant was only capable of working in an “absolute clean-air environment.” For all the reasons discussed above, the Complaint alleged that Lincoln’s reliance on its consultant’s vocational report was improper.

In less than two months after filing the lawsuit, Lincoln voluntarily reversed its denial of Ms. Hodgson’s claim for LTD benefits and agreed to pay her all disability benefits provided by the policy, plus prejudgment interest and our attorneys’ fees and costs. It was a total victory for Ms. Hodgson.

Unfortunately, many insurance companies participate in similar tactics to deny legitimate claims for benefits. Instead of accepting the opinions of treating physicians, insurance companies will often deny claims based on “a failure to meet the definition of disability” or lack of “objective evidence” or perform a “paper review” of medical files by “independent” medical consultants who are hired by the insurance company. If your disability insurer denied your claim for short-term disability or long-term disability benefits, please contact our firm for a free consultation. We have extensive experience with handling these types of disability claim denials

On October 14, 2020, Judge Janis L. Sammartino of the Southern District of California ruled in favor of McKennon Law Group PC’s client in her motion for attorneys’ fees and costs arising out of an ERISA disability lawsuit against Aetna Life Insurance Company. Our client, a former senior vice president at a major retailer, became disabled as a result of her numerous medical conditions which include chronic pain syndromes, neurological deficits, spinal problems, deterioration of high-level cognitive functioning and gastrointestinal issues. She has a long-term disability policy with Aetna. After paying two years’ worth of benefits, Aetna terminated our client’s claim for disability benefits. After pursuing her administrative appeals, our client sued Aetna to obtain the benefits she was owed. We convinced Aetna to reinstate our client’s benefits. When it was discovered that Aetna had improperly deducted our client’s worker’s compensation benefits from her payments of disability benefits, we convinced Aetna that it had erred and to pay our client the withheld funds. However, Aetna still refused to pay our client’s attorneys’ fees and costs. We filed a motion for the fees and costs.

In ruling on the motion, Judge Sammartino rejected a variety of Aetna’s arguments as to why it should not pay our client’s attorneys’ fees and costs. For example, Judge Sammartino explained that, even though she had not ruled on the merits of the claim, our client’s lawsuit prompted Aetna to reinstate our client’s benefits and, under a “catalyst theory of success,” our client had demonstrated success on the merits of the case, a key factor in establishing entitlement to an award of attorneys’ fees. Judge Sammartino also rejected Aetna’s arguments that our client’s attempts to augment the administrative record before suing Aetna were not compensable as part of the litigation. As Judge Sammartino explained, the attempts to augment the record served as a demand letter related to litigation and were not part of the administrative appeals process. The awarding of fees for this additional time significantly increased the value of the award of fees.

We had several strategic victories along the way that contributed to this favorable result. Not only did we convince Aetna to reinstate our client’s benefits, but we also successfully rebutted several attempts by Aetna to acquire a copy of our fee agreement with our client. Whereas fee agreements are discoverable under certain circumstances, they are completely irrelevant to an award of fees under ERISA. See Van Gerwen v. Guarantee Mut. Life Co., 214 F.3d 1041, 1048 (9th Cir. 2000); Welch v. Metropolitan Life Insurance Co., 480 F.3d 942, 946 (9th Cir. 2007). Not only did successfully denying Aetna access to the fee agreement deny Aetna access to additional arguments as to why the fees should be reduced, but the time arguing that issue was compensable when we filed our motion for fees.

The Court ordered Aetna to pay our client 80% of her requested fees and costs, $182,869.82. This was the final piece of a very successful case.

Health insurance plans frequently deny claims by plan members on the basis that the claimed services are not medically necessary. This limitation is applied even more so in the context of claims for mental health and substance abuse services where plans often seek to limit what type of coverage they provide or how long they will cover such treatment. The recently-enacted California SB 855 expands the coverage obligations for fully-insured health plans in California for mental health and substance abuse treatment. Self-insured plans are not impacted. The law applies to all California health plans and disability insurance policies issued, amended or renewed on or after January 1, 2021. It requires that health plans provide coverage for all medically necessary services for mental health issues under the same terms and conditions applied to other medical conditions. The bill also prohibits a health care plan from limiting benefits or coverage for mental health and substance abuse disorders to short-term or acute treatment and defines covered benefits to include basic health care services, intermediate services and prescription drugs.

The law defines “medically necessary treatment of a mental health or substance abuse disorder” as a service or product addressing the specific needs of a patient for the purpose of preventing, diagnosing, or treating an illness, injury, condition, or its symptoms, including minimizing the progression of such, in a manner that meets all of the following:

Is in accordance with generally accepted standards of mental health and substance use disorder care;
Is clinically appropriate in terms of type, frequency, extent, site, and duration; and
Is not primarily for the economic benefit of the health care service plan and subscribers or for the convenience of the patient, treating physician, or other health care provider.

The law prohibits health plans from applying different, additional or conflicting criteria when making medical necessity determinations. The law also requires that health plans base medical necessity determinations on current generally accepted standards of mental health and substance abuse disorder care and that they apply specified clinical criteria and guidelines in conducting utilization reviews.

The bill also makes any provision in a health plan that reserves discretionary authority to the plan to determine benefit eligibility, interpret the terms of the plan or provides standards for interpretation that are inconsistent with California law, void and unenforceable. In addition, the law expands coverage to include medically necessary treatment of all mental health and substance abuse disorders described in the most-recent edition of the International Classification of Diseases or the Diagnostic and Statistical Manual of Mental Disorders. Lastly, the law provides that if medically necessary treatment of mental health and substance abuse disorders is not available in-network within the geographic and timely access standards, the plan must arrange coverage to ensure medically necessary out-of-network services at the same cost-sharing level that the member would pay for in-network services.

Health plans and insurers that provide coverage in California are already subject to the 1999 California Mental Health Parity Act and the federal Mental Health Parity and Addiction Equity Act of 2008, which, combined, require coverage of medically necessary treatment of severe mental illnesses, serious emotional disturbances of a child, and substance use disorders under the same terms and conditions applied to other medical/surgical conditions. The California Mental Health Parity Act required mental health parity to nine enumerated severe mental illnesses but did not require parity in the treatment of substance abuse, anxiety, opioid use, alcohol use, and post-traumatic stress disorders.

The overall impact of SB 855 is to expand healthcare plans’ obligations for covered mental health services. Claimants faced with denied health insurance claims for these services should contact an experienced insurance attorney such as the McKennon Law Group PC who can help guide claimants through these new requirements and ensure that their health plans are providing appropriate coverage.

National Football League (“NFL”) players are covered by an employer-sponsored long-term disability (“LTD”) policy called the Bert Bell/Pete Rozelle NFL Player Retirement Plan (“Plan”). This NFL Plan, like most employer long-term disability plans, is governed by ERISA. Therefore, disabled NFL players face many of the same evidential challenges as company-bound employees when filing a claim for disability. These similarities are evidenced in the recent decision, Dimry v. Bert Bell/Pete Rozelle NFL Player Retirement Plan, 2020 WL 5526607 (N.D. Cal. Sept. 15, 2020)(“Dimry”). The court held in Dimry that Plan administrator (“Bert Bell”) abused its discretion when denying Mr. Dimry’s disability claim primarily for the following reasons: (1) Bert Bell did not provide Dimry with a “full and fair” review; (2) Bert Bell demanded “objective evidence” which was not required by the Plan; and (3) Bert Bell failed to consider Mr. Dimry’s Social Security award.

Dimry originally filed a complaint against Bert Bell to recover LTD benefits in 2016. Shortly after, the Social Security Administration (“SSA”) found that Dimry had been disabled since 2012. The district court found that Bert Bell had abused its discretion when it denied Mr. Dimry’s LTD claim because it ignored two reports from Mr. Dimry’s treating physicians in favor of two so-called “neutral physicians” who were paid almost $300,000 by Bert Bell to review claims. The district judge found in favor of Dimry finding Bert Bell had abused its discretion since the denial of Mr. Dimry’s benefits claim was “based upon an unreasonable bias in favor of Plan-selected physicians” and remanded the matter to Bert Bell to re-evaluate Mr. Dimry’s disability claim. On remand, Bert Bell relied on the Plan’s medical director, Dr. Jackson, who opined that Mr. Dimry’s primary impairment appeared to be pain and subjective complaints that were not supported by objective evidence. Relying on Dr. Jackson’s report, Bert Bell again denied Mr. Dimry’s claim. Another lawsuit followed.

Dimry first argued that there was a conflict of interest because the three physicians who had reviewed his claim were biased since the first two physician reviewers had been paid almost $300,000 and Dr. Jackson had been paid $223,000 by the Plan. The court explained that “Even apart from any issue preclusion that may apply given the Dimry I court’s findings, under Demer ‘[t]he magnitudes of these numbers, particularly when combined, raise a fair inference that there is a financial conflict which influenced the [the physicians’] assessments.’ Demer, 835 F.3d at 902.”

Dimry next argued that he was excluded from Bert Bell’s “review of his claim following the remand in violation of the requirement that there be ‘a meaningful dialogue between ERISA plan administrators and their beneficiaries’ and that the Plan give a ‘full and fair review’ to an appeal of an adverse benefits determination.” A full and final review requires giving the claimant an opportunity “to submit written comments, documents, records, and other information relating to the claim for benefits” and provide the claimant with any new or additional evidence, as soon as possible, to give the claimant an opportunity to respond. In Dimry, not only did Bert Bell not provide Dr. Jackson’s report to Mr. Dimry, Bert Bell never informed Dimry that it was consulting Dr. Jackson or that he was issuing a report which it intended to rely on. The Court held that by excluding Dimry from the renewed review, Bert Bell was in violation of “the rule that there be a meaningful dialogue between ERISA plan administrators and their beneficiaries.”

Next, Dimry challenged Bert Bell’s finding that the objective medical evidence did not support his claims of neck and back pain. Although Dr. Jackson opined “that Mr. Dimry’s pain complaints could be accurate despite not being fully supported by the objective medical evidence given the nature of his impairment,” Bert Bell made no attempt to follow up with Mr. Dimry’s complaints of pain. The Court agreed with Dimry that requiring objective evidence to support his pain complaints was “illogical and without support in inferences that may be drawn from the facts in the record.” First, the Plan did not contain language limiting benefits to claimants that can provide objective evidence to support subjective complaints of pain. Second, the Court found that while Bert Bell “may consider the lack of objective medical evidence in making a benefits determination, ‘reliance on objective evidence can be problematic for medical conditions that are not amenable to objective verification.’”

Lastly, Dimry insisted Bert Bell abused its discretion when it failed to acknowledge Mr. Dimry’s social security award. In response, Bert Bell attempted to assert the following justifications for disregarding the SSA’s award decision: First, the SSA was somehow incomplete as it did not have and/or consider the Plan’s physician’s reports when it made its determination. However, the court did not find this argument convincing. Instead the court found Bert Bell “acted as an adversary, not a fiduciary,” and stated Bert Bell’s rejection of the SSA “is particularly striking where, as here, [Bert Bell’s] non-disability finding was based on the absence of objective evidence, and the [SSA] discussed the objective evidence in Mr. Dimry’s Social Security file at length – none of which Dr. Jackson reviewed.” Second, Bert Bell contended that since Mr. Dimry’s social security was rejected twice before it was granted, this constitutes evidence that reasonable minds could differ as to whether Dimry was disabled and precludes a finding that Bert Bell’s finding of no disability was arbitrary. The court again disagreed and explained, “[w]hile [Bert Bell] was not required to accept the [SSA’s] opinion, it had to consider it and explain why it was not persuasive.” Third, Bert Bell claimed that “[t]he Social Security decision turned on factors that are irrelevant to a finding of total and permanent disability under the Plan, such as [Mr. Dimry’s] education and work experience.” The court also rejected this argument stating that based on the relevant medical evidence, Mr. Dimry’s education and/or work experience had “nothing to do [with] whether the medical evidence fully supported Mr. Dimry’s pain complaints.” Finally, Bert Bell argued that it, unlike the SSA, was not required to give substantial weight to Mr. Dimry’s treating physician. While the court agreed that Bert Bell was not bound by the SSA’s treating physician rule, Bert Bell was also not allowed to simply discount the SSA’s ruling.

The lawsuit eventually resulted with the Court’s finding that Bert Bell had abused its discretion and remanded Mr. Dimry’s case back to Bert Bell for a renewed evaluation of his claim. The Court also stated that it “expects that once [Bert Bell] gives Dimry the full and final review ERISA requires, and eliminates the mandate of objective evidence – a mandate not in the Plan and not in Dr. Jackson’s reports – that Dimry will be found disabled under the Plan.

We often see LTD claims denied without a full and fair review provided to our clients. We often see plan administrators/insurers who use biased physicians who conduct cursory paper reviews, who wrongfully rely on the lack of objective evidence to deny LTD claims and who do not meaningfully address favorable SSA determinations. If you believe your LTD claim was denied without a full and fair review for any of the reasons discussed above, please contact us for a free consultation by calling our office at 949-387-9595 or completing the contact form on our website.

Many people acquire life insurance in order to guarantee that their loved ones are provided for in the event of their death. For most people, the policy is acquired, and it just becomes another monthly bill they rarely think about. However, on occasion, life takes a tragic turn and the insured who just applied for a life insurance policy but before the policy is issued, dies. Such a scenario calls into question when a temporary life insurance policy can be created which would cover an insured applicant’s beneficiaries. Paying death benefits under these types of temporary policies can be complicated and insurers love to fight paying beneficiaries in the situations. One of our clients had this very situation occur.

In State Farm Insurance Co. v. Landfried, No. 5:19-cv-01845, (C.D. Cal. June 25, 2020) (Slip op.), our client’s uncle applied for life insurance. He completed the insurance application over the phone with an insurance agent. When completing the application, he designated his nephew, our client, as the beneficiary. The insurance agent offered the uncle the opportunity to “bind” the policy. This meant that our client’s uncle could pay the initial month’s premium while he was still undergoing the application process and, should he die before the insurance company had completed the underwriting process, his family would still be entitled to the death benefits he was applying for. Insurance companies in California offer the opportunity to bind a policy because California law, both by California statute and case law, provides for the creation of a temporary policy under certain circumstances. The insurance agent informed the uncle that he needed to provide a payment of $217 to bind the policy. The uncle placed the money in his bank account and gave the agent his debit card information to pay the premium. The agent did not immediately process the payment. In fact, she waited three days before even attempting to process the payment. During the intervening three days, the uncle died.

State Farm denied the claim and filed a declaratory relief action against our client in federal court, seeking a court order declaring that the insurer did not owe our client the death benefits under the life insurance policy. Our client brought a counterclaim, seeking the death benefits as well as bad-faith damages above and beyond the face value of the policy. The insurer was sufficiently confident that it did not owe our client the death benefits that it brought a motion to dismiss the claims under Federal Rule of Civil Procedure 12(b)(6). The motion argued that, even if everything our client asserted was true, the insurer still would not owe our client any death benefits. After requesting additional briefing on the matter, the court denied the motion.

Whereas under California Insurance Code Section 11015 two parties can create a temporary insurance policy under certain enumerated circumstances, the court focused on a different manner of creating a temporary policy that covers the insured during the application process. The court stated in an order dated June 25, 2020 that:

The Court previously raised this issue with the parties at the February 10, 2020 hearing on these motions, and requested additional briefing on the application of State Farm Mut. Auto. Ins. Co. v. Khoe, 884 F.2d 401, 405 (9th Cir. 1989) and Metro. Life Ins. Co. v. Wood, 302 F.2d 802, 802–03 (9th Cir. 1962). Dkt. 28. As the Court stated at the hearing, these cases focus their inquiry on the possibility that a temporary insurance contract may be formed if a party completes an application, makes a payment of a first premium, and “the language of the application would lead an ordinary layperson to conclude that coverage was immediate.” State Farm Mut. Auto. Ins. Co. v. Khoe, 884 F.2d 401, 405 (9th Cir. 1989). This possibility for coverage exists entirely outside of the statutory conditions which create temporary insurance coverage under Cal. Ins. Code § 11015. See, e.g. Hodgson v. Banner Life Ins. Co., 124 Cal. App. 4th 1358, 1372-73 (Ct. App. 2004) (distinguishing between Section 11015’s statutory obligations and formation of a temporary insurance contract under California law based on the reasonable expectation of the parties and relevant language in any conditional receipt provided).
[. . .]
The Court finds that the Counterclaim’s factual allegations regarding (1) [the uncle’s] submission of a written application for life insurance, and (2) his express attempt to bind the policy by having a payment processed, as State Farm’s agent Jones allegedly told him he was able to, may plausibly have resulted in the creation of a temporary insurance contract under California law, dependent upon the language of the application itself, which is not before this Court. See State Farm v. Khoe, 884 F.2d at 405.

Id. The district court’s ruling relied heavily on State Farm Mutual Automobile Insurance Co. v. Khoe, 884 F.2d 401 (9th Cir. 1989) and Metropolitan Life Insurance Co. v. Wood, 302 F.2d 802 (9th Cir. 1962). These cases address the creation of temporary insurance policies via avenues that are different from those listed in the California Insurance Code. Given the significance of these cases, they each warrant at least a brief discussion.

In Wood, the insurance applicant delivered an application and a check for the first premium to the insurer’s agent. The applicant was examined by the insurer’s physician, but he died later that same day. The court held that an insurer’s obligation to pay had matured before the applicant died. See Wood, 302 F.2d at 803. The court relied upon jurisprudence that established that, when the application is ambiguous, the receipt of the application and initial premium payment results in the creation of a temporary insurance policy. The Wood court also explained that the insurability of the applicant did not matter. If the insurance company determines that the applicant is uninsurable, then it can merely refund the premiums and inform the applicant that it is not interested in providing insurance. It loses that right the moment the applicant dies.

The other case, Khoe, addressed a separate important issue relevant to the creation of temporary insurance policies: the insurance agent’s obligation to address limitations on temporary insurance during the application process. In Khoe, the Khoes applied for health insurance, and the application contained a conditional receipt “which stated that no insurance would be effective unless a policy was issued. The clause also stated that if a policy was issued, coverage would date back to the day the application was signed.” Khoe, 884 F.2d at 403. The parties disputed whether the insurance agent had explained the clause to the applicant. The applicant also contended that he was informed by the agent that, if he paid right away, he would receive immediate coverage. Subsequent to signing the application and submitting the required premium, the applicant was hospitalized, and the insurer attempted to avoid paying the medical bills. See id. at 404. It claimed that the parties never entered into an insurance contract. Litigation ensued.

The Khoe court first concluded that the application clause that limited temporary insurance was not ambiguous and, therefore, a contract for temporary insurance could not have arisen under the clause. See id. at 405-07. However, the Khoe court then addressed whether the clause had been explained to the insured. As the Khoe court stated, “In Young v. Metropolitan Life Ins. Co., 272 Cal.App.2d 453 (1969), a California Court of Appeal imposed an obligation on the insurer to call an unambiguous conditional receipt clause to the insured’s attention and explain it to the insured.” Id. Applying this principle, the Khoe court held that “the conditional receipt clause is unambiguous and thus the language of the clause would not give rise to a contract of temporary insurance. Triable issues of fact exist, however, as to whether the clause adequately was read and explained to the Khoes. If the clause was not explained adequately to Nena Khoe, a contract for temporary insurance did arise on April 21, 1986.” Id. at 408‑09.

Temporary insurance contracts in California are very complicated. There are multiple avenues to create one. Temporary insurance policies are also often the policies that are most intensely contested by insurance companies because the insurers are now obligated to pay a significant sum of money even though they barely collected any premiums. However, one thing that the case law makes clear is: even if a policy has not been issued, if the application was completed and the initial premium was paid, then there is a chance that a temporary insurance contract was created.

If you have a life insurance question, our firm specializes in handling these types of insurance claims and we can help you. Call us for a free consultation today or complete the contact form on our website.

Los Angeles Daily Journal Publishes Article on October 23, 2020 by Robert McKennon Entitled “Ruling Demonstrates When Employers Are Agents of Insurers”

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