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The April 1, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled: “When Insurers Rescind, They Must Act Fast.” In the article, Mr. McKennon and Mr. McMillen discuss the California Court of Appeal’s decision in DuBeck v. California Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), which held that Blue Shield of California (“Blue Shield”), waived its right to rescind her health insurance policy and, therefore, her claim was covered. While Ms. DuBeck had allegedly willfully misrepresented material facts about her medical condition on her application, the appellate court found that even if she had done so, Blue Shield waived its right to rescind.

The article is posted below with the permission of the Los Angeles Daily Journal.

When insurers rescind, they must act fast
By Robert J. McKennon and Joe McMillen

Did you disclose your material medical history on your health insurance application?
What about your application for disability or life insurance? Be careful that you do or
you may find yourself without insurance when you need it most like Bonnie DuBeck
did when she learned she had breast cancer that her insurer would not cover because she allegedly misrepresented her medical condition.

Fortunately for DuBeck, the California Court of Appeal in DuBeck v. California
Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), held her
insurer, California Physicians’ Service, doing business as Blue Shield of California,
waived its right to rescind her health insurance policy and, therefore, her claim was
covered. While DuBeck had allegedly willfully misrepresented material facts about her
medical condition on her application, the appellate court found that even if she had
done so, Blue Shield waived its right to rescind. Looking at the facts, one wonders how the trial court did not easily reach the same conclusion.

On Feb. 16, 2005, DuBeck submitted a signed application for health insurance to
Blue Shield. Five days earlier, she had visited the Revlon UCLA Breast Center where a nurse performed a “fine needle aspiration” on a lump in her left breast that had
developed after she ran into a cabinet. On the nurse’s advice, DuBeck scheduled a
mammogram and consultation with a breast surgeon for Feb. 17, the day after she
submitted the insurance application.

DuBeck was asked on the application whether she ever had treatment or symptoms
related to potential breast problems or had been advised to have a physician conduct
an exam or further testing which had not yet been performed. DuBeck answered “no”
to each question, omitting material information about her recent and upcoming breast
procedures. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck
without knowing about her breast exam, procedures and potential health problems.
The lump turned out to be malignant. In the months that followed, DuBeck had breast
surgery and other related medical procedures. In April and May 2005, DuBeck started
submitting claims to Blue Shield under the policy for the medical services. Blue Shield
did not pay for the claims, but suspended processing them. It explained the services
might not be covered under the policy’s preexisting condition exclusion and that it
needed to investigate further.

Blue Shield continued to collect DuBeck’s premiums, $19,600, for the next seventeen
months. It paid for her other claims unrelated to her breast cancer. It did not rescind
the policy during that period.

Seventeen months after Blue Shield issued the policy, on Sept. 8, 2006, it sent
DuBeck a letter explaining it had determined she had not provided complete and
accurate information on her insurance application. Namely, she failed to disclose the
fine needle aspiration procedure, a mammogram and a breast surgeon exam. With full
knowledge that DuBeck had undergone breast cancer surgery and had submitted a
claim to Blue Shield to cover the costs of these procedures, Blue Shield decided to
terminate the policy prospectively rather than rescind it. The letter stated, “Blue shield
has determined that, rather than rescind the coverage completely, your coverage was
terminated prospectively and ended effective today, September 8, 2006.” Blue Shield
also promised to cover and pay for any covered services prior to the termination date.

On the same date Blue Shield sent DuBeck the letter, it sent her a “Certificate of
Creditable Coverage” confirming that her coverage began April 1, 2005, and ended
September 8, 2006. The certificate stated that it was “evidence of your coverage under this plan.”

Two years later, because it had still refused to pay for her breast cancer surgery and
related services, DuBeck sued Blue Shield for breach of the insurance contract and bad faith, among other claims. Blue Shield asserted an affirmative defense that the policy was subject to rescission because DuBeck had willfully misrepresented material facts in her application, rendering the policy void ab initio. It moved for summary judgment on that defense, which the trial court granted.

DuBeck appealed and argued Blue Shield waived any right to rescind the policy. The
Court of Appeal agreed, reversed the trial court, and found waiver as a matter of law.

The court noted rescission extinguishes a contract, rendering it void ab initio, as if it
never existed. Rescission is, of course retroactive, rendering a contract or insurance
policy unenforceable from the outset. Cancellation, however, is prospective. To rescind under California law, the insurer must return to the insured all the premiums paid, unlike cancellation.

It is established California law that an insurer has the right to rescind a policy when
the insured misrepresented or concealed material information in seeking to obtain
insurance. Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal. App. 4th
60, 75 (2010). However, that right, like any other, can be waived: “An insurance
company will be deemed to waive any ground which would otherwise entitle it to
rescind a policy … when, despite knowledge of the facts giving it the option, it impliedly recognizes the continuing effect of the policy.” Pierson v. John Hancock Mut. Life Ins. Co., 262 Cal. App. 2d 86, 91 (1968); see also Silva v. National American Life Ins. Co., 58 Cal. App. 3d 609, 61516 (1976).

In general, to constitute a waiver, there must be an existing right, a knowledge of its
existence, an actual intention to relinquish it, or conduct so inconsistent with the intent
to enforce the right as to induce a reasonable belief that it has been relinquished.
Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co., 150 Cal. App. 4th 517, 525 (2007), quoting Klotz v. Old Line Life Ins. Co. of America, 955 F. Supp. 1183, 1186 (N.D. Cal. 1996).

Under this authority, the Court of Appeal held that Blue Shield waived its right to
rescind the policy as a matter of law, finding the insurer’s conduct was “so inconsistent with the intent to enforce the right [to rescind] as to induce a reasonable belief that it has been relinquished.” The court reasoned Blue Shield told its insured it was terminating the policy prospectively rather than rescinding it, that all her claims prior to the cancellation date would be covered, and retained her premiums.

Additionally, the court explained that in 2009, the Legislature enacted Health and
Safety Code Section 1389.21, which prohibits an insurer governed by the KnoxKeene
Health Care Service Plan Act from rescinding or canceling a health care service plan
contract for any reason more than 24 months following its issuance. Although the
effective date of the statute was January 2010, the court stated: “we find support for
our decision in the Legislature’s judgment that two years is ample time for an insurer to uncover any misrepresentations made in an application and determine whether to
rescind or continue coverage.”

The court determined that Blue Shield first asserted its right to rescind DuBeck’s
policy (during litigation) over three and a half years after issuing it, and more than two
years after admittedly learning the truth about appellant’s medical condition. The court
concluded these facts established Blue Shield had engaged in conduct so plainly
inconsistent with an intent to enforce the right to rescind the policy that it had waived
that right. That Blue Shield first attempted to rescind the policy in litigation after it
represented that it would cancel the policy, but not rescind it, made this outcome
predictable.

This case teaches that insurers must promptly rescind the policy and return all
premiums upon learning of material misrepresentations in the application. They
cannot engage in conduct inconsistent with a right to rescind that would lead an
insured to reasonably believe the policy is still in effect. California courts will not
hesitate to find waiver as a matter of law in that scenario.

A liability insurer’s duty to defend its insured against lawsuits is extremely broad, much broader than its duty to indemnify its insured for a judgment entered against it. That has been the law in California for decades. But just how broad is the duty to defend? Does it extend to civil lawsuits alleging the insured raped and sexually assaulted the plaintiff? Does it extend to lawsuits alleging intentional acts by the insured? You bet it does if the policy contains the right language.

The California Court of Appeal recently addressed these issues in Gonzalez v. Fire Insurance Exchange, __ Cal. App. 4th __ (Feb. 5, 2015). There, plaintiff Jessica Gonzalez alleged she was sexually assaulted and raped by Stephen Rebagliati and nine other members of the De Anza College baseball team. Ms. Gonzalez, who was seventeen years old at the time, alleged she was invited to a party by Mr. Rebagliati and the other team members, given shots of hard liquor in quick succession, and then later that night sexually assaulted by unknown members of the baseball team as she lay unconscious in a room. Ms. Gonzalez alleged that Mr. Rebagliati and the other defendants prevented three innocent bystanders from taking her out of the room during the assault. She alleged that although Mr. Rebagliati was in the room, he did not rescue her. Also, that the men took photos, videos and cheered during the assault.

Ms. Gonzalez filed a lawsuit against Mr. Rebagliati and the other team members alleging fifteen causes of action, including rape, sexual battery, unlawful intercourse, false imprisonment, invasion of privacy, slander per se, negligence and other claims. While she pleaded claims labeled “negligence” against Mr. Rebagliati for inviting her to the party, serving her alcohol and failing to rescue her, those claims failed to allege accidental acts, only deliberate, intentional acts. All of the causes of action were pleaded against Mr. Rebagliati “and/or” the other defendants, except the negligence claims were pleaded solely against Mr. Rebagliati. Thus, the complaint allegations left open the possibility that just the other team members sexually assaulted and raped Ms. Gonzalez, not Mr. Rebagliati.

Mr. Rebagliati was insured through his parents’ homeowner’s policy issued by Fire Insurance Exchange (“Fire”) and an umbrella policy issued by Truck Insurance Exchange (“Truck”). He tendered the sexual assault lawsuit to both insurers and asked that they defend him. They denied the claim on the grounds that the sexual assault lawsuit did not allege an “accident” and their policies covered accidents, not willful misconduct; coverage was precluded under various intentional acts exclusions since all of the claims alleged intentional misconduct; and the sexual molestation exclusion precluded coverage for all of the lawsuit’s claims because each claim was inextricably intertwined with the uncovered sexual assault claim.

Mr. Rebagliati settled the sexual assault lawsuit with Ms. Gonzalez. As part of the settlement, he assigned her all of his rights against Fire and Truck under the insurance policies. He also agreed to entry of judgment against him in Ms. Gonzalez’ favor.

Ms. Gonzalez sued Fire and Truck alleging they breached their duty to defend their insured, Mr. Rebagliati, and for bad faith. Both insurers successfully moved for summary judgment. The trial court found the insurers did not have a duty to defend Mr. Rebagliati in the sexual assault lawsuit.

Ms. Gonzalez appealed. The appellate court reversed the summary judgment made in favor of Truck (the umbrella insurer) and held it had a duty to defend. The court, however, upheld the judgment in Fire’s favor. It reasoned the homeowner’s policy insured against just damages caused by “accidents” and the sexual assault lawsuit did not allege accidental acts, only intentional acts.

The court found Truck’s umbrella policy had broader language, a duty to defend its insured against accidents and intentional misconduct. Unlike the primary liability policy issued by Fire, the coverage grant in the umbrella policy was not limited to accidental acts. It covered injury caused by “personal injury” offenses enumerated in the policy including: wrongful detention or imprisonment; invasion of privacy; and slander. While the primary policy required similar “personal injury” offenses to result from an “accident” for coverage to exist, the umbrella policy did not. The Court of Appeal therefore found Truck had a duty to defend the underlying lawsuit, despite that it alleged solely intentional and not accidental acts. The suit alleged damages resulting from the “personal injury” offenses covered by the policy, including false imprisonment, invasion of privacy and slander:

Next, Gonzalez insists the court erred in granting summary judgment in favor of Truck because its umbrella policy provided broader coverage than the Fire homeowner’s insurance policy. Specifically, she argues the umbrella policy’s definition of “personal injury” did not require covered incidents to be “accidental” in nature. Given the wording of the policy’s definitions, we agree.

* * * *

Gonzalez points to the policy’s definition of an “occurrence”: “Occurrence means: [¶] a. with regard to bodily injury or property damage, an accident, . . . .; or [¶] b. with regard to personal injury, offenses committed during the policy period . . . .” (Italics added by the court.) . . . .

Accordingly, the Truck umbrella policy sets forth no requirement that a personal injury arise out of an “accident” in order for there to be coverage. As a result, Gonzalez’s complaint, which alleged causes of action for false imprisonment, slander per se, and invasion of privacy, raised the potential for coverage under the umbrella policy’s provision providing coverage for damages from an “occurrence” resulting in “personal injury.”

Next the court addressed three exclusions in Truck’s policy. First, it rejected Truck’s argument that it owed no duty to defend Mr. Rebagliati given the policy’s sexual molestation exclusion. That exclusion precludes coverage for damages resulting from any acts of molestation by the insured (Mr. Rebagliati) or any other person who is acting or who appears to be acting on behalf of the insured. The court reasoned the exclusion may not apply because the sexual assault complaint was pleaded using the disjunctive “and/or” for each claim and thus raised the possibility that Mr. Rebagliati might be found liable for covered conduct (such as invading Ms. Gonzalez’ privacy or wrongly imprisoning her) but not for the uncovered sexual assault claim. Because the complaint raised the possibility the other defendants committed the uncovered physical act of sexually assaulting Ms. Gonzalez, not Mr. Rebagliati and not anyone else acting on his behalf, the court found the exclusion may not ultimately apply to a judgment entered against Mr. Rebagliati and, therefore, a potential for indemnity coverage existed.

In reaching this conclusion, the court discussed the well-established rule that an insurer’s duty to defend is exceptionally broad and applies unless the insurer can prove there is no potential the underlying claims will fall within the policy’s indemnity coverage. The court also discussed the rules pertaining to exclusions, which also strongly favor policyholders, especially when deciding a duty to defend issue:

While an insured bears the initial burden to demonstrate a claim may be covered by a policy, when it comes to exclusions the burden is switched. It is up to the insurer to conclusively show an exclusion to the policy applies barring coverage. Once that possibility of coverage has been raised . . . then the insurer may defeat such claim of coverage by extrinsic evidence, but only where such evidence presents undisputed facts which conclusively eliminate a potential for liability. . . . . Moreover, exclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly. [Internal quotes and citations omitted; italics in original].

Since there was at least a bare possibility Mr. Rebagliati would be covered under his umbrella policy for a judgment entered against him in the sexual assault lawsuit at the time Truck denied him a defense, based on the underlying complaint’s broad allegations, the court held Truck owed him a duty to defend the entire lawsuit. It also held that the sexual molestation exclusion did not obviate Truck’s duty to defend because there remained a possibility the exclusion would not apply to him.

The court next found the umbrella policy’s exclusion for damages that are either “expected or intended from the standpoint of the insured” did not obviate Truck’s duty to defend. Nor did the statutory exclusion, read into every insurance policy under Insurance Code section 533, for a loss caused by the insured’s willful act. The court reasoned that coverage is not precluded under these exclusions by just intentional acts without more. Instead, the insured must have intentionally acted with a “preconceived design to inflict injury.” Indeed,

Courts have held that the appropriate test for expected damage is whether the insured knew or believed its conduct was substantially certain or highly likely to result in that kind of damage. . . . . Therefore, it is the insured’s subjective belief as to whether his or her conduct would cause the type of damage claimed that excludes coverage. [Internal quotes and citations omitted].

The court found under the complaint’s broad allegations, Mr. Rebagliati could have committed various intentional acts without the requisite intent to cause damage to Ms. Gonzalez and, therefore, there was at least a potential for covered liability under the policy despite its intentional acts exclusions. For example, it noted that the tort of slander per se does not necessarily require a defendant to subjectively intend to harm the plaintiff. Under the complaint allegations, the jury could possibly award damages against Mr. Rebagliati for intentionally making statements about Ms. Gonzalez, though he had no subjective intent to harm her. Thus, Truck failed to meet its burden to conclusively prove the intentional acts exclusions barred any possibility of a covered liability under its policy.

The court rejected Truck’s argument that it had no duty to defend based on the criminal acts exclusion. The court reasoned there was no evidence that conclusively proved Mr. Rebagliati sexually assaulted Ms. Gonzalez and thus committed a crime. And, based on the complaint allegations, it was possible the jury would find the other team members perpetrated the sexual assault, not Mr. Rebagliati. The court therefore held Truck had a duty to defend Mr. Rebagliati because it failed to conclusively demonstrate the exclusion applied to all of Ms. Gonzalez’ underlying claims against him.

The Court addressed one final matter, the insurer’s argument that Mr. Rebagliati’s potentially covered acts were “inseparably intertwined” with the uncovered sexual assault claim and therefore should be excluded from coverage as well. Truck relied on various sexual assault cases that had held as much. The court distinguished those cases and held:

We disagree with the insurers that these cases set forth a blanket rule that if a cause of action is related to sexual molestation it must be excluded from insurance coverage. This interpretation would gloss over the finer nuances of the law governing an insurer’s duty to defend.

The court noted that, unlike the other cases, Mr. Rebagliati was one of several defendants and Ms. Gonzalez’ complaint raised the possibility that other individuals and not Mr. Rebagliati perpetrated the sexual assault. Additionally, Mr. Rebagliati had not admitted to the assault and Truck had not conclusively proved he was involved in that aspect of the alleged wrongs prior to rejecting his tender of defense. The court thus found the insurer had not met its burden to conclusively demonstrate the policy’s criminal acts exclusion eliminated all possibility for indemnity coverage.

The lesson of Gonzalez v. Fire Insurance Exchange is that an insurer’s duty to defend is extremely broad and that duty requires an insurer to defend its insured against even a lawsuit alleging rape and sexual assault under the right circumstances (i.e., there is no requirement that personal injury arise from an accident). As California courts have held for decades, if there is any possibility for indemnity coverage under an insurance policy based on the underlying complaint’s allegations, the insurer must defend its insured against the entire lawsuit unless and until it can conclusively prove with undisputed facts the contrary.

In December 2013, we published an article highlighting the Sixth Circuit Court of Appeals’ bold decision to award the plaintiff disability benefits plus $2.8 million in disgorged earnings, as a potential “game-changer” in Employee Retirement Income Security Act of 1974 (“ERISA”) litigation—that is, if it survived review. Rochow v. Life Ins. Co. of N. Am., 737 F.3d 415 (6th Cir. 2013) (“Rochow I”). Alas, the Sixth Circuit Court of Appeals vacated the decision in February 2014 and stayed the case. Rochow v. Life Ins. Co., 2014 U.S. App. LEXIS 3158 (6th Cir. Feb. 19, 2014) (“Rochow II”). Finally, in March 2015, the Court of Appeals issued an en banc decision vacating the disgorgement award and remanding the case for a review of prejudgment interest. Rochow v. Life Ins. Co. of N. Am., 2015 U.S. App. LEXIS 3532 (6th Cir. 2015) (“Rochow III”). The Court held that because the plaintiff was adequately compensated by an award of the insurance benefits, attorneys’ fees and possible prejudgment interest, that in this case, disgorgement was not necessary to make the plaintiff whole. Although this decision is disheartening to claimant’s attorneys eager to test the limits of ERISA remedies, a careful reading of Rochow III reveals that the Sixth Circuit does not entirely foreclose disgorgement as an appropriate remedy under ERISA. Moreover, the concurring and dissenting opinions provide additional guidance for future ERISA claimants who suffer injuries and seek equitable remedies beyond their policy benefits.

Briefly, the original suit involved Daniel Rochow, an executive who applied for, and was denied, long-term disability benefits after being diagnosed with a severely debilitating brain infection. He brought suit under ERISA for the insurer’s failure to pay benefits and breach of fiduciary duty. The district court held the insurer’s denial was arbitrary and capricious, and on appeal, awarded $3.78 million to the estate, $910,629 for Rochow’s disability benefits and $2.8 million to disgorge the insurer’s profits based on return on equity as “appropriate equitable relief” under 29 U.S.C. section 1132(a)(3) (Rochow I). This award was upheld by the Court of Appeals under the theory of unjust enrichment in Rochow I, but vacated in Rochow II. Thus, the stage was set for Rochow III.

Rochow III addressed whether Rochow was entitled to recover benefits under both ERISA section 502(a)(1)(B) and equitable relief under section 502(a)(3). The Court explained:

A claimant can pursue a breach-of-fiduciary-duty claim under § 502(a)(3), irrespective of the degree of success obtained on a claim for recovery of benefits under § 502(a)(1)(B), only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § 502(a)(1)(B) is otherwise shown to be inadequate.

The court noted that both of Rochow’s claims were based on the same underlying “injury” (the insurer’s failure to pay benefits), and an award granting him these benefits plus attorneys’ fees did make him whole. Accordingly, the court vacated the disgorgement award under section 502(a)(3).

Of note, the Rochow III dissent sends a strong signal that the disgorgement issue is far from settled, and offers insureds guidance for future ERISA claims. First, Circuit Judge Helene White notes that although she agrees with the majority decision that disgorgement was not adequately supported, she would allow consideration of a refashioned disgorgement remedy on remand. Significantly, Judge White points out that the justices “all appear to agree disgorgement of profits is a potential remedy under ERISA.” Moreover, Judge White disagrees that disgorgement requires two separate injuries—the inquiry should be whether other equitable relief is appropriate under the circumstances, and the extent to which disgorgement duplicates the benefits-denial claim is one factor in this inquiry. Indeed, even if Rochow recovered his benefits and attorneys’ fees, other equitable relief may be appropriate—as evidenced by the fact that the majority permitted an interest award. Judge White underscores the Court of Appeal did not discern why one equitable remedy (interest) was appropriate, but another (disgorged profits) was not. Finally, Judge White suggested that disgorgement may be appropriate where an insurer’s denial was based on “impermissible considerations” such as “an organizational policy to delay paying valid claims for as long as possible” or if disgorgement was necessary to ensure proper claims processing in the future.

The dissent by Circuit Judge Jane Stranch held disgorgement was appropriate because Rochow brought two distinct claims (to recover plan benefits and for an accounting and disgorgement of profits wrongfully earned through the insurer’s breach of its fiduciary duty) and suffered two distinct injuries (the insurer’s denial of his disability benefits, and breach of its fiduciary duties). Specifically, the insurer engaged in “deliberate and willful wrongful acts” to deny Rochow’s claim. This denial allowed the insurer to retain substantial funds rightfully due to Rochow in its corporate account and earn millions in profits during a seven-year period. Ultimately, the dissent held that the majority mischaracterized the Rochow’s injuries and disgorgement was a proper remedy.

Although Rochow III is undeniably a victory for insurance companies, the strong concurring and dissenting opinions reveal that the Court did not foreclose the possibility of a disgorgement award. However, insureds may have to show a distinct injury or “impermissible considerations” at the hands of the insurance company such that payment of their claim is insufficient to make them whole. Indeed, the takeaway from Rochow III appears to be the Sixth Circuit reassuring insureds, better luck next time. This issue has not been resolved in the Ninth Circuit. Maybe there will be better luck next time.

Chances are that you have heard an anecdote or two about Lloyd’s of London, the insurance company known for, among other things, issuing policies that involve coverages other than the usual for automobiles and houses. A whisky company, for example, once bought a policy from Lloyd’s that would cover the cost of a reward to anyone who managed to haul in the Loch Ness Monster. Famous singers have had Lloyd’s insure their voices.

Similar stories involve promising or well-established athletes purchasing injury or long-term disability insurance coverage from Lloyd’s. As the Orange County Register recently reported, former University of Southern California wide receiver Marqise Lee did just that, taking out a $5 million policy that would pay benefits to him in the event that an injury or other disability caused him to be less valuable in the eyes of National Football League (NFL) professional teams come draft day.

Lee’s decision appeared prescient, as the player wound up spraining the MCL in one of his knees in September – when the college football season was in full swing. He missed a few games and reportedly played at less than 100% in some others. He was subsequently drafted in the second round by the NFL’s Jacksonville Jaguars, who offered him a four-year contract worth over $5 million.

Lee’s policy with Lloyd’s, however, promised to pay him the difference between the value of his rookie contract and $9.6 million, up to a difference of $5 million.

Like so many other insureds, Lee filed a claim for benefits based on his injury. Lee filed a claim with Lloyd’s to collect the difference between his rookie contract and the $9.6 million baseline, which came to a little more than $4.5 million, by filing a proof of loss claim based on medical information about his injured knee. Lloyd’s, in response, argued that Lee’s claim either misrepresented, concealed or left out critical information that would have, in effect, nullified the policy. Lloyd’s argument, that Lee did not disclose his entire relevant medical history, is a common argument made when a claimant files for disability insurance benefits, even if the claimant did disclose his or her entire medical history. Legally, it is called policy “rescission,” a tactic many insurers use inappropriately.

Lee subsequently filed suit in California against underwriters from Lloyd’s, asking to be awarded damages of $4.5 million and claiming that Lloyd’s made the choice to deny the claim “in bad faith” (that is, in violation of the implied covenant of good faith and fair dealing that is inherent in every insurance contract) and “with a conscious disregard for Lee’s rights.” Lee’s lawsuit also seeks punitive damages in excess of $4.5 million, “to make an example of the defendants and in order to deter similar conduct.”

Lloyd’s has tried to get the case heard in New Jersey, rather than in California. The Garden State is said to have laws that are more advantageous to insurance companies – one more reason why you should considering consulting an attorney, who can advise you of your options for surmounting little-known obstacles to resolving your case.

The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deal with frequently asked questions in the insurance bad faith, life insurance, long term disability insurance, annuities, accidental death insurance, ERISA and other areas of the law. This article is the second of two articles focusing on lump sum buyouts of a disability insurance claim. The first article discussed the various times the opportunity to enter into a lump sum buyout might be available to an insured, and some factors to consider when contemplating a disability insurance buyout. This article focuses on how to value the claim and the various factors considered when calculating the buyout sum.

As detailed in the first article, an insured receiving long-term disability insurance benefits might desire to negotiate a lump sum buyout with the insurance company, where the company makes a one-time, lump sum “buyout” of claim and policy. However, the most important question for an insured to consider is “what is my disability insurance policy worth?” This is a complicated question that can only be answered by assessing a variety of different factors.

First, the most important factor is the net present value (“NPV”) of the policy, which is calculated using monthly benefits payable under the policy and the benefit period. For example, if an insured is receiving $5,000 per month, and has ten years left on the policy, it may appear as if the policy is worth $600,000 ($5,000 times 12 months times 10 years). However, the policy is not worth $600,000, but rather the NPV of $600,000, that is, how much money today is needed to have $600,000 in ten years.

Determining the NPV of a claim can be complicated, and insurance companies have actuaries on staff whose job it is to calculate the value of policies. One of the most important factors in assessing the NPV is the discount rate to apply. The higher the discount rate, the lower the NPV and vice versa. Thus, an insurer will always attempt to use an unreasonably high discount rate to lower the NPV. Insureds will want to use a low discount rate. However, using a discount rate is further greatly complicated by assessing whether the policy has a cost of living adjustment provision that allows the benefits payable under the policy to increase by the rate of inflation. Accordingly, an insured is best served by consulting an attorney who is experienced in calculating the value of a disability insurance policy and negotiating lump sum buyouts with insurance companies. Indeed, because insurers are susceptible to allegations of heavy handed tactics in undervaluing a disability insurance policy, most insurers will require that you consult an attorney before engaging in such negotiations.

Other factors that determine how much the insurance company is willing to pay in a lump sum buyout include, but are not limited to, the insured’s mortality/life expectancy and whether there is any chance the insured will be able to return to work. Typically, insurers will only consider a lump sum buyout if they believe the insured is permanently disabled.

The application and interpretation of these factors can be critically important in determining the value of a disability insurance policy, and, not surprisingly, the insurance company is going to make every argument possible to reduce the value of the policy. This is why it is important that insureds who are negotiating a lump sum buyout of a disability insurance policy hire attorneys, such as the McKennon Law Group, who have significant experience negotiating lump sum buyouts. That experience will help to ensure that the insured receives the largest amount possible.

For example, a client of the McKennon Law Group had a disability insurance policy that paid her benefits for her life, not just age 65 (like most policies). During negotiations of the lump sum settlement, the insurance company argued that, given the insured’s medical condition, she was unlikely to live beyond her late 60s or early 70s. Given this determination, along with an unreasonably high discount rate, the insurance company placed a very low present value on the disability insurance policy. However, the McKennon Law Group was able to convince the insurance company that its position regarding the insured’s life expectancy was seriously flawed, by presenting evidence that the insured’s parents were still alive and were about 90, and by obtaining letters from the insured’s doctors that her conditions were not expected to decease her otherwise long life expectancy.

In summary, an insured should not expect that the disability insurance company will offer a lump sum equal of the full value of the disability insurance claim. Indeed, typically lump sum buyouts fall between 65% and 85% of the value of the policy. However, by hiring experienced counsel, the insured can greatly increase his or her opportunity to collect a lump sum buyout at the maximum payout possible.

Like long-term disability insurance policies, it stands to reason that an insurance plan that is intended to pay insurance benefits for long-term care would be a relatively safe investment for your or a loved one’s future. After all, again like long-term disability insurance policies, many such policies are sold to people years before any anticipated long-term care needs present themselves. With premiums having been faithfully paid for many years, you might think there would not be a problem when the time comes to use the benefits. But, alas, we are talking about insurance companies and their motivation to deny claims.

Unfortunately, as Forbes magazine reported recently, the world of long-term care insurance can be fraught with red tape that can prevent claims from getting paid. And while long-term care policies have changed in how they are written over the years, every long-term care insurance policyholder should receive the benefits that they are due.

Part of the problem lies in the fact that policies from the 1990s were written differently than today’s policies. As a result, some people with older contracts—the ones that would appear to be the strongest because they have been paid into the longest – sometimes encounter significant trouble.

Various ways in which some insurers seek to deny claims include the following.

Some insurers require that the facility that is providing long-term care meet certain licensing and personnel requirements. Still others require that the facility meet certain criteria even if the criteria are not specified in the policy.

Something known as the “gatekeeper provision” is fairly common in older long-term care policies. This provision requires that a policyholder have a prior hospital say, a nursing home confinement or even both before claims are paid for long-term care. Many states, however, have outlawed these kinds of provisions.

Insurers have also been known to say that they will not pay benefits for so-called personal care such as errands a caregiver runs for the policyholder, or for tasks such as light housekeeping. A number of policies exclude care provided by family members, as well, but the policy’s specific wording should be carefully checked. Care provided by a spouse may not be covered, but that care given by, say, a grandson, could be.

At times, insurers will deny benefits because a policyholder neglected to pay premiums due to a cognitive impairment. However, many states require a certain period of time to cover such lapses, and if a physician’s statement can be obtained attesting to the cognitive impairment, the policy can be reinstated.

As you can see, long-term care insurance policies can present unique challenges or disabilities. Feel free to contact us for a free consultation regarding your specific situation.

Robert McKennon and Joe McMillen Publish Article: “When Insurers Rescind, They Must Act Fast”

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