Premiums Archives - McKennon Law Group

Sometimes employers offer their employees the opportunity to purchase additional insurance coverage for the employees themselves and for their dependents as part of an employee benefit plan. In such cases, the employer often functions as a plan administrator and as the agent of the insurance company issuing the policy. To attempt to insulate themselves from legal liability, insurers often insert “non-waiver” provisions relating to the agency status of the employers to whom they sell life, health and disability insurance coverage.

Cho v. First Reliance Standard Life Insurance Co., 2021 WL 2885855 (9th Cir. 2021) involved an employee who purchased additional life insurance coverage in the amount of $500,000 for her dependent spouse through her employer, Giorgio Armani Corporation. Ms. Cho signed up for the coverage and paid premiums for it for more than a year when Ms. Cho’s dependent spouse died. First Reliance denied the claim based on the policy provision that clearly provided that the insured submit “proof of good health” for the coverage. Ms. Cho was forced to file suit against First Reliance in order to get the benefits of the insurance she had purchased and paid for. She claimed that First Reliance had waived its right to enforce the requirement for “proof of good health” because its behavior was “so inconsistent with an intent to enforce” it. The district court agreed and awarded her the full $500,000 policy benefit.

First Reliance appealed to the Ninth Circuit Court of Appeals. It contended that a “non-waiver” clause in the policy immunized it from liability and distinguished the case from the Ninth Circuit’s decision in Salyers v. Metropolitan Life Insurance Co., 871 F.3d 934, 940 (9th Cir. 2017), which the court commented was very similar on the facts. First Reliance claimed that it was not responsible for the acts and omissions of the plan administrator even though the plan administrator handled “nearly all the administrative responsibilities” of the plan. The Ninth Circuit easily found that the plan administrator was the agent of First Reliance, and, therefore, First Reliance was liable for the plan administrator’s conduct:

Cho is entitled to the benefits for which she paid. Because the plan was self-administered and Armani handled “nearly all the administrative responsibilities,” its “direct interaction with plan participants” would have suggested it was acting with “apparent authority on the collection of evidence of insurability.” See Salyers, 871 F.3d at 940–41 (citation and internal quotation marks omitted). For over a year Armani accepted Cho’s premiums without any submission of evidence of insurability though it “knew or should have known” the terms of the plan required such evidence. See id. at 941. Armani’s actions were “so inconsistent with an intent to enforce” the requirement that it was reasonable for Cho to believe she was not required to submit such evidence. See id. (citation and internal quotation marks omitted).

Cho, supra, 2021 WL 2885855, at *1.

This was an easy case – Armani “knew or should have known” that the terms of the plan required submission of proof of good health, and “Armani’s actions were ‘so inconsistent with an intent to enforce’ the requirement that it was reasonable for Cho to believe she was not required to submit such evidence.”

The Ninth Circuit did not enforce the non-waiver clause because “[a]llowing insurers like First Reliance essentially to vitiate Salyers and the good behaviors it seeks to promote by including one sentence in their plans would be unfair and unjust.”

Insurance companies can always be counted upon to do what they can to try to avoid liability through the use of self-serving provisions like the non-waiver clause at issue in Cho. However, they are still subject to principles of equity and fairness – they cannot “contract their way out” of liability for the substantial gross negligence of themselves or their agents.

If you have been unfairly denied insurance coverage based on mistakes made by insurance companies or their agents, McKennon Law Group, PC may be able to help you. We specialize in handling ERISA cases like this one and obtaining the maximum policy benefits, holding insurers responsible for the coverage they agreed to provide.

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.

Every insurance contract is accompanied by an implied covenant of good faith and fair dealing, meaning that the insurer cannot “unfairly frustrate” or unreasonably “deprive” the insured of the benefits of the insurance contract. This implied covenant applies to all types of insurance policies, including disability insurance, life insurance, health/medical insurance, long-term care insurance, accidental death and dismemberment insurance, and homeowners insurance. If the insurer unreasonably or without proper cause refuses to pay a benefit due under in insurance policy, the insurer may have acted in “bad faith.” This may allow an insured to collect extra-contractual damages, such as emotional distress damages, attorney’s fees and punitive damages. Typically, bad faith allegations follow a decision by the insurance company to deny a valid claim for benefits.

However, a recent Central District of California decision confirmed that a bad faith claim can be asserted even in the absence of a claim denial, if the insured can assert that any benefit of the policy was withheld by the insurance company. A bad faith claim does not necessarily only follow the denial of a claim. An insurer’s decision to unreasonably withhold anything of value regarding the insurance policy can be an act of bad faith.

That case, EFG Bank AG, Cayman Branch v. Transamerica Life Insurance Co., 2017 WL 3017596, 2017 U.S. Dist. LEXIS 109780 (C.D. Cal., July 6, 2017), involved a dispute between Transamerica and the owners and beneficiaries of 68 universal life insurance policies. Under the policies, premiums were deposited into an account for each policy, and each month, Transamerica withdrew a monthly deduction from each account and deposited a separate amount of interest. The amount in each policy’s account is known as the “Accumulation Value.” The plaintiffs alleged that Transamerica breached those insurance contracts, and did so in bad faith, by wrongfully increasing the monthly deduction rates (“MDR”) on the policies, and in doing so reduced the Accumulation Value of the policies.

Transamerica filed a motion to dismiss, claiming that its actions in calculating the MDR were proper and consistent with the plain language of the policies. The Court denied the motions to dismiss, in full, and in the process, confirmed that insurers can be liable for bad faith, even in the absence of a claim denial decision.

First, the court denied Transamerica’s motion to dismiss the breach of contract claim, finding that the policies did not give Transamerica “unfettered discretion” to set the MDR lower than the guaranteed maximum rate included in the policies.

Turning to the bad faith claim, the Court first ruled that it was not duplicative of the breach of contract claim because the plaintiffs alleged that Transamerica “exercised its discretion [in setting the MDR] in a way that was intentionally designed to unfairly frustrate the agreed purposes of the Policies.”

Next, the Court analyzed Transamerica’s argument that plaintiffs could not maintain a bad faith claim because they did not allege that Transamerica “withheld a benefit,” an allegation necessary to maintain a bad faith claim. See, e.g., Benavides v. State Farm General Insurance Co., 136 Cal. App. 4th 1241, 1250 (2006) (“[T]he essence of the tort of the implied covenant … is focused on the prompt payment of benefits under the insurance policy, there is no cause of action … when no benefits are due.”). The Court rejected Transamerica’s argument, explaining that if Transamerica improperly increased the MDR, that reduced plaintiffs’ Accumulation Value in the policies and forced them to pay increased premiums, and that impermissibly increasing premiums could constitute a breach of the implied covenant of good faith and fair dealing. See, e.g., Notrica v. State Comp. Ins. Fund, 70 Cal. App. 4th 911 (1999).

Typically, bad faith insurance claims are asserted only after an insurance company wrongfully denies a benefits claim. This case further confirms that an insurance company can be liable for bad faith damages for actions other than denying a claim. Basically, if the insurance company withholds anything of value under an insurance policy from an insured or causes the insured to unnecessarily pay increased premiums, they are potentially liable for bad faith damages.

Ninth Circuit Reaffirms Salyers; Rejects Insurer’s Contention That “Non-Waiver” Provision in ERISA Life Insurance Plan Insulates It From Plan Administrator’s/Agent’s Imputed Liability

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