Life Insurance – Frequently Asked Questions
When making a life insurance policy claim, it is important to clarify whether the insured has an individually-purchased policy or an employment-based group policy. If the insured is a member of a non-governmental employment-based group life insurance plan, the life insurance will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA, which establishes the standards for the parties responsible for administering an ERISA plan and claim and has stringent requirements for processing life insurance claims. If the insured owns an individual life insurance policy, any required deadlines and standards in processing a life insurance claim will be administered according to state law. As discussed in this FAQs section and as discussed in the insurance bad faith and ERISA FAQs sections, it is critical to determine whether ERISA or state law apply as the available remedies and potential damages are very different.
In making a life insurance claim, the insured will first want to clarify whether he/she has an individually-purchased policy or an employment-based group plan. If the insured has a non-governmental employment-based group policy, the plan will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA, which sets the standards for the party responsible for administering an ERISA plan. ERISA has stringent requirements for processing life insurance benefit claims. If the insured owns an individual life insurance policy, any required deadlines and standards in processing a life insurance claim will be administered according to state law. California law is particularly beneficial to life insurance claimants.
General Timeline For ERISA Governed Life Insurance Policies Under Group Plans
- A claim should be approved or denied within 90 days of receipt of the claim. See 29 C.F.R. § 2560.503-1 (f)(1).
- Should more time be necessary to review a claim, the plan can extend the time frame for up to 90 days, but the plan must inform the insured within the initial 90 days that additional time is needed, why the additional time is needed, if there are any unresolved issues or additional information needed, and when a final decision will be rendered. Id.
- If a claim is denied,the insured has 6 0days to file an appeal. See 29 C.F.R.§ 2560.503-1 (h)(2) (i).
- A decision on the insured’s appeal must be made not later than 60 days after receipt of the insured’s request to review a denied claim. See 29 C.F.R. § 2560.503-1 (i)(1).
- Should special circumstances require an extension, the plan may take up to 60 extra days, but the plan must provide an explanation in writing of the special circumstances along with providing a date by which the plan expects to make a decision on the insured’s claim.See 29 C.F.R. § 2560.503-1 (i)(1).
General Timeline For Individual Policies Governed By California Law
- A claim should be approved or denied within 40 calendar days of receipt of all necessary information to determine liability for the insured‘s claim. See 10 C.C.R. § 2695.7 (b).
- The 40-day period does not begin to run until all relevant information has been received. See 10 C.C.R. § 2695.7(b).
- Should the insurer require additional information to conclude the claim investigation, then it must notify the insured in writing within 40 days after the claim is filed, and provide a written list of all information reasonably needed to investigate the claim. See 10 C.C.R. § 2695.7 (c) (1).
- An insurer must continue to send the insured an update every 30 days if additional time and materials are still required, while continuing to clearly set forth what is needed to process the claim. See 10 C.C.R. § 2695.7 (c) (1).
- California law provides four years to sue on a contract. SeeCCP. §337 (1). However, an insurance contract may set forth a shorter time limit in which a suit must be brought in the policy, if the policy provision is clearly stated and reasonable in the time it provides. See Frazier v. Metropolitan Life Ins. Co., 169 Cal.App.3d 90, 103 (1985) (Two year statute of limitations was found to be reasonable).
The most important document in filing a life insurance claim is the life insurance policy, or if the insured is a member of a group insurance program for which ERISA applies, the summary plan description and group insurance certificate. These documents typically provide a detailed overview of how the plan or policy works, what benefits it provides and how to file a claim for benefits. If the insured is a member of a union or a plan associated with a collective bargaining agreement, he/she should also check any applicable collective bargaining agreement’s procedures for filing, claims, grievances and appeals. If the insured does not have a copy of the life insurance policy or summary plan description, the insured should immediately make a written request for a copy of his/her policy, summary plan description and/or group certificate that contains the claims procedures. The plan administrator in ERISA matters is required by law to provide the insured with a copy upon written request. The insured will also want to contact his/her insurance agent, insurer or plan administrator to obtain claim forms.
At the very minimum, an insurer will require that the insured provide the death certificate of the insured person. In some situations, a copy of a marriage certificate may also be helpful, particularly if there are ex-spouses that use names from former marriages. An owner or beneficiary may also need to have access to current mortgage or loan paperwork, credit card statements and employee benefits information.
Remember, a life insurance claim is a very proof intensive process, and a claimant should document all interactions with insurer, plan administrators, employers and representatives of the insurance company (such as insurance agents) every step of the way. Always memorialize all telephone or in-person conversations by letter summarizing what was discussed, and send it to all parties involved in the processing of the claim to confirm the communication occurred. Also, the claimant should maintain a file of everything related to the claim and keep a chronology of claim related events. This way, should the insured be forced into litigation, there is a clear and definitive record of how the claim was handled.
The most common exclusion in life insurance policies is the suicide exclusion. Life insurance policies typically contain provisions excluding coverage for death caused by suicide or attempted suicide. Policy language excluding suicide must be plain and clear and conspicuous to be enforceable. This requires that the words used in the policy are part of the working vocabulary of the average layperson, and that the policy exclusion is presented or positioned in a place that attracts the reader’s attention. See Malcolm v. Farmers New World Life Ins. Co., Cal. App. 4th 296, 301-302(1992). For example, California courts have held that the phrase “suicide, whether sane or insane” was not ambiguous, and was easily understood as intentional self-destruction independent of whether the insured was sane or insane at the time of the act. See Searle v. Allstate Life Ins. Co., 38 Cal.3d 425, 436 (1985). While a death that occurs during an attempted suicide will result in an exclusion of policy benefits, a death resulting from an “accident” is not a “suicide’ even if the decedent was engaged in reckless activity.” See Padfield v. AIG Life Ins. Co., 290 F.3d 1121, 1126(9th Cir. 2002) (applying federal common law under ERISA). The insurer must establish beyond a preponderance of the evidence that the insured took his or her life, and while evidence of mental impairment is admissible, it will not necessarily be the determinative factor in a finding of suicide. In order for mental capacity to be the determinative factor, it must be established that the mental capacity of the insured was so impaired that he or she did not understand the physical nature and fatal consequences of the act that was the cause of death. See Searle v. Allstate Life Ins. Co., 38 Cal. 3d at 439 (1985).
Criminal acts exclusions are also common exclusions, and typically exclude coverage for injury or death sustained while committing or attempting to a commit a felony. See Romero v. Volunteer State Life Ins. Co., 10 Cal.3d 571, 574 (1970). Some other life insurance exclusions that are becoming less common include dangerous act exclusion, war time exclusion and aviation exclusion. These exclusions are becoming rarer as most insurers tend to charge a higher premium to cover these activities rather than exclude them as they did in the past.
Stranger-owned life insurance, or STOLI, is the practice or plan to purchasea life insurance policy for the benefit of a third party investor who, at the time the policy is created, does not have an insurable interest. An insurable interest exists when loss or damage to a person or object would cause the third party to suffer a financial or personal loss, and usually is created by property rights, contract rights or potential legal liability. In these cases, insurers seek to have the policy declared void ab initio (void from the beginning of the contract) for lack of an insurable interest or due to the misrepresentation by the applicant.
In contrast, a life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Typically, a life settlement is sought when the insured decides he or she no longer wants or needs the life insurance policy the insured previously purchased, which happens for various reasons, including an inability to pay premiums, the opportunity to obtain a superior insurance policy, changes in estate planning needs and rising healthcare costs. Therefore, a life settlement offers the insured the option of gaining value.
The critical factor in terms of determining whether a transaction is a life settlement rather than a STOLI transaction is whether the life insurance policy that is being settled was initially purchased for a legitimate insurance purpose. Therefore, the court will endeavor to closely analyze the material facts to determine whether the intent was to create an insurable interest or to sell to a third party investor. Some of the factual circumstances that indicate a STOLI transaction include: the purchase of a life insurance policy for an insured between 65 years old and 85 years old in exchange for an immediate lump-sum payment, selling policies initially after they were purchased or purchasing a policy at no cost to the insured individual in exchange for a partial payment on the policy’s face value to the insured’s beneficiaries upon the owner’s death. Typically, an insurer will request to keep the premiums paid should a STOLI arrangement be found; although currently, case law is unclear as to whether an insurer has the legal right to retain premiums paid on STOLI transactions.
The incontestability clause is a life insurance policy provision that prevents an insurer from denying a claim or voiding a life insurance policy after it has been in force for a specified period of time. California Insurance Code section 10113.5 states that all individual life insurance policies require an incontestability provision, which limits the insurer’s ability to contest the policy based on a material misrepresentation made on the application for a time period up until two years. As long as the insured died within the contestability period, the insurer may contest the information at the inception of the life insurance policy even after the expiration of the two year period. See Amex Life Assur. Co. v. Sup. Ct. (Slome Capital Corp.), 14 Cal.4th 1231, 1236(1997). A material misrepresentation is a statement made by a potential insured in the application process that is factually incorrect, and is material to the insured risk, such that had the insurer known about it at the onset of its review, it would have refused to issue the policy or would have issued the policy with limitations or a higher premium.
However, should the life insurance policy be lapsed for non-payment of premiums, the insurer can request another application, and will be provided another two years to contest that application. The incontestability clause does not obligate an insurer to pay life benefits for a life insurance policy that is void ab initio due to the application being a forgery, the owner lacking an insurable interest or the applicant being an imposter.
A lapse or termination in coverage typically occurs from a failure to timely pay a scheduled premium or otherwise results from the insured manifesting an intent not to renew a life insurance policy. Express provisions in a life insurance policy will discuss when the insurer is allowed to lapse a policy for failure to pay premiums. All life insurance policies include a grace period during which coverage remains in effect although the renewal premium has not been paid before the expiration of the policy period. Payment of the renewal premium during the “grace period” will prevent any lapse in coverage.
If an insurer lapses a life insurance policy and if the insured believes this was improper, it is important to take immediate action. The first step is to contact the insurer to confirm that the policy has indeed lapsed and is not currently in a grace period. If the policy has indeed lapsed, then the insured should inform the insurer of the impropriety of the policy lapse, and request that it reinstate the policy. Where a policy has lapsed for nonpayment of premiums, the insurer may offer to reinstate upon receipt of the unpaid premiums. Typically, an insurer may condition such an offer on receipt of a new application, and it often will exclude coverage for losses between the lapse date and reinstatement date. An insurer may be estopped from refusing reinstatement where it retains premiums tendered with an application for reinstatement for an unreasonable amount of time. See Madirosian v. Lincoln Nat’l Life Ins. Co, 739 F.2d 474, 478 (9th Cir. 1984) (applying California Law).
Furthermore, should the insurer act as if the policy is still in force through misleading representations or conflicting notices for past due payments, then it may be deemed to have waived its right to cancel the policy. If the insurer attempts to exclude coverage for losses as a result of improper lapse, it is important to remind them of the circumstances that caused the lapse, and document the entire chain of events in a formal letter to the insurer. The insured should also contact his/her insurance agent/broker (if there is one) to determine why the policy lapsed and what can be done to reinstate it. It may be possible to force the insurer to take responsibility for the agent’s actions if the agent acted negligently. If all else fails, the insured should consult with an experienced life insurance attorney about exploring his/her legal rights further.