The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law.  To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.

If you purchased an individual life insurance policy, as opposed to an employer-sponsored policy, the Employee Retirement Income Security Act (“ERISA”) will not apply to your claim.  Instead, separate principles of contract law govern your claim, including “insurance bad faith.”  Insurance bad faith litigation, as opposed to ERISA, allows a life insurance beneficiary’s recovery for damages beyond policy benefits.  In this article, we discuss insurance bad faith in the specific context of life insurance policies.  First, we briefly explain insurance bad faith and next we discuss the top five ways insurers commit insurance bad faith: improper attempts to rescind the policy, unreasonable delay in paying the claim, improper lapse of the policy, misrepresentation of the policy provisions and improper reliance on the policy exclusions.

What is Insurance Bad Faith?

Implied in every insurance contract is a promise of “good faith and fair dealing,” which means that the insurer must not harm the insured’s rights to receive benefits under the policy.  To comply with its promise to act in good faith, the insurer must adhere to certain duties, such as the duty to adequately and accurately communicate with the insured.  An insurer acts in bad faith when it fails to meet those duties unreasonably and without proper cause.  Determining whether there has been bad faith conduct is important, in part, because it directly affects the insured’s potential recovery.  If the insurer is found to have acted in bad faith, the insured may have access to a substantial additional recovery, including emotional distress, consequential and punitive damages.

1) Improper Attempts to Rescind the Policy

Most life insurance policies have a two-year incontestability clause.  After two years that the policy is in force, an insurer may only be able to rescind a policy based on material misrepresentations made on insurance application.  Often an insurer will, instead of investigating reasons to approve a valid claim, spend its time investigating ways to cancel or rescind the policy.  For example, if a life insurance policyholder dies and the beneficiary submits a claim, the insurer may conduct an investigation into the insured’s medical history at and prior to the time of the application.  If the insurer finds what it characterizes as material misrepresentations it will often attempt to rescind and cancel the policy so that it will never have to pay a death benefit claim.  To the extent that the insurer is only conducting the investigation to avoid paying death benefits or is representing immaterial facts as material, it has likely acted in bad faith.  There are many ways that only very experienced life insurance attorneys can defend against such actions.  If the insurer did not act reasonably or with proper cause in denying the claim, the insurer may be subject to significant bad faith damages.

2) Unreasonable Delay in Paying the Claim

After a beneficiary makes a claim for life insurance the insurer will begin its own investigation into the claim.  At this point, the insurer may request additional records regarding proof of death, payment of policy premiums, the insured’s medical history or other records regarding the application for the policy.  The insurer must balance competing objectives: on one hand, its duty to conduct a thorough review and on the other, not to unreasonably delay.  The “reasonableness” of an insurer’s delay may revolve around whether a “genuine dispute” as to coverage or the amount of coverage, exists and the evaluation of this will be focused on whether the delay in paying the claim was unreasonable given all of the underlying circumstances giving rise to the delay.  However, the insurer must reach this position in good faith and this does not include an improper investigation to retroactively rescind the policy.

3) Improper Lapse of the Policy

Most insureds pay regular monthly premiums for years without a problem.  Occasionally, in the last few months of the insured’s life, the insured may be so ill that she uncharacteristically fails to pay the monthly premium.  In this unfortunate situation, it does not matter that the insured has paid premiums faithfully for many years.  If the insured misses those last few premium payments, the insurer will lapse the policy.  However, California recognized this problem back in 2012 and so it enacted a statue that would protect the insured from this situation.  Accordingly, under California law, an insurer is required to adhere to certain notice and grace period requirements before it can lapse a life insurance policy for nonpayment of premium.  If the insurer fails to adhere to those requirements, then it will not only have to pay the life insurance claim because the policy will not have been properly lapsed, but also the insurer will have likely committed insurance bad faith.

4) Misrepresentation of the Policy Provisions

Occasionally, an insurer may improperly interpret the policy as including terms, provisions or requirements for coverage not clearly outlined in the policy.  Misrepresenting relevant coverage provisions to the insured can give rise to a claim for insurance bad faith.  Sometimes the agent is the culprit regarding such misrepresentations.  We have seen several situations where the agent that sold the insured the policy at issue misrepresented the relevant coverage provisions to the detriment of the insured.  In those instances, California law requires that insurers do not deny coverage based on an agent’s negligent misrepresentation of those coverage provisions.  When insurers ignore their agent’s statements regarding coverage, they may commit bad faith.

5) Improper Reliance on Policy Exclusions

Life insurance policies always contain exclusions from coverage.  They essentially take away coverage from the insuring clause and provide what is not covered.  These exclusions are worded so as to encompass many possible scenarios which result in non-coverage of a life insurance claim.  Exclusions are often ambiguous and life insurers use them routinely to deny claims.  Exclusions may include dangerous activities such as skydiving and mountain climbing.  They may also include suicide or death in the commission of a crime.  If, for example, an insurer conducted an unreasonable and inadequate investigation of a death claim and concluded that the insured’s death was a suicide when the reasonable evidence suggested the death was not the result of a suicide, a life insurer will likely have engaged in a bad faith life insurance claim denial.

If your claim is governed by insurance bad faith, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial.  Having an experienced disability, health and life insurance attorney matters to the success of your insurance matter.  If your claim for health, life, short-term disability or long-term disability insurance has been denied, call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.