An Insurer Who Pays a Claim Negligently May Obtain Restitution

Don’t Look a Gift Horse in the Mouth

The failure of life insurance companies to check the Social Security Administration death records to determine if anyone is owed benefits on a life insurance policy has caused serious and expensive administrative fines served on various insurers and reported in Zalma’s Insurance Fraud Letter. Because of the administrative actions many insurers have paid claims after a search of the SSA records only to find, after payment, that they did not owe the claim.

In DeCoursey v. American General Life Ins. Co., — F.3d —-, United States Court of Appeals, Eighth Circuit, 2016 WL 2865394 (May 17, 2016) an insurer paid a beneficiary long after denying a claim only to find, after the beneficiary sued, that it paid in error.

FACTS

When Susan DeCoursey sued American General Life Insurance Company (the company) for interest she claimed it owed her on a payout it made on a policy, the company counterclaimed, asking for its money back because it had paid DeCoursey by mistake and so DeCoursey was not entitled to the payout in the first place, let alone interest. After the district court granted the company summary judgment on DeCoursey’s claims and granted her summary judgment on the company’s counterclaim, both parties appealed.

In 1985, DeCoursey’s husband purchased a $250,000 life insurance policy from the company’s predecessor in interest. In August 1986, DeCoursey’s husband and son died in a car accident. She submitted a claim on the policy, but her claim was denied because the policy had lapsed. DeCoursey took no further action. In June 2011, the company began an effort to determine if any life insurance beneficiaries had failed to notify it of an insured’s death and were thus owed life insurance benefits. The company did so by reviewing Social Security Administration death records.

As a result of the review, the company notified DeCoursey that she was entitled to benefits under the policy because the policy did not lapse until three months after her husband died, and so it paid her the policy’s face value, $250,000, in January 2013. Unsatisfied, DeCoursey demanded that the company pay her 9% interest from the time it denied her claim in 1986.  Much of the information relating to the policy had been discarded, but the company discovered, after an exhaustive search of its records, that the policy had indeed lapsed nine days before DeCoursey’s husband died.

The company then notified DeCoursey that it had erroneously paid her $250,000 because the policy had lapsed before her husband died, but it nonetheless generously offered to settle her claim by allowing her to keep the $250,000 along with an additional $25,000. The company was sued in state court and removed the case to federal court and counterclaimed for unjust enrichment.

The company then moved for summary judgment on DeCoursey’s claims, asserting that DeCoursey had failed to bring suit within the limitations period. The district court agreed, holding that DeCoursey did not bring suit until after the ten-year limitations period had expired. The district court granted DeCoursey’s motion for summary judgment on the company’s counterclaim, holding that the company had voluntarily paid DeCoursey $250,000 because it “put forth no evidence to suggest that it did not have the opportunity to diligently investigate the Policy before it was paid out.”

ANALYSIS

Claims accrue when the evidence was such to place a reasonably prudent person on notice of a potentially actionable injury, and at this point the plaintiff is obliged to discover potential damages and to seek redress. Missouri courts have routinely held that insurance-dispute claims accrue when the plaintiff receives notice that a claim was denied.

Since DeCoursey’s claims accrued in 1986, the ten-year limitations period bars the claims she brought in 2013.

DeCoursey also maintains that, even if her claims accrued in 1986, the limitations period was tolled when the company paid her the policy’s face value. Partial payment of a debt will generally toll a limitations period because it acknowledges the debt and carries an implied promise to pay the remaining balance. Where nothing appears to show a contrary intention, the payment alone prevents the statute from barring the claim. Tolling also prevents a debtor from lulling a creditor into a limitations bar.

Even if partial payment could restart, rather than merely toll, a limitations period, a proposition by no means obvious, the company’s repeated refusal to pay interest is completely inconsistent with an implied promise to pay the remainder of the alleged debt.

For fraudulent concealment to toll a limitations period, there must be something of an affirmative nature designed to prevent, and which does prevent, discovery of the cause of action. DeCoursey does not identify any affirmative fraudulent acts on the company’s part or tell us why it had a duty to speak. The record contains nothing tending to show that the company concealed a fact that prevented DeCoursey from asserting her claims after learning of coverage denial in 1986.

On cross-appeal, the company maintains that the district court erred in concluding that its voluntary payment of the policy amount defeats its counterclaim for unjust enrichment. Such a claim is appropriate “when one party has been unjustly enriched through the mistaken payment of money by the other party. This restitutionary claim arises when a defendant possesses money that in equity and good conscience belongs to the plaintiff.

The company contends that, at the time it paid DeCoursey the face value of the policy, it mistakenly believed that she had never submitted a claim on her husband’s policy and that the policy was in effect at his death. The district court apparently assumed for summary judgment purposes that the company’s claimed mistakes were genuine, but it concluded that the company put forth no evidence to suggest that it did not have the opportunity to diligently investigate the Policy before it was paid out and so paid it voluntarily.

The Missouri Court of Appeals has held that a payor’s lack of care will not diminish his right to recover, or somehow justify retention of the windfall by an unintended beneficiary.  If a consumer, despite having adequate financial records, carelessly overpaid his insurance premium, he would certainly be entitled to reclaim the money despite the fact that he had been negligent in sending it.

The Eighth Circuit concluded that a payor’s lack of care will not diminish his right to recover, or somehow justify retention of the windfall by an unintended beneficiary. This result comports with the relevant Restatement, which explains that the so-called voluntary-payment rule does not impute knowledge of relevant circumstances of which the payor is not in fact aware, describing as “voluntary” a payment that was actually the consequence of negligence or inadvertence.

A “voluntary” payment that will defeat a restitutionary claim normally occurs in the context of a payment made to settle a claim. Where the terms of settlement involve an explicit compromise of an uncertain liability, the contractual mechanism by which a risk of uncertainty is allocated to the payor is transparent. Here, on the other hand, the company’s payment of the face value of the policy did not involve an explicit compromise allocating the risk to the company that DeCoursey might not in fact be entitled to the face value of the policy.

A claim for restitution lies when one party has been unjustly enriched through the mistaken payment of money by the other party. A payor’s negligence should not estop it from asserting that its mistakes of fact resulted in a payment of money that was not due. There is no connection between the payor’s negligence and the voluntary-payment rule. Mistakes are often the result of negligence, and if a restitution claim were barred because the plaintiff was negligent, the voluntary-payment exception would swallow a large part of the general restitutionary rule.

The Eighth Circuit found there was no question that since the obverse was true, that a negligent insured would be entitled to restitution for mistaken premium payments an insurer is entitled to restitution for a mistaken claim payment.

ZALMA OPINION

The plaintiff’s greed when she demanded interest on the $250,000 payment resulted in a judgment that she was not entitled to interest and must pay the insurer the $250,000 it paid her in error. The less: when you receive a gift accept it with good grace and don’t complain or sue for more. Had she not demanded interest the insurer would have peacefully gone away and the plaintiff could have kept the $250,000 plus an extra $25,000 for her trouble.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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