Insurance is not a Gamble – It is a Contractual Risk Transfer Device

Insured who Paid More Premium than Life Benefit not Entitled to Sue Insurer

Insurance provides the primary method by which individuals and businesses transfer the risk of loss to an insurance company that accepts the risk and distributes the cost of that risk of loss among a similarly situated group of insureds.

People buy insurance to transfer the risk of loss from the purchaser of insurance to an insurance company. When the loss contemplated does not occur the insurer keeps the premium, invests it and uses the money to pay the claims of others who actually incur a loss.

In Kee Goostree, as representative of the Estate of Alton H. Padgett, and Jean G. Padgett v. Liberty National Life Insurance Company and Robert D. Bice, Case No. 1:19-CV-00071-KOB, United States District Court for the Northern District of Alabama Eastern Division (September 30, 2019) the Plaintiffs were unwilling to accept the fact that life is uncertain while death is certain.

To provide financially our loved ones when death occurs many people purchase life insurance policies. Like all insurance contracts, life insurance presents a gamble. The insurance company bases its premiums on actuarial tables and gambles that the insured will live long enough for the company to collect premiums sufficient to at least cover — and perhaps exceed — the face amount of the policy and have available funds to pay on those who die young. The insured makes a perverse gamble that he will die before he pays more in premiums than the face amount of the policy. But whenever the insured dies, the insured’s beneficiaries receive the face amount of the insurance, regardless of how much or how little the insured payed in premiums.

Plaintiffs complain that Defendant Liberty National “won the bet” and collected more in premiums than the face amount of the policies that Plaintiffs purchased between 1972 and 2015.

BACKGROUND

Mrs. Jean Padgett and the Estate of Mr. Alton Padgett are the two named Plaintiffs in this lawsuit. Mr. Padgett died in May 2018 at the age of 88, and Mrs. Padgett is now either 82 or 83 years old. Plaintiffs attempted a class action.

Plaintiffs contend that Liberty National targeted consumers who are under-educated and/or unsophisticated with respect to insurance and related financial dealings, the language of the policies, and methods of determining premium payments whereby the premiums paid on such policies far exceeded the policy’s face value.

Between 1972 and 2015, the Padgetts bought 15 life insurance policies from Liberty National: nine insured Mr. Padgett’s life; five insured Mrs. Padgett’s life; and one insured them jointly.  From 1972 to 2017, the couple had paid a total of more than $188,000 in premiums, yet the combined death benefit for all policies was approximately $45,000.

DISCUSSION

Count One: Breach of Contract

Mr. and Mrs. Padgett allege that they “substantially performed their obligations under the terms of the Policy . . . but have not received the benefit of the bargain.” But Plaintiffs’ breach of contract claim does not follow. A plaintiff alleging a breach of contract must prove:

  1. the existence of a valid contract binding the parties in the action,
  2. his own performance under the contract,
  3. the defendant’s nonperformance, and
  4. damages.

The parties agree to the existence of 15 valid insurance policies. But Plaintiffs do not bring this breach of contract claim based on any express provision of any of these 15 contracts. Plaintiffs contend, Defendant “fail[ed] to honor their agreement to act reasonably, prudently, and in the Plaintiff’s financial interests by repeatedly soliciting, recommending and inducing them to purchase policies which were unnecessary.”

Plaintiffs do not allege that Defendants breached any provision of the 15 policies. The contractual terms state that Defendant would pay for any claim in the event of an insured’s death, and Plaintiffs allege nothing to suggest that Defendant failed to perform regarding any of these contracts. Plaintiffs argue that the presence of multiple small contracts somehow spawned an ephemeral super contract that contained different, extra-contractual terms. The court found no law to support this line of reasoning.

Because Plaintiffs articulate no cognizable theory under which this court could find that Defendant breached any actual contract, the court granted Defendant’s motion to dismiss Plaintiffs’ breach of contract claim.

Count Two: Good Faith and Fair Dealing

Plaintiffs contend that Defendant breached its implied covenant of good faith and fair dealing in two ways. First, Liberty National sold policies that provided “no economic benefit” to the Padgetts; second, Liberty National recommended additional policies “without regard for the insured’s needs.”

The elements of breach of implied covenant of good faith and fair dealing are (1) the existence of a valid contract and (2) a party’s interference with the rights of another to receive the benefits of the contract. In Alabama, and most states, bad faith is not actionable absent an identifiable breach in the performance of specific terms of the contract.

Since the court  dismissed Plaintiffs’ contract claim for failure to allege a specific breach the court refused to find a nebulous cause of action that hovers outside each of the 15 agreements. The court, therefore, granted the motion to dismiss Plaintiffs’ breach of an implied covenant of good faith and fair dealing claim.

Count Three: Conversion

Plaintiffs argue that Defendant converted the premium payments that the Plaintiffs paid pursuant to the 15 life insurance policies. A plaintiff who brings a conversion claim must show (1) defendant’s wrongful taking of (2) plaintiff’s specific property with (3) an assumption of ownership of that property.

Because Plaintiffs have not alleged that Defendant withdrew any identifiable money from a specific account, the court granted Defendant’s motion to dismiss Plaintiffs’ conversion claim.

Count Five: Unjust Enrichment

To support their claim of unjust enrichment, Plaintiffs argue that “Liberty National received monies from Plaintiffs . . . in the form of revenues and profits from excess premiums that . . . must in equity and good conscience be returned to the Plaintiffs.”

Plaintiffs base their demand for unjust enrichment relief on payments they made pursuant to clearly articulated contracts. Because these contracts include the same subject matter under which Plaintiffs seek unjust enrichment relief, the court granted Defendant’s motion to dismiss Plaintiffs’ unjust enrichment claim.

Count Seven: Negligence

A negligence claim must demonstrate (1) duty, (2) breach of duty, (3) proximate cause, and (4) injury. Because Plaintiffs do not plausibly allege that Liberty National breached any recognized duty, the court granted Defendant’s motion to dismiss Plaintiffs’ negligence claim.

Count Eight: Negligent Training or Supervision

In Alabama, underlying tortious conduct is a precondition to invoking successfully liability for the negligent or wanton training and supervision of an employee. The court already dismissed the agent, Mr. Bice, from the suit with prejudice. As a matter of law, because Mr. Bice committed no wrongdoing, Liberty National cannot be held liable for negligently training or supervising him. The court granted Defendant’s motion to dismiss Plaintiffs’ negligent training or supervision claim.

Plaintiffs do not dispute that—going back to 1972—each policy plainly stated the premium amounts, payment schedules, and accompanying death benefits. Plaintiffs are unable to allege a cause of action merely because they lost their perverse bet and lived well into their eighties, still paying premiums on their policies.

Accordingly, the court granted Defendant’s motion to dismiss all counts and dismissed the case in its entirety with prejudice.

ZALMA OPINION

When my children were grown and on their own I cancelled my life insurance policies since they were no longer needed. I refused to pay to gamble that I would die before I paid out more than the promised benefit. The Plaintiffs – happily – lost the gamble by living into their 80’s. They then tried to sue because they made a bad bet. If this case survived there would be no reason to write life insurance nor would there be funds to support the beneficiaries of those who died young. Regardless of the court’s comments insurance is not a gamble – it is a contractual agreement to transfer risk and nothing more.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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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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