Lie to Life Insurer Deprive Beneficiaries of Benefits

Fraud Claim Requires Intent to Deceive

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all  the facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39]).

When a person fails to tell the truth to its insurer when applying for insurance the insurance company has the right to void coverage. In Melissa Gammel and Brad Gammel vs. UNUM, United States District Court, W.D. Oklahoma 2016 WL 2587281 (05/04/2016) plaintiffs Melissa and Brad Gammel (the “Gammels”) filed suit against defendant UNUM Life Insurance Company of America (“UNUM”), asserting claims for bad faith and fraud. The dispute is centered on a life insurance policy issued by UNUM to Earlene Forsythe (Melissa Gammel’s mother and Brad Gammel’s grandmother). Plaintiffs allege that UNUM wrongfully denied benefits under that policy.

FACTUAL BACKGROUND

Earlene Forsythe (“Forsythe”) worked for Comanche County Memorial Hospital (the “Hospital”) as a registered nurse until she retired on November 30, 2011. While employed at the Hospital, Forsythe was insured under a group policy for life and accidental death and dismemberment insurance. When she retired, her group coverage expired and she had two options to pursue continued coverage: conversion coverage or portability coverage.

Under UNUM’s policy, all insureds whose group coverage terminated due to a qualifying event (including retirement) had the option to “convert” their life insurance coverage to an individual policy, which could provide limits up to the amount that was provided under the group policy but would cost premium at rates substantially higher than the group premium rates. Some group policies, however, including the Hospital’s group policy, allowed insureds to “port” their life insurance coverage to a policy that would include coverage limits at a percentage of the group policy limits, and would continue to be billed at the group premium rate. To qualify for the portability coverage under the Hospital’s policy, an insured was required to certify on a coverage application to the absence of any medical condition that had a material effect on life expectancy. If a claim was filed within two years of the effective date on a ported policy and if UNUM learned that the insured had such a medical condition at the time of the application, the beneficiaries could only recover a reduced amount of insurance (a “commuted benefit”) which was based on what the policy premium would have purchased at an individual rate.

Forsythe applied for portability coverage in the amount of $30,000 for life insurance benefits. On November 13, 2012, less than two years after the policy effective date, Forsythe passed away. Plaintiffs submitted a claim under the life insurance policy. In the course of investigating the claim UNUM learned that despite Forsythe’s certification on her application that she had no medical condition that had a material effect on her life expectancy, by that time she had been diagnosed with various medical conditions including coronary artery disease, atrial fibrillation, hypertension, diabetes mellitus (Type 2), and morbid obesity. UNUM therefore paid plaintiffs a “commuted benefit” totaling $1,826 and plaintiffs filed this suit.

DISCUSSION

Plaintiffs assert UNUM breached its duty of good faith and fair dealing in two ways. First, they argue that UNUM failed to investigate whether Forsythe submitted her answers on the insurance application with an intent to deceive, and as a result UNUM unreasonably denied the full benefits of her portability coverage. Second, they argue UNUM improperly calculated Forsythe’s commuted benefit by including an annual “conversion fee” which further reduced the benefit amount.

Under Oklahoma law, insurers can decline coverage on the basis of the insured’s misrepresentations only in limited circumstances—when the misrepresentation is fraudulent, material to acceptance of the risk, or such that if the insurer had known the truth it would not have issued coverage to the extent it did. The Oklahoma Supreme Court has interpreted its statutes to include a requirement of knowledge of the representation’s falsity or some intent to deceive. (Hays v. Jackson Nat’l Life Ins. Co., 105 F.3d 583, 584, 587 (10th Cir. 1997).) As a result, failure to investigate the facts related to an insured’s knowledge or motivation in making a false or incorrect representation may, in a proper case, expose an insurer to liability for bad faith.

Nonetheless, a plaintiff asserting bad faith based on inadequate investigation must make a showing that material facts were overlooked or that a more thorough investigation would have produced relevant information. When a plaintiff identifies no information that would change the underlying facts on which an insurer can reasonably rely, summary judgment is appropriate.

Here, there is no dispute that Forsythe had all of the medical conditions that UNUM uncovered in its investigation. And there is no dispute that Forsythe, a registered nurse, knew of her conditions at the time she made her application. Prior to her application date, she had visited a cardiologist five times.

With respect to their fraud claims, plaintiffs assert defendant made fraudulent representations by informing Forsythe she “may” continue her life insurance coverage when she actually had a right to converted insurance coverage. Proof of fraud must show a material false representation, made with knowledge of its falsity or recklessly without knowledge as to its truth or falsity, as a positive assertion, with the intention that it be acted upon by another, who does act in reliance thereon, to his injury.

Plaintiffs also assert defendant made fraudulent representations that Forsythe’s coverage was approved at requested policy limits without evidence of insurability, when in fact UNUM reduced her policy coverage after investigating Forsythe’s “insurability” at the time the claim was submitted.

However, both the group life policy under which the portability option was available and the application for portability coverage made clear that eligibility for coverage depended on the absence of any medical condition that had a material effect on life expectancy. They also indicated that if such a medical condition was discovered to have existed, the policy benefit would be reduced to that which a conversion policy would provide.

No showing has been made that Forsythe’s policy or the Gammels’ claim were handled contrary to the terms expressed in the group insurance policy. Further, no evidence has been submitted which would support an inference that UNUM intended to breach the policy terms at the time it made the representations. Therefore, summary judgment was granted.

ZALMA OPINION

People suing insurance companies for breach of the covenant of good faith and fair dealing forget that the covenant applies equally to the insurer and the insured. Here, a registered nurse, knowing she suffered from several life threatening diseases did not disclose the fact when she applied for the life insurance. Her actions were a breach of the covenant and rather than causing the policy to be void merely reduced the benefits her beneficiaries could collect. In effect, she defrauded UNUM and still obtained some benefits.

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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