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Conversion Clauses in Life Insurance Policies

Many life insurance policies include a conversion clause. A conversion clause provides a policy owner with the contractual right to update or to convert a policy.  The primary benefit of a conversion clause is that the person whose life is insured does not have to undergo medical underwriting for an updated policy to issue.  In Tennessee life insurance policy cases, a policy owner’s rights under a conversion clause may be important to understand.

Underwriting classes are determined based on the medical history, physical condition, habits, and smoking status of the life of the person insured by the policy. Sometimes though, an insurance company will change the names of its underwriting classes so that there is no underwriting class by the same name or description as the underwriting class which applied to the first policy. If that occurs, what type of underwriting class, and thus, premium rate, should apply when the policy is converted?  The classification of the life of an insured can mean thousands, or tens of thousands, of premium dollars.

A couple of federal cases provide some guidance.

In Preis v. New England Life Ins. Co. (W.D.La. May 28, 2009), the plaintiff had an insurance policy with New England Life Insurance Company (“New England”) with an underwriting classification designated as “Preferred Standard.” Under the terms of the policy, the plaintiff was entitled to exchange his original policy for a new policy in “the same … underwriting class.”

Following the issuance of the plaintiff’s life insurance policy, New England merged with Metropolitan Life (“MetLife”). When the plaintiff chose to exchange his policy for a new one, MetLife designated the Plaintiff’s risk class as “Male Standard Nonsmoker” which it claimed was the equivalent of New England’s “Preferred Standard” class. The plaintiff, however, alleged that, since he received the lowest risk category under his prior New England policy, he was entitled to the same with MetLife.  When MetLife declined to offer him its lowest risk category, he filed suit for, inter alia, breach of contract.

In the Preis case, MetLife filed a motion for summary judgment.  The court denied it because the plaintiff provided proof showing that his original insurance policy with New England provided him with the lowest available risk classification.  The court’s reasoning, although not expressly articulated, was clear: Where the insured’s underwriting class falls within the original plan’s hierarchy (high-risk, low-risk, somewhere in between) will determine the underwriting class applicable to the new or converted policy.

In Johnson v. Prudential Ins. Co. of Am., Inc.  (M.D. Tenn. 2013), the court appeared to adopt the same rationale employed in the Preis case, albeit in favor of the insurance company.  In that case, the plaintiffs’ policy included a conversion clause allowing them to convert to a new policy “in the same rating class.”  When plaintiffs elected to exercise the conversion clause, however, the defendant insurance company informed them that the names of the classifications had changed.  The insurance company stated that it would provide an “equivalent” classification for the life of the person insured.

The plaintiffs sued alleging, inter alia, breach of contract. They claimed that, if the names of the classifications had changed, then they were entitled to a classification that was similarly worded to the prior classification.  The similarly worded classification the plaintiffs argued they should receive would have lowered their premiums.

In granting the defendant’s motion for summary judgment in the Johnson case, the court noted, however, that adopting the plaintiffs’ argument “would result in a strained interpretation awarding plaintiffs a windfall for name’s sake.”  Instead, the court adopted the defendant’s argument that, under the original policy, the rating class was the middle-tier of a three-tiered rating class.  So, the court held that the rating class the plaintiffs should receive under the new policy should be the corresponding middle-tier under the re-named three-tier regime.

As the court explained in the Johnson case, the conversion clause allowing the plaintiffs to convert to a new policy in the “same rating class” did not, as the plaintiffs alleged, preclude the defendant from offering an “equivalent” class.

Conversion clauses can pose challenging issues, especially when the insurer changes the names of the underwriting classes.   If, upon exercising a conversion clause, an insurance company gives you a new and pricier underwriting class, consult with an experienced Tennessee insurance policy litigation lawyer to determine your contractual rights.

 

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