Articles Posted in life insurance

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Under Tennessee law, all life and disability insurance policies must include an “incontestability provision” stating that, after a period of no more than two years, the policy “shall be incontestable.”  In essence, an incontestability provision prohibits an insurance company from voiding the policy because of misrepresentation in the policy application (other than an intentional or fraudulent one). Although Tennessee law requires the incontestability period to begin no more than two years after the issuance of the policy, insurers may allow for shorter periods in their policies.

Why are incontestability provisions required under law? Tennessee courts have explained that the purpose of an incontestability provision is to provide a “statute of limitations in favor of the insured” by setting out a limited period for the insurer to examine the validity of the policy.  An incontestability provision gives an insurer an incentive to scrutinize an application carefully on the front end, before it begins accepting premiums.  Without incontestability provisions, an insurer could overlook questionable statements on an application for coverage knowing that, years later, if the insured makes a claim for benefits, it could rely on any misstatements to deny coverage.

Even with an incontestability provision, an insurer may be able to void a policy and deny coverage based on any intentional misstatement in an application for insurance. For insurers, however, it can be difficult to prove that the person who completed the application intentionally provided incorrect information, as is necessary to establish fraud.  Often, claimants and beneficiaries will be able to argue successfully that any misrepresentations made on an application for life insurance were oversights or misunderstandings.

An incontestability provision can make a critical difference in a claim for benefits. Say, for example, the owner of a life insurance policy incorrectly states in the application that the person whose life is insured by the policy has not been diagnosed with hypertension. Until the incontestability provision is triggered, the insurance company may be able to withhold death benefits on the basis that the owner’s misrepresentation voids the policy.  Once the incontestability provision is in effect, however, the insurance company cannot use the owner’s misrepresentation as a reason to deny benefits, unless they can show that the misrepresentation is covered under an exception to the incontestability provision for fraud.

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Under Tennessee law, a party can establish that a beneficiary of a will procured the making of the will by undue influence. If undue influence is proven, the will is invalidated and the beneficiary of the invalidated will receives nothing by virtue of the will. What holds true for beneficiaries of wills procured through undue influence also holds true for beneficiaries of life insurance policies whose beneficiary status was the result of undue influence.  A party can challenge a beneficiary’s right to recover under a life insurance policy by showing that the person who owned the policy (“Decedent”) changed the policy’s beneficiary designation because of undue influence.

Tennessee courts recognize that it is difficult for a party to establish undue influence through direct evidence.  As a result, in a life insurance policy case, a party seeking to set aside a beneficiary designation can do so by showing “suspicious circumstances.”  These suspicious circumstances usually involve the following: (1) a confidential relationship; (2) the Decedent’s physical or mental infirmity; and (3) the beneficiary’s active involvement in causing the designation of a beneficiary or beneficiaries under the life insurance policy.

Of the three circumstances above, establishing the existence of a confidential relationship is arguably the most important part of an undue influence case.  So what exactly is a confidential relationship? To start, any fiduciary relationship (attorney-client, guardian-ward, conservator and incompetent) is a confidential relationship.

Familial relationships may also be confidential relationships if one party had a relationship of dominion and control with respect to a weaker party.  An example of this might be a nephew taking care of an ailing uncle, who depends on the nephew for basic life care like meals and transportation to medical care providers.  If the uncle removed his children as the beneficiaries of his life insurance policy in place of the nephew, a court will likely presume that the change in beneficiary designation came about due to undue influence.

That presumption of undue influence can be a game-changer. In a life insurance policy case, a beneficiary seeking to rebut a presumption of undue influence must do so by “clear and convincing” evidence, which is the highest burden of proof in most kinds of civil litigation. Despite that high bar, parties can—and do—overcome the undue influence presumption by offering evidence showing that Decedents, despite their dependence on stronger parties, made independent decisions when changing beneficiaries of life insurance policies.

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Many life insurance policies contain  exclusions that prevent the recovery of any benefits if the insured commits suicide.  (In many policies, the suicide exclusion is only effective for two years from the date of issuance of the policy.)  Under Tennessee law, if there is inadequate proof to determine if the death was by accident or suicide, or if the proof is conflicting or equally balanced, courts will presume the death was an accident.   This is an important rule because, in many cases, it is not clear how the insured died.

For example, in Smith v. Prudential Ins. Co. of Am., 2012 WL 405504 (M.D. Tenn. 2012), facts in the record indicated both that Gary Smith, the life insured (“Smith”), committed suicide, and that he died accidentally.  The Defendant (“Prudential”) argued that Smith staged his suicide to make it look like a hunting accident, and noted that the medical examiner ruled Smith’s death a suicide.  In further support of its theory that Smith took his own life, Prudential also pointed to the nature of the contact wound, the location and direction of the shot, and to the fact that Smith was an experienced hunter who Prudential asserted was too skilled to have shot himself accidentally.

Prudential also argued that Smith had a motive to take his own life because he was faced with sudden and overwhelming debts triggered by a disastrous business partnership.  The insurer also rested on the fact that he died just five weeks after doubling the limits on his life insurance policy.

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If you have an ERISA long-term disability claim, you cannot file a lawsuit challenging an insurer’s denial of benefits until you have exhausted your administrative remedies.  So, even if the insurer, or plan administrator, denied your claim for long-term disability benefits, you still need to take the time to file an administrative appeal, unless you do not want pursue your right to disability benefits.

There is an exception, however, to the rule that you must appeal the initial denial.  If filing an appeal would be “futile,” a court will allow a disability lawsuit to proceed even if the claimant did not exhaust his or her administrative remedies.  This exception is called the “futility doctrine,” and it is recognized by the United States Court of Appeals for the Sixth Circuit (the circuit that includes all the federal courts in Tennessee).

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For claimants, it is not easy to challenge an insurer’s denial of long-term disability benefits in court, particularly in an ERISA case.  Courts review the insurer’s or administrator’s decision under an “arbitrary and capricious” standard meaning that they will uphold the decision as long as it was the result of a “deliberate, principled reasoning process.”  To put it simply, a court will uphold a decision to deny long-term disability benefits even if it disagrees with it, so long as the insurer can point to some facts justifying the denial.

Because no two disability cases are alike, courts have not, and cannot, set out clear rules on what constitutes an arbitrary and capricious denial of benefits.  However, a recent decision from the United States Court of Appeals for the Sixth Circuit (the circuit that includes all the federal courts in Tennessee) provides important guidance on when an insurer’s disability determination, under the arbitrary and capricious standard, will be reversed. Continue reading

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In our last post, we discussed the insurable interest requirement in Tennessee. Under that requirement, the prospective owner of the policy must prove that he or she would suffer some type of loss if the insured were to die while the policy was in effect. This requirement prevents speculators from buying insurance on a person’s life in the hopes that the person dies before the death benefit exceeds the amount of premiums paid.

Obtaining and assigning financial instruments can be a lucrative business. So, sometimes, parties may try to structure a life insurance policy in such a way that it appears that the policy were supported by an insurable interest.  Courts, however, may well scrutinize such policies, especially if it appears that a speculator used an elderly person as a conduit to acquire a beneficial interest in a life insurance policy that the speculator otherwise could not acquire.

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The law which requires a policy owner to have an insurable interest in whatever is being insured seems fairly straightforward.  Under Tenn. Code Ann. § 56–7–101, a person who buys an insurance policy must have an insurable interest in what is being insured.  For example, you can only take out a homeowner’s policy on your own home, and not on the home of a stranger.

In the context of life insurance, the insurable interest rule requires that the beneficiary of the policy suffer some type of loss if the insured were to die while the policy was in effect.

For example, a minor child would have an insurable interest in his or her parents.  An investment firm would have an insurable interest in an entrepreneur to whom it had just given a sizable loan to start a company. In contrast, if a stranger convinced a wealthy senior citizen to let him or her take out a policy insuring the senior citizen’s life, that policy would be void.

As it relates to life insurance, the insurable interest requirement prevents speculators from buying insurance on a person’s life in the hopes that the person dies before the death benefit exceeds the amount of premiums paid.

In practice, the insurable interest requirement is not as simple as it seems.  For example, what if there is an insurable interest at the time the policy is issued, but not at the time the person whose life is insured dies? That question was answered by the Court of Appeals of Tennessee in Trent v. Parker (1979).  In that case, a corporation took out a life insurance policy on its CEO.  The CEO later left the company, and then filed suit against the company asking the court to cancel the policy.  Ruling in favor of the CEO, the lower court voided the policy stating that the company no longer had an insurable interest in its former employee.

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Under what circumstances will a court rule that the named beneficiary under a life insurance policy is not entitled to receive the proceeds of the policy?  In Estate of Lane v. Courteaux (2017), the Court of Appeals of Tennessee wrestled with that issue, before ruling against the party who argued that a named beneficiary should not be entitled to any proceeds under the policy.  According to the court, a named beneficiary of a life insurance policy will almost always be able to recover the death benefit, even when there are compelling reasons to award the proceeds to another party.

The facts of Estate of Lane are tragic.  A wife had a $600,000 life insurance policy in which she named her husband the sole beneficiary. Later, she was diagnosed with terminal cancer.  Shortly after, her husband learned he also had terminal cancer.

Although the husband was not expected to outlive his wife, she passed away before he did.  Shortly before her death, the wife, while retaining her husband as a co-beneficiary, added her sister, Amanda Courteaux, as a co-beneficiary.  This caught the husband by surprise.  When he discovered, after her death, that his wife did add her sister as a beneficiary of the life insurance policy proceeds, he speculated that his wife wanted her sister to provide for their son, who was on the verge of losing both his parents.  Under the life insurance policy at issue, the wife’s sister was entitled to $300,000 of the policy proceeds.

Later, the husband believed Courteaux was going to use the proceeds for purposes other than his son’s welfare.  He then filed a complaint against Courteaux seeking to have nearly all of her share of the proceeds placed into a trust for the benefit of his son.  In his lawsuit, the husband sought relief, in part, under the legal principle of promissory estoppel.

Prior to the trial, the husband passed away, and his executor and estate were substituted in his place.  Before he died, the husband gave a deposition in which he testified about a document created by his wife that he discovered after her death.  According to the husband’s testimony, the document indicated his wife wanted Courteaux to have only $30,000 of the proceeds for herself, with the remainder of her share to be transferred to her husband to use for their son’s benefit. (It is not clear from the court opinion what exactly this document was, or what it said.)  At trial, the deceased wife’s half-sister also testified wife wanted Courteaux to receive only a $30,000 share of the proceeds.

At trial, Courteaux conceded that she and her sister both promised to take care of each other’s children if anything ever happened to one of them.  Nevertheless, she testified that the life insurance proceeds were “my money.”

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A serious and important question in a life insurance policy case can be: Is a death caused by a drug overdose an “accident” or is it an intentional act that can permit an insurer to deny benefits under the terms of the policy?

Courts in the Sixth Circuit have wrestled with this issue for decades, but they now appear to agree that, barring evidence that the insured intended to commit suicide, a drug overdose should be deemed an accident, and not an intentional act. (Federal district courts in Tennessee are in the Sixth Circuit)

In Andrus v. AIG Life Ins. Co., (N.D. Ohio 2005), the Plaintiff was the beneficiary of her husband’s life insurance policy. The life insurance policy was governed by ERISA.  The Plaintiff was denied benefits after her husband overdosed on prescription medication, including OxyContin.  Under the terms of the life insurance policy, coverage was available only in the event her husband’s death was an accident.  The policy did not define the term “accident;” however, it excluded coverage from death caused by intentionally self-inflicted and suicidal acts.

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Under Tennessee law, a life insurance company can deny a claim for benefits if the insured individual was less than honest in his or her insurance application. Specifically, Tennessee Code Annotated § 56–7–103 provides that a misrepresentation in an application for an insurance policy can void the policy if the misrepresentation “increases the risk of loss.”

So what exactly does that mean?

Let’s take an easy example: If the applicant fails to disclose a known heart condition on his or her application, and then dies of a heart attack, the life insurance company likely will be able to deny any claim for the proceeds.

What happens, however, if the applicant dies of a heart attack after failing to disclose a DUI conviction? The Tennessee Court of Appeals dealt with these same facts in Smith v. Tenn. Farmers Life Reassurance Co. (2006) and held that the insurance company’s refusal to pay benefits under the policy was allowed under Tennessee law.  As the court noted, the misrepresentation in that case did not need to involve a “hazard that actually produced the loss in question.” Rather, the issue was whether the misrepresentation would have increased the risk of loss.  In Smith, the court determined that the insured’s misrepresentation influenced the insurance company’s decision to issue the policy and, therefore, increased its risk of loss.

It may seem like, based on the ruling in Smith, that it is fairly easy for life insurance companies to use a supposed misrepresentation on an application as a reason to deny benefits.  Another Tennessee Court of Appeals decision, however, indicates that life insurance companies will have to support their misrepresentation claims with direct evidence, and cannot simply ask the court to infer that the applicant was less than forthcoming on his or her application.

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