An insurance company may waive its right to deny benefits when it accepts premiums for coverage that its policy did not actually provide. It may also waive its right to deny benefits where, even for a short period of time, it provides the very benefits it later seeks to deny and discontinue.
In O’Connor v. Provident Life & Acc. Co. (E.D. Mich. 2006), an employee received, through his employer, a life insurance policy covering his life with a death benefit of $273,000. After the insured employee died, the insurance company declined to pay $273,000 to the insured’s beneficiary. Under the terms of the policy, the insured was only eligible to receive basic and optional coverage of up to five times his annual salary. Because his salary rounded up to $24,000, he was eligible for a maximum death benefit of no more than $120,000.
Two years before the insured passed away, however, he filled out an enrollment form in which he opted for $250,000 in supplemental coverage, plus a core benefit equal to his annual salary, adding up to a total death benefit of $273,000. Importantly, the enrollment form the insured completed stated that premiums would not be deducted from his paycheck unless the coverage was approved. Nevertheless, the insured’s employer deducted premiums from his paycheck based on the $273,000 death benefit he elected to receive, even though he wasn’t eligible to receive it. As a result, the insured had no reason to believe that he did not qualify for the full amount of the benefit he selected.
When the insured passed away, however, the plan administrator only paid the $120,000 death benefit. The beneficiary, who was the insured’s widow, filed a lawsuit claiming she was entitled to receive the amount of coverage her late husband selected. In her lawsuit, the plaintiff did not dispute that her late husband never should have qualified for the full $273,000 death benefit. She argued that, once the plan administrator accepted premiums for the higher amount of coverage, it waived its rights to deny her that coverage.
The plaintiff also argued that she and her late husband relied to their detriment on the fact that they believed they qualified for the $273,000 death benefit. She asserted that had they known he did not qualify for the coverage he elected to receive, he would have applied for additional life insurance elsewhere. As a result, she argued, the plan administrator should be “equitably estopped” from denying the full death benefit.
The district court rejected both the plaintiff’s arguments. While noting that the plan administrator misrepresented, in its enrollment form, that the employer would not deduct the premiums unless it approved the coverage, the court focused on two key facts: There was no evidence that the plan administrator was aware of the insured’s annual earnings and the amount of his elected coverage exceeded five times those earnings. The district court found that the insurer’s employer was aware of that information, but that the plan administrator was not.
The court also noted that the plaintiff and her late husband could not have detrimentally relied on the fact that they initially qualified for a $273,000 death benefit, because the terms of the policy plainly stated that his coverage was capped at five times his annual earnings. That limitation, the court noted, was not ambiguous in any way.
Further, the court stated that the plaintiff’s late husband could not have qualified for additional coverage through another insurer due to a pre-existing health condition. Therefore, the court found that any representation that the insured qualified for more coverage than he was eligible to receive did not result in any damages to the plaintiff.
In Pitts By & Through Pitts v. Am. Sec. Life Ins. Co. (1991), a somewhat similar case, the United States Court of Appeals for the Fifth Circuit arrived at a different outcome and ruled against the plan administrator. In that case, the plaintiff had insurance coverage through a group health policy purchased by his employer. The policy required that the company have at least ten members in the group; however, employees later quit their jobs with company leaving the plaintiff as the only member insured under the policy.
After the plaintiff became sick, the plan administrator paid for his medical expenses even after it discovered that the size of the group had shrunk below the threshold required by the policy. Later, however, the plan administrator denied coverage on the basis that the employer breached the terms of the policy. In upholding a lower court ruling against the insurer, the Fifth Circuit held that the insurer waived its right to enforce the employee threshold when it accepted premium payments and covered the plaintiff’s medical expenses without reservation.
Most jurisdictions define waiver as an intentional relinquishment of a known right. In O’Connor, there was no finding of a waiver because the plan administrator did not know that the insured had applied for coverage that exceeded the amount he was eligible to receive. However, in Pitts, as discussed above, the insurer knew the plaintiff’s employer breached the terms of the policy, but continued to provide coverage anyway. As a result, it waived its rights to enforce a requirement of the policy that it previously ignored.
These cases, as you can probably tell, are highly fact-intensive. If you believe that your plan administrator or insurer is trying to enforce a policy requirement that it already waived, contact an experienced insurance litigation law firm to investigate the facts of your case.