As lawyers who specialize in the wrongful denial of life insurance claims, we see insurance companies deny legitimate claims from beneficiaries day in and day out. The claims adjusters who issue these denials don't do this because they are bad people. They do this because they are under tremendous pressure to generate profits for the insurance company.
Consequently, a life insurance company will often deny a claim for benefits even when it is obvious that the benefits are due to the beneficiary. In one recent case, all of the facts and circumstances suggested that a simple typographical error was made in the policyholder’s life insurance application. Nonetheless, because that typo gave the insurance company an “out” when it came to paying the claim, they clung to that mistake like a life preserver.
Before we dive into the specific facts of that case, we’d like to take a couple minutes to describe the legal principles that were at play in that case.
Life insurance policies are nothing more than legal contracts between the policyholder and the insurance company. As such, they are governed by general principles of contract law. One of the most basic principles of contract law is that the parties to any contract must be honest with one another while they are negotiating the terms of their deal.
If one party lies, and that lie was significant enough that the other party would never have entered the deal had they known the truth, the party who was lied to can later avoid his obligations under the contract. A lie that significant is known in contract law as a “material misrepresentation.”
In the life insurance context, the life insurance application is a form of negotiation. In other words, the applicant has a duty to be truthful in his answers to the application questions. If he lies about something that would have caused the insurance company not to issue him a policy, the life insurance company may actually be able to avoid its obligation to pay beneficiaries after that person dies.
It's easy to imagine the types of lies that would be material to a life insurance company. Claiming to be a non-smoker when you actually smoked for years is a material misrepresentation. Claiming that you have no health conditions when you actually suffer from asthma and diabetes is a material misrepresentation. Perhaps those are obvious examples. In the case where about to discuss, however, they misstatement in the application was far less obvious.
The policyholder in that case was a man named Greg. Greg was a very successful Dean of a university. He was a busy guy and did not like to take time out of his day to deal with personal matters. Nonetheless, when he was promoted to Dean, he was given the opportunity to apply for a life insurance policy through the university's group life insurance plan. His wife, Sandy, encouraged him to do so.
Not one to ignore his wife, Greg visited the Human Resources department of the University. Rather than filling out the application himself, one of the department secretaries hand-wrote Greg's answers to the questions as he read through them. One of the questions on the application asked for Greg's total annual salary.
Greg answered the question truthfully – he earned $250,000 per year. The secretary, however, incorrectly recorded his response. She accidentally added an extra zero onto his income figure, making it look like Greg made $2.5 Million per year. The mistake, while not intentional, was also not insignificant.
Life insurance companies set benefit rates based on, among other things, a person’s earning potential. For example, a person who makes $60,000 per year might be eligible to receive a $75,000 death payout whereas a person who makes $600,000 per year might be eligible to receive a $1,000,000 death payout.
Even if a person is willing to pay higher premiums for a higher payout, their death benefit is typically tied to their earning potential during life. This is because life insurance policies are not intended to put beneficiaries in a better position than they would have been if the policyholder lived. They are simply intended to replace income the policyholder might otherwise have earned had he not died. Based on the secretary’s mistake, Greg was issued a policy worth $3 million.
Unexpected death and a wholly denied claim
Just over one year after Greg was appointed Dean, he passed away in a bicycling accident. Sandy was obviously devastated but pulled herself together enough to file a claim for the $3 million benefit with the life insurer. Because Greg had died within two years of receiving the policy, the insurance company claimed that it had the right to undertake a thorough investigation into the truthfulness of Greg's application.
When it did so, it discovered that Greg only made $250,000 per year, not $2.5 million. The insurance company claimed Greg purposefully lied in order to get his wife a higher death payout. Consequently, the company denied Sandy’s claim in its entirety.
Fortunately, one of Sandy's friends was a lawyer specializing in the wrongful denial of life insurance claims. He quickly recognized that if Greg had intentionally misstated his income in the application, that would be a material misrepresentation worthy of a claim denial. Here, however, the secretary admitted that she had simply made a mistake in recording Greg's answers.
The lawyer took that information to the life insurer’s appeals board. He argued that while Sandy probably was not entitled to a full $3 million payout, she was entitled to the payout Greg was eligible for based on his $250,000 salary. Fortunately, the insurance company agreed and paid Sandy a $300,000 death penalty without further delay. Had Sandy not hired a specialized lawyer to take on her case, she might have walked away from that money.If you have had a life insurance claim denied on the same or a similar basis, please don't hesitate to call our firm to discuss the situation. Contesting the wrongful denial of life insurance claims is what we do every single day. We're here to help and are happy to discuss your case.