Defending Lapse Cases

In recent months, courts have granted summary judgment in favor of insurers in disputes concerning lapsed life insurance policies. See, e.g., Cohen v. Companion Life Ins. Co., 56 Misc. 3d 1202(A) (N.Y. Sup. Ct. 2017); Cash v. AXA Equitable Life Insurance Co., 229 F. Supp. 3d 542 (W.D. Tex. 2017). These decisions are noteworthy because lapse cases can present challenges for insurers – particularly at the summary judgment stage. For example, policy owners often seek to defeat summary judgment by alleging that they did not receive the relevant notice(s). To overcome the rebuttable presumption of non-receipt, insurers should consider submitting multiple affidavits setting forth in painstaking detail the virtual chain of custody of the notice. The level of detail is critical. 

With recent decisional law in mind, below are several suggestions that insurers should consider in defending a policy owner’s challenge of a lapse and in positioning the case for summary judgment.

Ensure Compliance with Respect to the Content and Timing of Notices

As a general matter, the content of grace/lapse notices must comply with the terms of the subject policy. Insurers should also confirm that the content of their notices is consistent with governing statutes and regulations. Although the plaintiffs’ bar has faced mixed results on this issue, courts sometimes require strict compliance – even when the plaintiff has alleged not receiving the notice.

The amount requested in the grace notice should also be consistent with the policy terms and compliant with statutory authority. If, for example, the amount requested in the grace notice exceeds the precise amount of the deficiency at the moment the grace notice is issued, an insurer should confirm that the language of the policy supports the amount requested in the grace notice. Insurers should also consider case law on these issues to confirm that courts have not applied the statutes and policy terms in a way that undermines the insurer’s position. Timing may also present challenges for insurers. While the length of the grace period may be subject to statutory requirements (without regard to the date on which a policy holder receives notice), certain policies may dictate the grace period to commence upon receipt of the notice.

Maintain Complete Copies of Policies

In lapse cases, courts will typically first look to the terms of the policy – taking note of, among other things, the premium frequency and grace provisions, both critically relevant to a lapse. Specimen or duplicate policies may not be sufficient or, at the very least, may require insurers to take steps to prove that the specimen or duplicates are an accurate reflection of the language used in the original. See, e.g., Finley v. Transamerica Life Ins. Co., No. 15-CV-00678-WHO, 2015 WL 6871944, at *1 (N.D. Cal. Nov. 9, 2015), appeal dismissed (Feb. 26, 2016). Having a complete copy of the original policy will lend credibility to the insurer’s position concerning its contractual obligations.

Demonstrate the “Chain of Custody” – One Company Affidavit May Not Be Enough

Leaving aside the content and timing of notices, an insurer’s case may hinge on its ability to establish that the relevant notices were in fact mailed. In Cohen, for example, the insurer submitted five affidavits providing a detailed accounting of the transmittal of the premium notice – from generation to mailing. This included affidavits from the claims, business service, and mail “back office” departments. The other two affidavits came from a third-party vendor, which was responsible for the mailing and delivery of certain correspondence. While this level of detail may not always be necessary, more is often better when trying to overcome a policy owner’s claim of non-receipt.

At the outset of litigation, it would be prudent to confirm how premium due notices and grace notices are generated, printed, and mailed. Historical logs and data can be persuasive (and even conclusive) evidence of the generation and mailing of notices. For example, consider obtaining an affidavit setting forth the technological steps pursuant to which the notice was generated, such as detailed processing information and possible safeguards against errors.

Retain and Review Information Regarding the Intent of the Policy Owner

It is important to consider how your company maintains records of its communications with insureds, beneficiaries, policy owners, and producers. For example, documentation showing the policy owner knew the policy would lapse (presumably in response to the grace notice) – even intended for it to lapse – may be significant. A call from the policy owner in which the policy owner confirms receipt of the notice may be similarly significant. Retaining and reviewing records of such communication may provide valuable insight and can undermine a plaintiff’s allegations that the insurer made promises or representations regarding the lapse of the policy.

Final Thoughts

When faced with a lapse dispute, an insurer should first confirm its compliance with the policy terms and statutory authority. Although this may seem like a straightforward task, it is advisable to review recent case law to confirm that courts have not interpreted the policy terms or statutes in a way that undermines the insurer’s position.

Following an analysis of the contract, statutory terms, and applicable case law, it would be prudent to obtain information from “back office” departments and third-party vendors to analyze the lapse process. This may be time-consuming and tedious. Many times, for example, the mailing and processing departments are located in another facility separate – and perhaps hundreds of miles away – from the legal department. Thus, coordinating schedules of lawyers and company employees can be difficult. But obtaining detailed information from “on the ground” employees spanning departments from customer service to printing can end up saving significant time and expense by avoiding a trial.

Representative Cases

• Cohen v. Companion Life Ins. Co., 56 Misc. 3d 1202(A) (N.Y. Sup. Ct. 2017) (summary judgment in favor of insurer based in large part on detailed affidavits supporting the generation and mailing of relevant notices).
• Cash v. AXA Equitable Life Ins. Co., 229 F. Supp. 3d 542 (W.D. Tex. 2017) (summary judgment in favor of insurer based in large part on supporting affidavits and dismissal of policy holder’s unsupported statement of non-receipt).

Disclaimer: The purpose of this publication is to provide information for the purpose of encouraging thought and raising further discussion. Using any information presented in this publication, including receiving additional correspondence from an attorney at Drinker Biddle & Reath LLP regarding this publication or others like it, does not in and of itself create an attorney-client relationship between Drinker Biddle & Reath LLP and you/your company. Nothing written in this publication should be construed to be legal advice or litigation strategy for any particular matter or lawsuit.