Life Insurer Had Reasonable Basis To Rescind; No Bad Faith


lifeinsuranceMILWAUKEE, Aug. 5 — A federal judge in Wisconsin has dismissed a  bad faith claim on the insurer’s motion for partial summary judgment, finding it had a reasonable basis to contest a claim for death benefits based on possible misrepresentations in the application.

Calvin Nutt and Lowanda Smith submitted answers to medical questionnaires as part of the purchase of life insurance from United of Omaha Life Insurance Co.  Mr. Nutt answered “No” to a question regarding whether he had ever been treated for chronic obstructive pulmonary disease (COPD).  The policy cancelled for non payment, but the couple resubmitted the application, and again denied treatment of Mr. Nutt for COPD.

On July 10, 2016, Smith submitted a claim under the policy after Nutt was murdered.  United  undertook a policy review within the two year contestability period and obtained medical records which showed that one of Nutt’s treating doctors ordered diagnostic testing on whether his complaints of chest pain may have been caused by COPD.  The results were negative for COPD.

As part of the claim, Smith obtained an autopsy report which indicated Nutt did not have COPD.  She filed suit in Wisconsin State Court alleging breach of contract and bad faith, and United removed the action to U.S, District Court for the Eastern District of Wisconsin.  The insurer thereafter filed a motion for partial summary judgment on the bad faith claim.

Judge J.P. Stadmueller granted United’s motion on the bad faith claim, and denied Smith’s motion for partial summary judgment on the breach of contract claim on grounds of lateness and reliance on evidence not in the record.   Judge Stadmueller  wrote, in granting United’s summary judgment motion on the bad faith:

“[t]he undisputed evidence shows that Smith’s bad faith claim must fail…United was within its rights to review the policy given that Smith’s claim occurred within the contestability window. It sought medical records and, from those it could obtain, there was some basis to believe that Nutt had lied about his COPD. Though that basis was moderated by other statements in the records, for instance the ‘well aerated’ opinion on Nutt’s x-rays, all that is required ‘[t]o avoid a bad faith claim . . . [is] one reasonable basis on which to deny benefits.’ As of September 1, 2015, United had ‘exercise[d] its duty of ordinary care and reasonable diligence in investigating and evaluating’ Smith’s claim and had a reasonable basis to debate the claim. . . . [T]he fact that the basis for denial later evaporated is no reason to impose bad faith liability for the earlier denial decision.”

The judge also ruled Smith failed to show United was unaware of a reasonable basis to contest the claim, which was also fatal to Smith’s bad faith claim.

Lowanda Smith v. United of Omaha Life Insurance, No. 15-1344, E.D. Wis.; 2016 U.S. Dist. LEXIS 101726




Life Insurer Did Not Act In Bad Faith In Interpleader

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HARRISBURG, Pa., June 24 —  A federal judge in Pennsylvania has ruled that the  executrix of an estate failed to establish a right to relief for a life insurer’s alleged bad faith in denying her claim for benefits under a policy of life insurance.

MONY issued Steve Eckert a life insurance policy with a death benefit of $127,000.  His wife at the time, Carol, was named the beneficiary.  In 1989, however, The Eckerts divorced, but Steve Eckert failed to remove his ex wife as the beneficiary.   Eckert remarried to Pamela Eckert in 2006.

Eckert died, and the beneficiary was never changed.  MONY filed an interpleader complaint in the U.S. District Court for the Middle District of Pennsylvania, seeking to pay the proceeds into court.  Eckert’s current wife, Pamela, and former wife, Carol,  both filed answers and crossclaims.  Pamela also filed a bad faith claim against MONY, and a claim alleging violation of the Pennsylvania Unfair Insurance Practices Act.

MONY moved to dismiss the three counterclaims filed by Pamela Eckert.  District Judge William W. Caldwell denied the motion in part, but ordered breach of fiduciary duty and bad faith claims dismissed.  Pamela Eckert filed an amended answer, again alleging bad faith, and MONY again filed a motion to dismiss.

Judge Caldwell dismissed the bad faith claims again, finding that aside from her allegation that MONY denied her the policy proceeds, Pamela’s pleading did not support a bad faith claims since it was “wholly unconnected to a denial of benefits.”  He wrote:

“Subparagraphs (a), (d), (e) and (f) [of Eckert’s opposition brief], relate to a transfer of ownership, not to a denial of benefits. Even if they alleged actionable conduct (and we express no opinion on that matter), this conduct could not be understood to bear on a claim for policy proceeds. In other words, Eckert may be correct (at least in this case) that a transfer of ownership led to a denial of (or at least a dispute about) her claim for the proceeds of the policy, but the fact that an insurer’s conduct leads to a transfer of ownership does not mean it gives rise to a claim for denial of benefits after that transfer has been made. As judicially construed, section 8371 covers bad faith in denial of benefits, not bad faith in the transfer of ownership in a policy. Section 8371 does not reach the latter conduct.”

MONY Life Insurance Co. v. Carol Snyder, f/k/a Carol Eckert, and Pamela Eckert, No. 15-2109, M.D. Pa.; 2016 U.S. Dist. LEXIS 34371)(Caldwell, J.).


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