In recent years, there have been a number of lawsuits seeking to revive long-lapsed universal life insurance policies based on alleged technical deficiencies in the grace notices. Many of these cases have similar facts: the original owners purchased high-value, flexible-premium life insurance on elderly individuals; the owners stopped paying premiums years ago; the policies lapsed; an investor purchased the lapsed policies for the sole purpose of bringing a lawsuit against the insurance company; and the investors eventually bring suit, usually on the eve of applicable statute of limitations. As the facts imply, the policies often are suspected stranger-originated life insurance (STOLI). The legal underpinnings are also related, as the lawsuits involve claims for breach of contract and declaratory relief on the theory that the grace notices were deficient.
The information that an insurer includes on a grace notice and the mechanics of when it will be mailed out and to whom depends on the contract itself and relevant state statutes; therefore, the outcome of any particular case is largely dependent on the terms of the insurance policy and which state's law governs. See, e.g., Weiss v. Lincoln Nat'l Life Ins. Co., 2016 WL 4991533, at 4 (E.D.N.Y. Sept. 15, 2016) (finding a requirement for an "amount due" in both the contract and the state statute under certain circumstances). Some of the early opinions found there were factual issues that precluded dismissal at the pleading stage, which had the effect of encouraging plaintiff's counsel to bring other cases. See Blumenberg v. Aviva Life & Annuity Co. of N.Y., 41 Misc. 3d 1207, 977 N.Y.S. 2d 665 (Supreme Ct., Kings Co. 2013); Zeligfeld v. Phoenix Life Ins. Co., 39 Misc. 3d 1213, 975 N.Y.S.2d 370 (Supreme Ct., Kings Co. 2013).
As the first round of cases advanced to the summary judgment stage, a federal court in New York held that a grace notice which improperly stated the amount required to remove the policy from grace, coupled with evidence that the owner had tendered some amount of premium, was ineffective to lapse the policy under New York law. Lebovits v. PHL Variable Ins. Co., 199 F. Supp. 3d 678, 680 (E.D.N.Y. 2016). That victory was pyrrhic for the investor-plaintiff, however, as the court also required the owner to pay past-due premiums for nearly six years. Id. at 682. Because the owner failed to do so, the court ultimately entered judgment for the insurer.
Though investors have had mixed success with these cases, see Weiss v. Sec. Mut. Life Ins. Co. of N.Y., A.D.2d, 45 N.Y.S.3d 169 (2d Dep't Jan. 11, 2017) (affirming summary judgment for insurer), this fact has not slowed the pace of the complaints being filed. To the contrary, similar allegations continue to be lodged against numerous insurers. See Jakobovits v. PHL Variable Ins. Co., No. 17-3527 (E.D.N.Y., filed June 12, 2017); Jakobovits v. Lincoln Nat'l Life Ins. Co., No. 17-05344 (S.D.N.Y., filed July 14, 2017). Notably, most of the cases that have been and continue to be brought are in New York, frustrating insurers' ability to argue that the policies are void ab initio as part of a STOLI scheme due to the age of the policies. Kramer v. Phoenix Life Ins. Co., 15 N.Y.3d 539, 549 n.5 (N.Y. 2010) (provisions of N.Y. Ins. Law § 7815, making STOLI illegal, do not apply to policies prior to May, 2010).
It is against this backdrop that the Southern District of New York recently granted in part an insurer's motion for summary judgment. Jakobovits v. Allianz Life Ins. Co. of N. Am., 2017 WL 3049538 (S.D.N.Y. July 18, 2017). In Jakobovits, the Court granted summary judgment for the insurer on six of the nine investor-owned lapsed policies at issue because the owners had not given notice of assignment to the insurer per the terms of the policy. As to the other three policies, it found that the plaintiff had breached the policies by not paying premium and that the insurance company did not breach the literal terms of the policies with respect to grace notices that overstated the amount of premium due to keep the policy in force because the policies did not require an amount to be stated at all, but decided that a factual issue remained as to whether the insurer breached the implied duty of good faith and fair dealing.
The case involves nine life insurance policies insuring the lives of three individuals. Id. at *1. Aside from two small premium payments on two of the policies, no payments other than the initial premium payments were ever made on the policies, all of which lapsed in 2009 and 2010 due to nonpayment of premium. Id. Prior to lapse, the owners were notified that the policies were in grace. Id. at *2. None of the policy owners attempted to tender any amount of premium. Id.
For six of the nine policies, the Court granted complete summary judgment for the insurer, finding that the insurer was not notified of changes in ownership in accordance with the terms of the policies. Id. at *5. The ownership of the policies was transferred between various entities, and the policies provided that assignment would be effective upon notice to the insurer. Id. It was undisputed, however, that other than notice of an initial transfer, the owners never subsequently provided the insurance company with such notice. Id. Consequently, "the purported transfers... were ineffective to give Plaintiff an insurable interest in them," resulting in plaintiff's "lack of standing" to sue on those six policies and summary judgment for the insurer. Id.
While the chain of ownership was anything but complete for the remaining three policies, the Court found that factual issues precluded summary judgment on the notice aspect of those policies. Turning to the merits, the court first found that "[t]he question of Plaintiff's breach is, as a threshold matter, not in dispute." Id. Because plaintiff failed to pay any premium, it materially breached the contract. Id. That did not end the inquiry, however. The court had to also determine whether the insurer "itself breached and thereby caused the policy owners to stop paying." Id. at *6. Denying the investor-plaintiff's cross-motion for summary judgment, the Court reviewed the language of the policy, which did not require that the grace notice contain any amount, and held that the company committed no "actual breach" of the policy's terms. Id. at *6-*7 (distinguishing Weiss, where the "terms of the policy" "required the Grace Notice to state the amount due").
The court found factual issues remained, however, on plaintiff's claim of breach of the implied covenant of good faith and fair dealing. Plaintiff's theory, in this and the other similar cases, was that the insurer "intentionally demanded excessive premiums in an effort to force these policies into lapse." Id. at *7. Despite the insurer's evidence that it did not do so, plaintiffs were able to marshal sufficient material at the summary judgment stage to convince the court that triable issues of fact remained. Id. The court concluded that plaintiff's declaratory judgment claim was duplicative of its breach of contract claim, and therefore granted summary judgment for the insurer on that claim. Id. at *8.
Jakobovits is a step forward for insurers who face allegations that alleged technical deficiencies in grace notifications, often sent many years in the past, require the reinstatement of potentially millions of dollars in life insurance. It stands for the propositions that an owner unequivocally breaches when he or she does not pay premium; that a company does not breach the policy by including an incorrect amount in the grace notice if the policy does not include a requirement that the grace notice state the amount due; and that an owner must comply with the notification provisions of the insurance policy in order to have standing to sue on the policy.
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