United States: Investors' Attempts to Breathe Life Back into Long-Lapsed Life Insurance Policies Fail

Last Updated: January 3 2018
Article by Dawn B. Williams

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions