Posted on: 10/31/2012
David P. Donahue, Maynard Cooper & Gale
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The California
legislature recently passed A.B. 1747 into law, establishing new requirements
affecting the way life insurance companies notify policy owners of a potential
policy lapse for nonpayment of premiums. Most life insurance policies contain a
provision requiring the insurer to provide notice to the policy owner that
necessary premium payments have not been received and that the policy will
lapse if premiums are not received within a specified period of time (usually
31 days). The new California legislation, effective January 1, 2013, and to be
codified in section 10113.71-72 and 10173.2 of the California Insurance Code,
establishes a statutory minimum 60-day grace period before an insurance company
can terminate a policy for nonpayment of premiums and provides that notices of
pending lapse and termination are not effective unless mailed to the policy
owner at least 30 days prior to the effective date of termination. The bill
also requires that life insurers permit policy owners to designate at least one
other person to receive such lapse notices and mandates that life insurers
annually notify policy owners of the right to make or change such designations.
The bill provides that such notices not mailed to designees and known assignees
are ineffective.
For the life insurer, these
new requirements present an opportunity to review its current policies and
procedures regarding lapse notices. Beyond the obvious necessity of creating
procedures to ensure compliance with the longer grace period mandated by the
California legislature and taking the required regulatory actions necessary for
the approval of new policy language and designation forms, life insurers may
also be wise to examine their policies and procedures concerning both the
physical mailing of lapse notices and the tracking of such mailings.
Litigation involving the
mailing of lapse notices is a fairly common occurrence. These cases typically
involve a situation where an insured dies shortly after a life insurance policy
lapses due to the failure of the policy owner to pay the required premiums and
the beneficiary makes a claim for benefits. Such cases can also involve
situations where a policy lapses and the insured seeks to reinstate the policy
later, only to find that they are no longer insurable under the same terms or
health rating established when the policy was first issued. Unfortunately,
these cases often come with allegations that the required lapse notice was not
sent by the insurer. Most states have longstanding case authority holding that
evidence that a letter was deposited with the U.S. Postal Service with proper
address and sufficient postage affixed creates a rebuttable presumption of
delivery. See, e.g., Crude Oil Corp. of America v. Commissioner, 161
F.2d 809, 910 (10th Cir. 1947) (“When mail matter is properly addressed and
deposited in the United States mails, with postage prepaid thereon, there is a
rebuttable presumption of fact that it was received by the addressee in the
ordinary course of mail.”). In some instances, however, even if an insurer can
show that the required notices were generated within the time frames dictated
by the policy or applicable statue, the methods employed by many companies that
send out large volumes of mail make it understandably difficult—if not impossible—to
provide the level of detail necessary to definitively show that a particular
piece of mail was duly placed in the U.S. mail with proper address and postage
affixed. To avoid the frustration of trying to “disprove a negative,” as well
as the potential for a bad result, life insurers (and/or their third-party
mail-handling vendors) should take this opportunity to examine cost effective
ways to create and retain records that can later be used to demonstrate
that an individual lapse notice was (1) generated at the appropriate time and
(2) placed in the mail with proper address and postage. Such a record would
provide a much more effective means of demonstrating compliance than would the
oft-used records many companies are relegated to using in such litigation
scenarios demonstrating little more than that the company mailed out thousands
of pieces of mail on a given day. The cost of such a change would likely be
less than the cost of hotly litigating even one dispute or the cost of paying a
claim that the insurer should not have to pay.
Likewise, if you represent
life insurers presented with claims that the insurer failed to mail a lapse
notice, awareness of these sometimes significant hurdles to proof of mailing is
essential to your ability to evaluate the case and get ahead of the issues.
Early in the case, you should have a firm handle on whether the notices were
generated at the proper time and exactly what the mailing process of the
insurer entails and what kinds of records are available as proof. You should
also be familiar with what your state-specific “mailing presumption” cases
require, so that you can develop evidence and testimony from the outset that
places the company in the best possible position to prevail.
David P. Donahue
Maynard, Cooper & Gale, P.C.
Birmingham, AL