In Hilston v. American General Life Insurance Company, the plaintiff brought breach of contract and bad faith claims against her late father’s life insurer, the policy being held in a trust. The court found that her claim as substitute trustee was barred by the two year statute of limitations, in light of notice to earlier trustees; but her bad faith claim as an individual beneficiary was not.
The pertinent facts are that the prior trustee paid the premiums every year for 12 years (1996-2008). The policy required the insurer to provide written notice at the beginning of each year, setting out that year’s premium. The complaint alleged that the proper notice was not provided in the 13th year, and the trustee did not make the premium payment.
After not receiving payment, the insurer decided to “lapse the Policy” for failure to pay premiums due. The plaintiff alleged the insurer sent no notice of the lapse, grace period, termination, or reinstatement of rights, and that neither she, her father, nor the trustee knew the policy had lapsed until years later. The policy could not be reinstated due to the insured’s poor health, and he died in July 2012.
Plaintiff sued the trustee in 2013, during which case she issued a subpoena to discover any notices the insurer had provided. There was no response, and she demanded payment of death benefits in April 2012. This demand was rejected later in April 2014, and plaintiff filed suit in December 2014.
In addressing the trustee’s claim, the court observed that “an action for bad faith denial of coverage accrues when the insured first learned that the insurance company was denying coverage.” This trigger does not always require an actual formal denial, as “[w]hile it is an unfounded refusal to pay proceeds of policy that is at the heart of a bad faith claim, at some point, the failure of the insurer to . . . provide coverage puts the insured on notice that the insurer has denied coverage.” The court then cited a litany of cases for the idea that bad faith can be found for conduct other than denial of a benefit.
[Note: As stated on this blog previously, there is an issue as to whether “bad faith” conduct that does not involve denial of a benefit, can, in and of itself, constitute section 8371 bad faith; or whether that conduct is an indicia or evidence of bad faith supporting that the delay or denial of a benefit is actionable under section 8371. In a footnote, the court stated that: “We follow the federal courts within this Circuit and find that violations of the [Unfair Insurance Practices Act] cannot support a statutory bad faith claim.”]
In this case, the allegations indicated that the trustee did not actually learn the policy was not in effect for over two years, stating the trustee and insured were surprised when they learned that fact; especially in the absence of any notice from the insurer. In ensuing correspondence in 2011, it was unambiguous to the trustee and the insured that the insurer took the position the policy lapsed.
The court was willing to apply the discovery rule to extend the trigger for the statute of limitations, but the statute was triggered in 2011 when the insurer made clear in writing that it was going to deny any benefits under the policy. “The subsequent denial of benefits in 2014 can simply be classified as a ‘continuing refusal’ to provide benefits under the policy and is not actionable.” Thus, the statute of limitations ran on the trust in 2013, over a year before suit was filed.
The analysis for the plaintiff as beneficiary had a different result. A beneficiary does not have standing to sue until the death of the insured. Although more than two years passed after she gained standing, before suit was filed, plaintiff pleaded that “she did not become aware of [the insurer’s] deficient notices until 2014.” Thus, for pleading purposes, the allegations were accepted as true and the claim could not be dismissed, applying the discovery rule.
The court further found that plaintiff had stated a bad faith claim, in alleging the insurer knowingly “failed to provide notices of premium due, grace period, lapse, reinstatement, or termination to [the trustee] or [the insured],” and still terminated the policy. She also alleged that the insurer had failed to investigate the propriety of letting the policy lapse, and whether the requisite notices were sent. The court ruled that if the insurer “did in fact lapse the Policy with knowledge that it had not sent the required notices, then it arguably lacked a reasonable basis to terminate the Policy. Further, if [the insurer] had that knowledge and still terminated the Policy, it disregarded its lack of a reasonable basis.”
Date of Decision: May 12, 2015
Hilston v. Am. Gen. Life Ins. Co., CIVIL ACTION NO. 14-7269, 2015 U.S. Dist. LEXIS 61804 (E.D. Pa. May 12, 2015) (Kearney, J.)