A judgment holding that an insurer must pay death benefits even though the premiums had lapsed has been overturned by the B.C. Court of Appeal.
The decision, which dealt with insurance under a mortgage, means that Burlington, Ont.-based CUMIS Life Insurance Co. will not have to pay almost $300,000 in death benefits to the widow of a policyholder who died shortly after the policy lapsed due to non-payment of premiums.
The case drew attention when the trial court found the benefits were payable despite a three-month lapse in the premiums and the death of the insured during the period of the lapse. (See Investment Executive, June 2011.) But the appeal court disagreed, unanimously ruling in late January that a lapsed life insurance policy cannot be reinstated after the insured’s death.
PAYMENTS MUST BE MADE
The circumstances of the case are unusual, but certainly not so strange that advisors might not run into a similar situation. In particular, the case highlights the importance of having systems in place to ensure that important, periodic payments continue to be made, even when life takes a tumultuous turn.
The lawsuit was launched by Susan Paul, widow of Dennis Paul, after CUMIS denied a death benefit of almost $300,000 under a mortgage’s life insurance policy. The $393 monthly premiums had been paid through the couple’s joint account by automatic withdrawal beginning in 2006, up until Aug. 28, 2008. Subsequent premiums were not paid because the Canada Revenue Agency had frozen the account for non-payment of almost $200,000 in taxes.
CUMIS wrote to Dennis twice in October 2008 about the failure to pay the premiums and the policy’s lapse, but the letters were left unopened. In addition, they were not sent by registered mail, as is required by law. Dennis died on Nov. 24, 2008.
A female friend of Susan’s found the unopened letters among Dennis’s papers and called the insurer the day after his death, at Susan’s request. The friend talked to the insurer’s call centre representative, telling him she was Susan, and inquired about the status of the insurance, but did not say that Dennis had died.
The rep advised the friend that the policy had lapsed and that three months’ worth of premiums — a total of $1,179 — were needed to reinstate the policy. That amount was paid by Susan and the policy was initially reinstated. CUMIS later discovered that Dennis had died while the policy had lapsed, and denied coverage.
NO RISK AFTER DEATH
The trial judge sided with Susan Paul, holding that CUMIS had not taken proper steps to inform itself of the prevailing circumstances and, by initially agreeing to reinstate if the missed premiums were paid, had waived its rights to terminate the policy for non-payment of those premiums.
But, in an oral judgment, Justice P.D. Lowry of the Court of Appeal concluded that the terms of the policy prevailed: once the 60-day reinstatement period under the policy expired, a new application for insurance was required.
Ruled Lowry: “In my view, the insurance on Mr. Paul’s life could not have been reinstated once he was no longer alive because, unknown to the insurer, there was no longer any insurance risk. The reinstatement of insurance is an insurer’s agreement to again insure a risk for premiums to be paid as agreed in the first instance. When the insurer wrote to ‘Mr. Paul’ confirming the insurance had been reinstated, it was agreeing to again insure his life for premiums to be paid. But there was no life to insure: there was no continuing insurance risk. There was no reinstatement possible.”
Noted lawyer Emily Williamson, of Harper Grey LLP in Vancouver, the decision “is really an affirmation that policy holders must be forthright in their dealings with insurance companies.” IE