Annuity Valid Despite Missing Information, Rules U.S. District Court Judge
August 10, 2010 by Tom Egan
August 09, 2010 | Rhode Island Lawyers Weekly
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August 2, 2010 Monday
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Annuity valid despite missing information, rules U.S. District Court judge
Tom Egan
An insurance company could not terminate an annuity even though the applicant and beneficiary did not state their relationship with a terminally ill person whose life was designated as the measuring tool for the annuity, a U.S. District Court judge has ruled.
The insurer argued that the annuity application was “materially … incomplete or otherwise deficient” because of the missing information.
But Judge William E. Smith found that the insurer, by issuing the annuity, waived the right to challenge any omission in the application.
“Under Rhode Island law, an insurer waives the right to deny coverage by accepting a premium payment ‘with full knowledge’ of grounds for not fulfilling its obligations under the policy,” Smith said.
Thus, the judge found the insurance company committed breach of contract by not paying the annuity’s “death benefit” to the beneficiary.
The 25-page decision is Nationwide Life Insurance Co. v. Steiner, et al., Lawyers Weekly No. 52-022-10.
Providence attorney Robert Fine represented the insurer. He was opposed by Daniel Prentiss, also of Providence.
Annuity issued
The defendants, Sheila and Manfred Steiner, applied to purchase the annuity in question from plaintiff Nationwide on March 18, 2008. On the application form, they listed Manfred Steiner as the owner, Sheila Steiner as the beneficiary, and a woman named Sheryl Stroup as the “annuitant. ”
The application form expressly asked the beneficiary to list her “Relationship to [the] Annuitant,” but the defendants left that question blank. The insurer accepted the application anyway, and in exchange for an initial payment of $1 million, it issued the annuity on March 20, 2008.
The annuity included a “death benefit” provision that guaranteed the return of the cost of the policy upon redemption, meaning that the owners could recover whatever they paid in, even if their investment lost value because of stock market plummet.
Nearly a year after the death of Stroup on April 28, 2008, the defendants sought to redeem the annuity policy. At that time, the value of their investment had dropped substantially, and they demanded the death benefit to cover the loss.
The insurance company soon made two discoveries. One was that Stoup was terminally ill when the defendants applied for the policy. Second, the insurer realized it had issued a second annuity, to someone not a party to the litigation, for which Stroup was the same annuitant.
The insurance company rescinded the annuity, offering the defendants a check for the “surrender value” of the contract. That consisted of the purchase price minus market losses – i.e., without the addition of any death benefit to make up for the decline. The total amount was $481,418.15.
The insurer then filed a federal complaint seeking a judgment declaring that it validly revoked the annuity based on the language of the policy’s termination clause.
Specifically, the insurer claimed that the application was “materially … incomplete or otherwise deficient” because it did not state the relationship between the annuitant and the beneficiary. The insurer also theorized that the defendants’ annuity was “being used with other contracts issued by Nationwide to cover a single life or risk,” because of the second policy on Stroup’s life.
The defendants counterclaimed alleging breach of contract.
Incomplete info
“[A]t stake in this dispute,” the judge said, “is this: who eats the half-million dollar hit to the annuity portfolio, the Steiners or Nationwide?”
The insurer asserted that it lacked “full knowledge” of the particular facts that the defendants omitted.
“That, however, does not salvage its termination rights,” Smith said. “The question is whether an insurer must honor its policy when the application was incomplete, but the insurer retained the premium and delivered the contract anyway. The vast weight of authority binds insurers to their commitments in this situation. ”
The Rhode Island Supreme Court, Smith observed, had not addressed the issue.
“However, it is no stretch to conclude it would follow the general rule, given that it already recognizes insurers may waive the right to litigate coverage by accepting premiums with knowledge of the basis for a dispute,” he wrote. “The Court therefore concludes that Rhode Island law supports a finding of waiver in these circumstances. ”
The insurer also relied on the last paragraph of the termination clause, providing that the insurer’s failure to “detect, mitigate or eliminate altered risk” does not act as a waiver of its rights.
“The no-waiver clause cannot fix Nationwide’s mistake,” the judge said, adding that either no one at Nationwide had read the application or the insurer judged the missing information to be irrelevant and chose not to follow up.
“It would be absurd to characterize this as a ‘failure to detect,'” Smith stated. “There was no need to ‘detect’ the blank space, or discover its ‘true character’ or ‘existence. ‘”
‘Multiple contracts’ language
Smith found that Nationwide’s reliance on the “other contracts” language in the termination clause “falls flat. ”
According to the termination clause, “This Contract is not intended for use … by someone trying to cover a single life with multiple Nationwide contracts. ”
The defendants contended that that provision applies only when one person buys several annuities on the same life.
The insurer responded by claiming a “discretionary right to terminate” multiple contracts on the same annuitant.
“Thus, at any time after issuing the second contract, Nationwide says, it may invoke the termination clause against either the first or the second buyer,” the judge noted.
The flaw in that theory, if correct, was that there was never a real contract, Smith said.
“[I]f Nationwide can cancel the annuity based on its own subsequent action, then it was never contractually bound to anything. In effect, Nationwide has in its argument disavowed any ‘limitations [or] restrictions’ that would forge a binding agreement under its view of the annuity,” the judge wrote.
August 9, 2010
