Chapter Thirty

• Jurisdiction: New York

Chapter Thirty

THE ABCs OF LIFE INSURANCE

Douglas W. Dunham, Esq. Ellen P. Quackenbos, Esq.

In its simplest form, life insurance is a promise to pay a benefit upon the death of the insured. In practice, however, life insurance regulation, law and the interpretation thereof are far from being so simple and straightforward. This chapter highlights and examines some of the fine points of life insurance regulation, practice and law. It is not meant to be an exhaustive tome, but rather a guidepost to the complexities posed by life insurance law, with an emphasis on the law of the state of New York.

I. An Overview of the Regulatory environment

The business of insurance in the United States is in general regulated by state governments with minimal input from the federal government. Under § 2(b) of the McCarran-Ferguson Act, state law regulating the business of insurance is not preempted by a conflicting federal statute unless the federal statute specifically provides otherwise.⁴⁰¹⁷ As a result of state primacy in the field of insurance regulation, no consistent body of law governing insurance matters exists. Each state has enacted laws governing insurers domiciled or doing business in the state. States conduct periodic examination of insurers’ financial conditions and trade and market practices. The rationale for such regulation and practice is to ensure that the insurer will perform on its promise to pay benefits at a particular time or upon the death of the insured. In New York, life insurance law is sourced from three areas: statute, as codified in the New York Insurance Law; regulations, as promulgated by the Superintendent of Insurance (Superintendent) and the New York Insurance Department (Insurance Department); and the judiciary.⁴⁰¹⁸

The New York legislature has specifically entrusted to the authority of the Superintendent a broad range of powers and responsibilities.⁴⁰¹⁹ These include the ability to (1) prescribe, withdraw and amend written insurance regulations, not inconsistent with the Insurance Law;⁴⁰²⁰ and (2) enforce the Insurance Law and determine appropriate penalties for violations of said law.⁴⁰²¹ The Superintendent’s oversight and regulatory powers are perhaps no more apparent than in the context of the formation and governance of life insurance companies, the regulation of a life insurer’s financial condition, reinsurance, mergers and consolidations, antitrust and unfair trade practices. Two of these areas, regulation of financial condition and unfair trade practices, are examined below.

The regulation of an insurer’s financial condition under the Insurance Law rests “on four pillars.”⁴⁰²² The first pillar requires the filing of periodic financial statements from admitted life insurers.⁴⁰²³ The second pillar requires that the Superintendent examine every domestic insurance company at least once every five years, and provides for permissive examination of any insurer “authorized to” do or doing business in New York as often as the Superintendent “‘deems it expedient for the protection of the interests of the people of this state.’”⁴⁰²⁴ The third regulatory pillar imposes limits on the amount of new life insurance a domestic and foreign insurer may underwrite in any given period and on the expenses and commissions incurred by life insurers.⁴⁰²⁵ The fourth confers on the Superintendent a “set of statutory remedies” which permit the imposition of a wide range of escalating penalties and/or actions, including rehabilitation, liquidation or the cessation of business of a financially imperiled insurer.⁴⁰²⁶

The Insurance Law prohibits an insurance company from engaging in “unfair claim settlement practices.”⁴⁰²⁷ Although discussed in more detail later in this chapter, the term is defined to include certain acts “committed without just cause and performed with such frequency as to indicate a general business practice.”⁴⁰²⁸ Included among the acts constituting unfair claim settlement practices are (1) knowing misrepresentations to claimants regarding “pertinent facts or policy provisions”; (2) “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear”; and (3) “compelling policyholders to institute suits to recover amounts due under [the insurer’s] policies by offering substantially less than the amounts ultimately recovered in suits brought by them.”⁴⁰²⁹ This provision of the Insurance Law clearly reflects state policy that insurers must deal fairly with their insureds and with the general public.⁴⁰³⁰ The administration of unfair claim practice laws is generally the function and responsibility of the Insurance Department. While administrative fines are available for unfair claim practices, the generally accepted view is that a private right of action in favor of the insured or a third party is not created.⁴⁰³¹ On more than one occasion, the New York Court of Appeals has confirmed this view. “[T]he provisions of the Insurance Law are properly viewed as measures regulating the insurer’s performance of its contractual obligations, as an adjunct to the contract, not as a legislative imposition of a separate duty of reasonable care.”⁴⁰³² Under this analysis, the Insurance Law’s unfair claim practices act does not give rise to a private cause of action by beneficiaries or insureds, nor does the act impose a tort duty of care flowing to the beneficiary or insured, separate and apart from the insurance policy.

II. The Life Insurance Policy

A. Contract Formation—Individual and Group Life

1. Filing and Approval

It is well established that insurance policies are contracts and that general rules of contract construction (i.e., offer, acceptance and consideration) apply.⁴⁰³³ In New York, as in other jurisdictions, life insurance policy forms must be filed with and approved by the Superintendent; otherwise, said policy or contract cannot be made in New York.⁴⁰³⁴ The Superintendent may disapprove any life insurance policy form for delivery or for issuance for delivery in New York “if its issuance would be prejudicial to the interests of policyholders” or if “it contains provisions which are unjust, unfair or inequitable.”⁴⁰³⁵ The Superintendent may also disapprove any policy form issued by a domestic insurer for delivery outside New York if its issuance would be prejudicial to the interests of policyholders.⁴⁰³⁶

2. Writing Requirement

As the above filing and approval requirement suggests, life insurance policies must be in writing as a regulatory pre-condition.⁴⁰³⁷ Aside from the regulatory requirement, New York courts have held that life insurance policies come “within the scope” of the New York Statute of Frauds, which states:

Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking: 1. By its terms is not to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime. ⁴⁰³⁸

3. Readability Requirement

The readability requirement applies, among other things, to individual life insurance contracts and to group insurance policies and contracts covering fewer than 100 lives.⁴⁰³⁹ The Insurance Law requires that policies and contracts be written in a “clear and coherent manner”; use “words with common and everyday meanings”; be filed with and approved by the Superintendent; achieve specified scores on reading-ease tests; and be printed and laid out as specified in the statute.⁴⁰⁴⁰ Nonconforming policies cannot be made, issued or delivered in New York on the life of a New York State resident.⁴⁰⁴¹

4. Advertising Rules

The New York Insurance Law and regulations maintain stringent rules regarding advertisement of life insurance contracts. The law in New York prohibits life insurers from using any statement misrepresenting the terms, benefits or advantages of any of its policies or contracts, or making any misrepresentation of the insurer’s financial condition or an incomplete comparison of policies.⁴⁰⁴² The Insurance Department has also supplemented the advertising prohibitions delineated in the Insurance Law with a series of regulations designed to govern the form and content of insurer advertising and to impose disclosure requirements.⁴⁰⁴³

5. Anti-Discrimination Rules

Under the Insurance Law and regulations, life insurers are prevented from engaging in certain forms of discrimination in making life insurance contracts. For example, life insurers cannot:

(1) make or permit any unfair discrimination between individuals of the same class and of equal expectation of life, in the amount or payment or return of premiums, or rates charged for policies of life insurance . . . , or in the dividends or other benefits payable thereon, or in any of the terms and conditions thereof;

. . . .

(3) knowingly permit, and no agent thereof and no licensed insurance broker shall offer to make or make, any policy of life insurance . . . or agreement as to such policy . . . other than as plainly expressed in the policy. ⁴⁰⁴⁴

The Insurance Law also prohibits discrimination in the availability and terms of life insurance policies on the basis of race, color, creed, national origin or disability,⁴⁰⁴⁵ and in the availability of life insurance on the basis of sex or marital status.⁴⁰⁴⁶

B. Common Policy Terms and Conditions

1. The Insured and Rating the Insured

The insured is the person named in a life insurance policy whose death triggers payment of the death benefit to the beneficiary. The calculation of an insured’s life insurance rates, or premiums, usually takes into consideration the following information and presumptions: (1) the probability of the insured event occurring; (2) the time value of money; (3) the benefit promised; and (4) loading fees to cover expenses, taxes, profits and contingencies.⁴⁰...