April 18, 2017

NY DFS Targets Contestable Claims Investigations

By Charles J. Vinicombe, John M. Bloor and Laura M. Zulick

The New York State Department of Financial Services (the “DFS”) issued a Circular Letter on January 27, 2017, addressing the DFS’s position on what it considers to be “life insurance unfair claims settlement practices” in the life insurance industry in connection with contestable claim investigations. The DFS expressed concern that some insurers have engaged in the practice of contesting claims and “withholding claims payments” following the deaths of insureds “during the two-year contestable period, in the absence of actual evidence of misrepresentation, and improperly have shifted the burden of proof to beneficiaries.”

Notwithstanding the contractual and statutory right of insurers to conduct contestable claims investigations, the DFS criticizes the practices of some insurers in requiring beneficiaries to cooperate with the insurer in its claims investigation and in obtaining the deceased insured’s medical records. Absent “actual evidence” of a material misrepresentation, the Circular Letter states that insurers are prohibited from requiring a beneficiary’s cooperation in procuring medical records and other claims information to allow the investigation of whether the insured made any material misrepresentations in the policy application. The DFS also asserts that any policy form provision that purports to impose any such duty upon a beneficiary in order to receive death benefits “will be deemed by the Superintendent to be unfair.”

In the Circular Letter, the DFS states that “the insurer must make prompt payment on a claim” and that it may not “unilaterally refuse to pay a life insurance claim” unless it has “actual proof that the applicant made a material misrepresentation.” If there is “actual proof” of a material misrepresentation, the insurer can rescind the policy either through agreement with the beneficiary or through a judicial proceeding. The Letter does not address the impediments to an insurer obtaining any such “proof” in the absence of a beneficiary’s cooperation in obtaining the insured’s medical records.

New York Governor Andrew Cuomo promptly followed-up the Letter with a press release. “Insurers are on notice of their obligations and that this administration has zero tolerance for those who seek to sidestep their responsibilities,” Governor Cuomo said. “With this action, we are holding insurance companies accountable, helping to ensure beneficiaries receive what they are entitled to, and are working to create a more fair and more just New York for all.” The press release stated that DFS investigations have discovered “disturbing practices” among some insurers in connection with small face value life insurance policies marketed to low- and middle-income consumers for funeral, burial and other final expenses.

“A life insurance company cannot require a beneficiary to produce a deceased policyholder’s medical records to pursue an alleged misrepresentation investigation or use illegal and unfair tactics to withhold and deny claim payments when those payments are due and most needed upon the insured’s death,” said Superintendent Maria T. Vullo. “The unlawful practices identified in DFS’s examinations and investigations have deprived New Yorkers of their rights under their life insurance policies, drained the value of their policies, and unfairly denied insurance payments to their beneficiaries. DFS will hold all insurers accountable for making prompt, fair and equitable settlements as required by law.”

While the Circular Letter does not have the force of law, it is likely to be relied upon by claimants for bad faith claims that an insurer failed to promptly pay a death claim without proof of a material misrepresentation and/or improperly required an insured’s medical records from a claimant.

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