In many states, the authorities do not expect insurance agents and brokers to follow up with insureds who are late on premium payments. State laws require insurers to provide insureds with advance notice of cancellation, but they generally do not place that same obligation on producers. However, this assumption is not ironclad; as of Spring 2018, an Arkansas agency was caught up in a legal dispute on this very question.
The agency had obtained a $10 million life insurance policy in 2002 for a family trust on a family member. The trust made scheduled premium payments, and by early 2008 the policy had a cash value exceeding $2 million. Since the cash value was sufficient to cover future premium payments, the trust stopped making them.
After several years, the trust asked the agency for an illustration of the policy’s cash value. The agency reported that there was enough cash left in the policy to pay the premiums for a little over one more year. After that, the policy would lapse if the trust did not resume premium payments.
In February and March 2015, the insurer sent letters to the trust advising that it had not received scheduled premium payments and that it would cancel the policy if it did not receive them by April 9. The trust, however, had a new address, did not receive the insurer’s letters, and did not make the payments. On April 15, the insurer sent another letter informing the trust that the policy had been cancelled. The trust did not receive this letter, either.
It was nearly 18 months later that the trust learned of the cancellation, two weeks before the subject of the insurance died. The insurer denied payment of the $10 million claim.
The trust sued the insurer and the agency in Arkansas state court, and the parties argued over which court should consider the suit. For unstated reasons, the insurer wanted a federal court to hear the case, while the trust wanted it in state court. The insurer was incorporated in Indiana and headquartered in Pennsylvania, while the trust was based in Arkansas. If one of the defendants was also based in Arkansas, the rules would require the state court to hear the case.The agency was based in Arkansas, so by suing the agency the trust guaranteed that the case would be considered by a state court.
The insurer argued that this was a deceptive attempt by the trust to keep the case out of federal court. It moved to have the suit against the agency dismissed. However, the federal court concluded that the allegations in the trust’s complaint provided “a reasonable basis for predicting that (the agency) might be liable for negligence under Arkansas law.” The case was sent to state court.
The trust had argued that the agency breached its obligations by failing to forward the insurer’s letters to it or even telling it about them. If it had known about the letters, the trust said, it would have acted to keep the policy from lapsing. The court noted a 1986 state court decision holding that an insurance agent might be held liable in a situation where the agent received a cancellation notice, the insured did not, and the agent did not inform the insured. Given the allegations in the trust’s complaint, the court concluded that joining the agency to the lawsuit was not illicit because it was possible that a court would hold the agency liable.
It is unclear why the insurer was not aware of the trust’s new address. It was a serious error If the agency was aware and did not ask to have the policy amended. The trust may still have sued the insurer if it had the correct address, but it would have been harder to sue the agency. The state court may yet find the agency not liable, but the agency must contend with the ongoing lawsuit in the meantime.
Wherever an agency is licensed, it is important to know the laws in that jurisdiction. In many states, this suit against an agency would be a non-starter, but not so in this one. Losses can be prevented if an agency knows the law.