Any insurer that issues payments by making “checkbooks” available to insureds should pay careful attention to a new trend of class actions. I’ve posted a couple of times on the growing trend of class actions against life insurance companies involving the use of “checkbooks” to pay policy proceeds to beneficiaries (see my posts from May 4, 2011 and April 14, 2011. There is a Multidistrict Litigation in the District of Massachusetts, Lucey v. Prudential Insurance Company of America, in which Judge Ponsor recently issued a decision denying a motion to dismiss (pdf). The decision was mentioned in a recent article in Bloomberg Business Week.
This case involves life insurance policies issued to servicemembers and veterans under a special federal statute. The statute provides for beneficiaries to be paid “either in a lump sum or in thirty-six equal monthly installments,” at the election of the insured or the beneficiaries. The contract contained a similar requirement. Handbooks issued by Prudential and the Veterans Administration later provided for the use of “Alliance Accounts” under which beneficiaries are provided with a checkbook from which they can draw the entire proceeds or part thereof at any time, and they earn interest.
In denying the motion to dismiss in its entirety, Judge Ponsor found that under First Circuit precedent, “[a] lump-sum payment by check (which actually transfers the funds to the beneficiary) is simply not the same as a lump-sum payment by checkbook (which allows the insurance company to retain the funds and earn interest on them).” (Opinion, at 9.) The motion to dismiss was denied even on the fraud claim:
First, Plaintiffs allege that Defendant’s claim that it will satisfy the insured’s selection of the lump-sum payment option by creating an Alliance Account is not equivalent to a lump-sum payment. Second, Plaintiffs allege that Defendant’s statement that the Alliance Account is a personal interest-bearing account is false because the account is not personal and the interest is credited at Defendant’s discretion and not by a legal instrument setting an interest rate. These two statements, which suggest that Defendant intentionally misrepresented essential elements of the Alliance Account in order to induce beneficiaries to maintain the insurance proceeds in the accounts, are sufficient to overcome Defendant’s motion to dismiss Count 5. (Opinion, at 16.)
I don’t have much new to say about this topic beyond my prior comments, but wanted to highlight this new development. Life insurers should pay close attention to these cases. Property/casualty insurers that issue payments to insureds with similar “checkbooks” should also pay careful attention to these cases and review their contract terms and procedures. How the MDL court rules on class certification will be important.