Avid readers of this blog who follow developments in life insurance class actions will recall my posts earlier this year about cases claiming that life insurers improperly used “checkbook” accounts whereby, instead of issuing a check to a beneficiary for the full amount of the policy proceeds, they provide an interest-bearing account from which the beneficiary can withdraw some or all of the benefits at any time.  Earlier this year, courts in Nevada and Massachusetts denied motions to dismiss in these types of cases, and a Massachusetts federal court granted class certification.  For more on this, see my prior posts on May 4, 2011 (denial of motion to dismiss in case against MetLife in Nevada), May 12, 2011 (denial of motion to dismiss in suit against Prudential in Massachusetts) and June 30, 2011 (grant of class certification in suit against the Life Insurance Company of North America in Massachusetts).

The pendulum has recently swung a bit in the other direction, with Prudential prevailing on a motion to dismiss in the Southern District of Illinois.  In Phillips v. Prudential Insurance Company of North America, 2011 U.S. Dist. LEXIS 135982 (S.D. Ill. Nov. 28, 2011), the plaintiff made a claim under a life insurance policy and was provided with a claim form that offered her a number of options for how the payment would be made (a lump sum, installment payments for a fixed period, life income, an interest-bearing “Alliance Account,” etc.).  The form stated that if no option was selected, the claim would be paid using the “Alliance Account.”  The plaintiff signed the form without making any selection for how payment would be made, and she was provided with a checkbook for the “Alliance Account,” from which she could withdraw at any time any amount up to the full amount of the proceeds with any interest that had accrued.  The relevant policy provision stated:

You may choose to have any death benefit paid in a single sum or under one of the optional modes of settlement described below (emphasis added).  If the person who is to receive the proceeds of this contract wishes to take advantage of one of these optional modes, we will be glad to furnish, on request, details of the options we describe below or any others we may have available at the time the proceeds become payable.

Id. at *9. 

The court found no breach of contract because:

When [plaintiff] left the Claim Form blank without specifically stating that she wished to receive the benefits she was due under the Policy, she changed the method by which she would receive those benefits from a single sum to an Alliance Account.  There can be no breach of contract where the contract, by its express terms, allowed plaintiff to elect to receive the benefits in a different manner than specified by [plaintiff].  Prudential thereby distributed the insurance proceeds in accordance with the contract. 

Id. at *11.  The court also concluded that the “Alliance Account” was expressly authorized by an Illinois statute, and that there was no breach of a confidential relationship because under Illinois law there is no fiduciary relationship between an insurer and insured.  Id. at *13-17.  The court distinguished the Nevada case (Keife) on the grounds that the court there concluded that the policy in that case had an entire agreement clause and could not be modified by a separate document.  The Massachusetts case (Lucey) was distinguished on the grounds that the beneficiary in that case had chosen a “lump sum payment” and was provided with an Alliance Account.  See id. at *7-8 n.3.

The bottom line I see here is that, as I’ve predicted in prior posts on this issue, the outcomes in these cases are likely to depend heavily on the particular terms of the insurance contract and any documents that might be considered incorporated into the contract or an amendment thereto.  Whether the contract and any amendments comply with basic contract law also are likely to be central issues.  Life insurers that have this type of program in place and have not revisited it recently may want to have in-house and/or outside counsel take another careful look at their contract terms and other relevant documents that are used.  Having a solid contract in place, or amending it in a legally-defensible way (as well as ensuring compliance with any applicable state statute or regulation), can potentially make a big difference if a company is sued on this issue.  It also may not be too late to “fix” a potential problem depending on the particular circumstances.