Insured Demanding Reinstatement Must Pay Premiums on Improperly Terminated Life Insurance Policy

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Rubenstein v. The Lincoln National Life Insurance Co., 2014 NY Slip Op. 31957(U), ruling that the holder of life insurance policy that was improperly terminated without the required statutory notice must pay premiums due for the period when the policy lapsed.

The court explained that the policyholder had to pay the premiums on the policy it sought to have the court reinstate:

Plaintiff cites Weld v MidAmerica Mutual Life Insurance Company, 385 N.W.2d 58 (Court of Appeals, Minnesota, 1986) to support the position that insurance premiums need not be paid during a period when no coverage was in effect. In Weld, the plaintiffs health insurance policy had lapsed for non-payment of premiums, however the defendant reinstated the policy by accepting subsequent premium payments. Unbeknownst to the plaintiff, the payments he made after the policy's reinstatement were being applied by defendant retroactively to pay the prior defaults. When plaintiff suffered an injury a few months after the policy was reinstated, the carrier declined coverage as the insurance premiums were deemed two months overdue, beyond the 31 days grace period for making a claim after missing a premium payment. The court found that the language of the policy failed to give the plaintiff notice that his premium payments will be applied to prior defaults. Rather, the language of the policy implied that coverage would begin anew upon the reinstatement date. As such, the court found that the plaintiff had commenced a new term of insurance when his policy was reinstated, and that the defendant was obligated to pay plaintiff’s claim and it could not retroactively apply plaintiff's premiums to a period during which he had no coverage.

The facts in Weld are completely distinguishable from the facts in this case. In Weld, the plaintiff was paying monthly premiums without any notice that his insurance company was accepting these payments while considering itself under no obligation to provide coverage to him. The court found that defendant was not entitled to claim that it was reinstating the plaintiff’s insurance policy without advising the plaintiff that he would be paying back past due premiums before his coverage would commence. The court found that coverage began anew on the reinstatement date and thus plaintiff was covered for his losses incurred during the period that he was paying premiums on the reinstated policy.

In the present case, the policy in question is a life insurance policy, and at the time the defendant declared it in lapse, it was actually in effect. Moreover, unlike Weld, once the policy is reinstated, plaintiff cannot claim that he was not covered for the entire time in question. Plaintiff has not demonstrated any legal or factual basis to find that defendant's error in declaring the policy to have lapsed relieves the plaintiff of the obligation to pay the premiums for the coverage that he purchased for the entire time period that it is in effect. This would result in plaintiffs obtaining an unearned windfall of having a Five Million Dollars life insurance policy while not paying any premiums towards it for four years. Moreover, unlike Weld, the insurance contract here clearly states that to reinstate the policy, the holder must pay the amount of the debt.

This decision serves as a reminder that statutory notice requirement prior to the termination of an insurance policy are strictly enforced and if not complied with can give the insured another chance to reinstate coverage. Another take-away from this decision is that the courts are not inclined to give the insured a windfall, so back premiums will likely have to be paid.