Court Reinstates Canceled Life Insurance Policy

When an 88-year-old Pennsylvania businessman died without life insurance coverage, his family business was able to have its canceled life insurance policy reinstated when a Pennsylvania court declined to apply a law called “the mailbox rule.”

The businessman was a partner in his family business. For many years the business itself had carried a life insurance policy on the man’s life so that the business would have money to buy the man’s share of ownership in the business upon his death. Each April, the insurance company sent an annual premium bill. Usually the dividends and earnings on the life insurance policy were large enough to pay the annual premium and the annual bill would show no balance due. But in 2001, when the annual premium doubled, the family business did owe a premium payment because the policy earnings were no longer enough to cover the premium.

In late 2001, months after the premium went unpaid, the insurance company issued a cancellation notice. The family business acted quickly to request a premium bill and paid it. The family business insisted that it never received the premium bill in April 2001.

Upon receiving the late payment, the insurance company inquired about a medical questionnaire completed by the insured businessman. The family business was confused by the inquiry and was further confused by a subsequent letter from the insurance company returning the late premium payment. In the letter, the insurance company concluded that the family business had ignored a reasonable request for medical information and referred to the file on the policy as “closed,” but did not use the word “canceled.”

In the following year, the businessman died, and the insurance company denied coverage on the life insurance policy, claiming that it had canceled the policy when it closed its file, and that the acceptance of the return of the late premium showed that the business knew that it did not have life insurance in place.

The family business sued for reinstatement of the policy, maintaining that it never received a timely premium bill in the last year of the policy, that it never received a final cancellation notice, and that it accepted the refunded premium because it assumed that it was an overpayment.

The Pennsylvania court first noted that the family business was entitled to clear and timely annual premium bills. Even though the insurance policy did not require annual bills, the court ruled that where an insurance company establishes a pattern of sending bills the company must continue to do so.

The court further found that, where the consumer needs information and guidance about the amount owed on a life insurance policy, the company must send bills. Consumers are not obliged independently to investigate and monitor the status of their life insurance premium payments. Instead, it is the obligation of the insurance company to keep the consumer informed of the premiums owed on the policy.

Mailbox Rule

The court then found that the insurance company was not entitled to the protection of “the mailbox rule.” The mailbox rule provides that proof that something was mailed creates a “presumption” that the mailed item was actually received by the recipient. In order to take advantage of the mailbox rule, the insurance company had to prove that it put an accurately addressed, postage-prepaid premium notice in a U.S. Post Office mail drop or that its employees, in the regular course of business, prepared and signed the premium notice and put it in the place they regularly used to send out mail.

All that the insurance company could prove was that its internal records showed a premium notice was created. It offered no testimony or records that the notice was put in an office mailroom or was deposited in a U.S. Post Office. In fact, its employees candidly testified that the automated mailing equipment they used sometimes ripped or destroyed some of the outgoing mail.

Because the insurance company could not prove that it mailed the premium notice and some of its subsequent communications, the policy was reinstated by the court.

The mailbox rule provides all litigants in any kind of lawsuit with a powerful presumption that a document was actually received. One of the best ways to secure proof of mailing is to use the U.S. Post Office Certificate of Mailing. Different from registered or certified mail receipts, the Certificate of Mailing simply serves as a receipt from the U.S. Post Office for a piece of outgoing mail.

Another way for a business to meet the mailbox rule is to have an employee make a memorandum of his or her actually mailing the item. Testimony by an employee that a particular item was mailed can be sufficient to trigger the mailbox rule.