Life Insurance – ERISA And Misrepresentation

Here is a case for insureds in Grand Prairie, Weatherford, Mineral Wells, Arlington, Dallas, Fort Worth, and other places in Texas to think about.
This case was decided by the United States Court of Appeals for the Fifth Circuit, on April 13, 2011. The style of the case is, Araceli Medina Garcia v. American United Life Insurance Company. Here is some background.
In January 2006, Salvador DeReza Garcia died in a car accident. At the time of this death, Salvador was covered under a group life and accidental death insurance policy issued by American United Life Insurance Company (AUL) and subject to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. Sections 1001-46. Salvador’s wife, Araceli Medina Garcia, submitted a claim under this policy following his death. AUL denied her claim because Salvador was living illegally in the United States and made material misrepresentations regarding his identity during the application process. A lawsuit was filed, the district court ruled in AUL’s favor. This appeal followed. This appeals court affirmed the ruling of the trial court.
Salvador’s employer, Tatum Excavating, Inc. and Tatum Excavating, Inc. Employee Benefit Plan (collectively, Tatum) signed a contract for a group policy for several of its employees with AUL. The policy offered life insurance coverage in the amount of $20,000 per eligible employee. A few months after Tatum entered into this agreement, Salvador signed a group enrollment form to apply for the policy (hereinafter the enrollment form). The enrollment form reflected Salvador’s alleged date of birth as August 19, 1966, and purported Social Security Number as 623-90-3634. Later, Araceli was designated as the sole beneficiary.
After Salvador’s death, Tatum sent AUL a proof of death form, notifying AUL of Salvador’s death, Araceli’s Mexican identification card, and Salvador’s death certificate, identifying his date of birth as August, 19, 1966, place of birth as Mexico City, and SSN as 623-90-3634. In order to verify eligibility, AUL requested additional documentation because, based on Salvador’s place of birth, there was no indication from the documents that Tatum sent that Salvador was a US citizen. Tatum then sent AUL another copy of Araceli’s alien registration card and a copy of Salvador’s I-9 form, which reflected a SSN for Salvador of 623-90-3634 and Alien Resident Card number 048-931-385 with an expiration date of May 26, 2009.
AUL immediately began an eligibility investigation, seeking verification of Salvador’s alien status and the SSN. The investigation reflected that the SSN did not belong to Salvador, AUL sent Araceli a letter rescinding Salvador’s policy and denying Araceli’s claim. Upon Araceli’s appeal, a reinvestigation was initiated that confirmed the prior results. Specifically, the SSN belonged to a woman who died in 1966 and there was not a number matching Salvador’s name. Further the Department of Homeland Security (DHS) had no information in their system that matched the information provided by Salvador.
One thing relevant here is that as with all ERISA claims, federal law applies rather than state law. This is relevant because in this case the ruling was against coverage whereas under state law the result would have probably been the opposite.
Under federal standards in this case, the appeals court reviewed the trial court’s ruling based on an “abuse of discretion” standard.
The writing related to the enrollment form states, “the undersigned understands and agrees … benefits under any policy will be paid only if AUL decides in its discretion the applicant is entitled to them.” This gives AUL discretion to make claims determinations. According to this court, “… arguements to the contrary are unavailing.”
In determining whether the claim denial was proper, the court considered three factors in its review: 1) whether the administrator gave the policy a uniform construction; 2) whether the administrator’s interpretation is consistent with a fair reading of the policy; and 3) whether different interpretations of the policy will result in unanticipated costs. The court then said “An administrator’s decision is ‘fair and reasonable,’ if the decision is supported by substantial evidence.”
So, in this case, AUL had to show that the misrepresentation in Salvador’s application for coverage was material. It is undisputed that the SSN was false and that Salvador was not legally in the US to work or even be present. Araceli’s arguement was that this was not a material misrepresentation.
This court said Salvador’s misrepresentations were clearly material and of the type that would have presented AUL from issuing the policy. A SSN is an integral part of the process by which a party’s identity can be verified. Because Salvador provided a false SSN and inhibited AUL’s ability to verify his identity, he not only placed AUL at risk of severe penalties, but also inhibited AUL’s ability to assess the underwriting risk involved in issuing him the policy.
They then said the Department of the Treasury’s Office of Foreign Assets Control (OFAC) maintains the Specially Designated Nationals List (the List), which includes the names of individuals designated, for example, as terrorists, drug dealers, and money launderers. Insurance companies are prohibited from engaging in transactions that in any way involve individuals on the List. Punishments for violations of this law can be substantial. As AUL explained in its denial letter to Araceli, “the misrepresentaion respecting Salvador’s identity and his ability to work and reside in the U.S. would not permit AUL’s compliance with” federal regulations, regarding the List. Thus, Salvador’s misrepresentation made AUL vulnerable to substantial civil and criminal penalties, such as those enumerated in, 50 U.S.C., Section 1750.
There are a large number of people residing and working in the Texas who are here illegally. For the most part these people obey the laws, both criminal and civil. They do things like, buy life insurance. This case is relevant in understanding the laws that may affect whether a life insurance company is going to have to pay a claim. An experienced Insurance Law Attorney must be consulted in these situations. There are often times things that can be done to make sure the coverage purchased is provided when a claim is made for benefits.