Life Insurance And Citizenship Status And ERISA

Llano life insurance agents need to know about this case from the United States 5th Circuit.  It is a 2011 opinion styled, Araceli Medina Garcia v. American United Life Insurance Company.

Araceli’s husband, Salvador, died in a car accident.  He had a policy with American through his employer.  The policy was an ERISA plan.  American’s plan administrator denied Araceli’s claim for benefits because Salvador was living illegally in the U.S.  Araceli filed a lawsuit seeking benefits.  On Salvador’s policy enrollment form he indicated his date of birth and social security number.

When Araceli made a claim for benefits, she submitted a proof of death form, her Mexican identification card, and Salvador’s death certificate, identifying his date of birth as above and his place of birth as Mexico City and the above social security number.  No documents reflected Salvador being a U.S. citizen.  American was then sent Araceli’s alien registration card and a copy of Salvador’s I-9 form, which was expired.

American’s investigation indicated the social security number was not his and the claim was denied.  Further investigation showed that DHS did not have any information on Salvador either.

Both sides filed motions for summary judgement.  Judgment was granted in favor of American.

In an ERISA claim, the plan administrator’s decision is reviewed based on an abuse of discretion standard.  As a general rule, intentional misrepresentation by an insurance policy applicant of a material fact, if relied on by the insurer, is ground for rescission of the policy.  It is undisputed that Salvador provided a false SSN, and Araceli did not argue that Salvador had a valid SSN or that he was legally entitled to be present and work in the United States.  Araceli’s argument is that Salvador’s providing a false SSN on his application was not a material misrepresentation that could justify American’s decision to rescind Salvador’s coverage and deny Araceli’s claim.

An insured’s misrepresentation is material if the facts that were misrepresented or omitted would have affected the insurance company’s decision to issue the policy.

Salvador’s misrepresentations were clearly material and of the type that would have prevented AUL from issuing the policy.  A SSN is an integral part of the process by which a party’s identification can be verified.  Because Salvador provided a false SSN and inhibited American’s ability to verify his identity, he not only placed American at risk of severe penalties, but also inhibited American’s ability to assess the underwriting risk involved in issuing him the policy.

To begin, the Treasury Department of Foreign Assets Control maintains the Specially Designated Nationals List, which includes the names of individuals designated, for example, as terrorists, drug dealers, and money launderers.  C.F.R., Section 595.204, prohibits insurance companies from engaging in transactions that in any way involve individuals on the list.  Punishment for violations of this law can be substantial.  Notably, criminal penalties can reach up to $1,000,000 and 20 years of imprisonment.  As American explained in its denial letter to Araceli, the misrepresentations respecting Salvador’s identity and his ability to work and reside in the U.S. would not permit American’s compliance with federal regulations regarding the list.  Thus, Salvador’s misrepresentations made American vulnerable to substantial civil and criminal penalties.

Additionally, without accurate information about a proposed insured’s identity, an insurance company cannot properly assess the business risk involved in issuing a policy.

Araceli was asking the court to overlook the fact that Salvador submitted a false SSN and exposed American to substantial liability.  This, the court would not do.