June 4, 1874, Lieutenant Colonel George A. Cutler, age 34, sat down with his life insurance agent, I.F.A. Studdart, New York Life agent, to purchase a life insurance policy. Knowing he was going into harm’s way, he desired to provide for his wife, Libbie, in the event of his death. He purchased a whole life policy for $5,000 with Libbie as the only named beneficiary. Two years and 21 days later he found himself surrounded by several thousand Lakota and Cheyenne warriors intent on taking his life. He died there at the Battle of the Greasy Grass, so named by the Indian warriors, and The Battle of the Little Bighorn, so named by the white soldiers and identified as the spot of his death on the death certificate used to verify his death, which allowed New York Life to pay Libbie the death benefit of $5,000 minus a $250 loan outstanding against the policy. That policy in today’s economy would have been worth over $500,000 to the beneficiary.

New York Life had charged a 5% military surcharge to cover that extra risk, so there was no hesitancy to pay the proceeds to Libbie. She declined any payment from the government so other soldiers’ surviving widows perhaps would have a little more money to help them in their hour of need.

Some pundits who thought Custer had used poor judgment in going to battle that day suggested the insurance company should have refused payment using the suicide clause as their reason to deny the claim. Perhaps they may have had a point

questioning Custer’s judgement, but they would still have been 21 days late for even that exclusion to have been in effect. The suicide clause in the policy expired after 2 years so that hurdle had already been cleared.

The life insurance industry has always prided itself in assuring the buying public it would keep its commitment to pay death benefit so long as consumer met premium payment on timely basis. So when does that expectation get challenged?

After the contestable period on a life policy, which is generally two years, about the only things which could cause a beneficiary not to receive death benefits would be

  • 1) a homicide where the beneficiary was a contributor to the death and
  • 2) material misrepresentation at the time of application which would have affected the policy being issued to begin with.
  • 3) involvement in terrorist act.

Homicide

In the first case, no one should be able to financially benefit from a criminal activity. Having said that, the insurance company would still have to look at the payment going to the secondary beneficiaries. They should not be punished for the criminal behavior of the first beneficiary unless they, too, contributed to the demise of the insured. The funds would still have to be paid to either the next beneficiary in line as set by state statutes or given to an interpleader who would determine appropriate payment to deserving party.

An interpleader is used when the insurance company knows the proceeds are due someone but it’s not clear who they should be paying them to. This allows the insurance company to fulfill its fiduciary obligation without having all the expense involved with having to defend its decisions on distribution of funds to interested parties.

A case in point:

A dairy farmer in North Idaho had taken his hay truck across the Canada-United States border to bring home hay he had purchased in Canada. It was late in the afternoon with the sun going down. After clearing customs he stopped on the U.S. side of the border to check the binders holding the hay on the truck. He turned on his hazard lights, set his brakes, and climbed out of the truck.

The spot where he pulled over was on a stretch of road which had a slow curve in its construction. The spot appeared wide enough and visibility both ways allowed any approaching traffic to see him clearly so they could proceed without concern for safety.

He had checked his binders and had crawled under the truck to check his tires when suddenly the silence of the afternoon was shattered by the sound of two vehicles colliding with one another. One of them was the truck full of hay. It lurched forward with the duel tires coming to rest just short of crushing the ribs of the unsuspecting driver.

He crawled out from underneath the truck and went around the truck to see what had hit him. A grim sight met his view.

A Canadian car with five adult occupants had come around the corner and, with no skid marks or any sign of attempting to stop, plowed into the back of the truck. The height of the truck allowed the car to slide under the bed of the truck penetrating all the way to the windshield before any impact. The impact crushed the vehicle all the way to the back window of the car. When the tow truck arrived and pulled the vehicles apart, all five passengers were found decapitated from the violence of the crash.

The Idaho highway patrolman in investigating the accident scene discovered the occupants of the vehicle had been drinking; and later when an autopsy was performed, it was concluded the driver was well under the influence of alcohol.

In filling out his accident report, the highway patrolman also noted the truck driver’s license had a notation he was only to drive during daylight hours due to his impaired night vision.

It was also apparent from the pictures the patrolman took that the truck driver could have pulled off the road at a wider spot than he did. The truck would not have been on the curved part of the road at all, thereby reducing the risk of an accident.

Upon further review it was discovered each of the five Canadians had minor children still at home dependent upon their fathers.

When the adjusters from the U.S. insurance company and the Canadian insurance company met, they concluded that with the complications of different citizenships, difficulty with determining liability percentages, and minor children involved, they would agree to turn their funds to an interpleader and allow him to work out a fair compromise and settlement. By taking that action, each insurance company was relieved of any future litigation and expense. As a point of interest, after two years of following the accident, I lost track of the process and do not know how it was finally settled. I do know the dairyman kept his dairy but gave up his driver’s license for good.

Material Representation

A second reason an insurance company would not pay a death claim would be for material misrepresentation. This is an act or statement at the time of application for insurance on the part of the insured or agent which would have had an impact on the issuance of a policy. It must be proven by the insurance company that said statement or action would have altered the decision to issue the insurance policy in order for payment to be denied.

Material misrepresentation could be of three types:

  • fraudulent
  • negligent
  • Innocent.

According to The Law Dictionary, “. . . fraudulent misrepresentation is very serious. It occurs when a party to a contract knowingly makes an untrue statement of fact which induces the other party to enter that contract. It also occurs when the party either does not believe the truth of his or her statement of fact or is reckless as regards its truth. A claimant of alleged fraudulent misrepresentation can claim both rescission, which will set the contract aside, and damages”. (Black’s Law Dictionary From online Legal Dictionary and Ed.)

Lying about or failing to divulge an applicant’s true profession as an underground miner, using explosives by simply listing occupation as “heavy equipment operator in a open pit operation;” or participation in deep sea diving where death could be attributed are two examples of fraudulent misrepresentation. Either of those misrepresentations could be used by the insurance company to refuse death payment.

“Negligent misrepresentation: A party that is trying to induce another party to a contract has a duty to ensure that reasonable care is taken as regards to accuracy of any representation of fact that may lead the latter party to enter the contract. If such reasonable care to ensure the truth of a statement is not take then the wronged party may be the victim of negligent misrepresentation. Negligent misrepresentation can also occur in some cases when a party makes a careless statement of fact or does not have sufficient reason for believing in that statement’s truth. As with fraudulent misrepresentation, claimant can pursue both damages and a rescission of the contract.” ( Black’s Law Dictionary From online Legal Dictionary and Ed.)

An agent knowingly writes down the wrong year of insured’s birth in order to get a lower premium for a client could have severe consequences if at death the date of birth on the birth certificate and the date of birth on the application don’t match. In that event, the insurance company, knowing they would have issued the contract, will probably adjust the amount of the death claim by collecting the proper premium which should have been paid over the lifetime of the contract.

“Innocent misrepresentation: In innocent misrepresentation, a misrepresentation that has induced a party into a contract has occurred, but the person making the misrepresentation had reasonable grounds for believing it was true at the time the representation was made. A claimant who has been the victim of innocent misrepresentation can still pursue damages, but he or she cannot pursue rescission. Again, to pursue damages, it must be shown the claimant suffered a loss because of the misrepresentation.” ( Black’s Law Dictionary From online Legal Dictionary and Ed.)

Example, if the insured’s legal name is Richard Q. Public but signed his application as Dick Q. Public would not in any way influence the insurance company not to enter a contract. At death they would simply verify the legal name and pay beneficiary accordingly.

Involvement in Terrorist Act  

Now a new challenge to death benefit being paid was raised in the Minnesota legislature. A bill was proposed in the 2017 session which would deny life insurance payments to any person convicted of aiding or committing terrorist  acts. (http://www.house.leg.state.mn.us/cco/journals/2017). This bill passed with 172 votes for and 2 votes against. Both of those who dissented were of the Muslim faith and felt the bill was too political with its overtones of support for Israel’s position toward those who opposed Israel.

The federal government has already dealt with what to do with federal benefits payable to those who commit acts of terror. Under the “Terrorist Penalties Enhancement Act of 2003” access to any federally funded programs available to the public, i.e. social security benefits, federal student loans or grants, small business loans, medicare or medicaid, etc., is denied. Since life insurance contracts are regulated by state departments of insurance, that act doesn’t address any issues regarding the disbursement of life insurance proceeds to those involved in terrorist acts, so the Minnesota bill closed that loophole.

It has not at this point seemed to have generated enough public interest to have other states enter the discussion. In my limited research I have not found any other state whose bylaws govern the procedure of paying out death claims generated by those who died committing acts of terror. This will be an issue which will probably take court action to determine what should be done. In the meantime it will be interesting to see how one state law will be allowed to reach across state lines when a resident of Minnesota commits an act of terrorism and loses their his/her in another state. If the insurance company is domiciled in another state, can it be held to different procedures than those incorporated in Minnesota. One thing is for certain, this will be a topic of debate in many insurance boardrooms as to how to proceed.

In summary, the insured on an insurance policy has nothing to fear regarding the death benefit being paid to the proper beneficiary if good citizenship is exercised and honesty governs their actions. Libbie Custer could attest to that back in 1876 and could still attest to it today.