Traditionally, insurers have issued riders with life insurance policies and annuity contracts to add additional benefits to those provided in the basic documents.
These added features were often in the form of waiver of premium benefits, accidental death or dismemberment features or the addition of more family members as insureds under a policy. Recent years have seen a steady growth in the use of riders with variable annuity contracts. This growth is a result of insurers trying to keep their products appealing in the super-competitive VA business. It is also a result of the increasingly difficult process of clearing variable contract modifications through state insurance regulators and the Securities and Exchange Commission.
Put simply, the insurance companies often find it easier and more expeditious to develop and clear a 1- or 2-page rider than to modify a multi-page policy form.
These riders often contain contractual language that can have profound effects on both the insurer and on the owner of the life insurance policy or annuity contract. While using riders to offer additional benefits or otherwise modify basic contract provisions is generally not troublesome, we often wonder about the practical problems insurers face when trying to prove which riders are, in fact, applicable to a particular policy or contract.
This is an especially important consideration when the insurer uses a rider to eliminate a product feature. For instance, until it became clear that the nation was suffering from an extended "bear" stock market in the early 2000s, many VA insurers were offering very aggressive minimum death benefits in their VAs. These features could obligate the insurer to pay such an annuity death benefit calculated on the highest contract value or guaranteed interest accrual as of a specific point in time. This could happen even if the contract owner had withdrawn a large portion of the VA cash value.
These aggressive minimum death benefit features were established when everyone thought the stock market would continue to rise indefinitely. Once it became obvious that this was no longer the case, many insurers rushed to find a way to eliminate this expensive feature. The result? A rider, added to newly issued contracts, which eliminates the product feature.
The question is, how can the insurer prove that the rider was, in fact, issued with the basic contract? If the contract owner claims he or she never got the rider, how does the insurer disprove this allegation?
All insurance lawyers are aware that one of the basic legal principles applicable to insurance contracts is that they are viewed as "adhesion contracts." An adhesion contract is one that offers a standardized contract form to consumers without affording the consumer a realistic opportunity to bargain. In essence, such a contract is offered on a "take it or leave it" basis.
Many types of adhesion contracts are deemed to be unconscionable and the courts will void them. Others, such as life insurance policies and annuity contracts are permittedbut they are tightly regulated. Moreover, where there is a dispute between the party that prepared the contract and the person to whom the contract is issued, any ambiguities will be construed against the party that prepared the contract.
Thus, vague or sloppy language in annuity contracts or life insurance policies will permit the contract owner to prevail in a dispute with the insurer if the contract owners interpretation of vague or conflicting contractual provisions is reasonable.
This principle of law applicable to insurance contracts is what concerns us about the proliferation of riders that add or delete benefits to the contract owners. It is likely that in a dispute with a contract owner regarding whether a rider was, or was not, issued with the contract, the contract owner would prevail unless the insurer could clearly prove its case.
Indeed, in the case of any ambiguity, the burden of proof could easily shift from the contract owner to the insurer.
We have been informed that some insurers may have tried to issue riders to change the terms of contracts that have been issued already. Presumably this tactic was a result of confusion between a contract rider and a contract amendment. There are even annuity contracts in which the insurer inserted language reserving the right to change contract features without the permission of the contract owner.
It is doubtful that many courts would permit such provisions to deprive a contract owner of rights or benefits contained in the basic contract, unless required by law.
In view of the difficulty insurers often have in obtaining nationwide approval of insurance policies and annuity contracts on an expeditious basis, it is doubtful that there will be much decrease in the use of riders in the foreseeable future.
However, we hope insurers will implement contract issue procedures that will clearly define what riders or other types of amendments are applicable to a particular policy or contract. At the very least, they should include a listing of applicable riders or amendments with the rest of the contract data or specifications. This listing should not only show the name of the rider or amendment but the actual form number and date of origination.
Such a listing could go a long way to preclude contract owners and their plaintiffs counsel from claiming they were entitled to a benefit when they are not.
In general, it may also be advisable to rethink when basic contract features are to be modified by riders or amendmentsparticularly if these modifications take something away from the contract owner. In this context, VA insurers should also take care that the contract form, the prospectus and the sales literature are consistent.
As we have stated in previous articles, any inconsistency between policy form, prospectuses and sales literature gives the contract owner the option to choose which version he or she prefers. And, it is unlikely that such a choice will be in the best interests of the insurer.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are principals in the Westport, Conn., and Pompano Beach, Fla., law firm of Blazzard, Grodd & Hasenauer, P.C. You can reach them at: Norse.Blazzard@BGHPC.com.
Reproduced from National Underwriter Edition, June 4, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.