Paperwork Screw-Ups by Employers Deny Families Life-Insurance Payouts
The denials are hitting families with policies purchased through employers’ benefits programs, according to government officials and consumer lawsuits. The U.S. Labor Department last month reached a settlement with Prudential Financial over what one official termed a “game of gotcha” to wrongfully deny benefits. The department said it is investigating other companies’ practices.
Prudential, one of the nation’s biggest life insurers by assets, said its goal is “doing business the right way.” It agreed to tighten its procedures with employers and will voluntarily pay claims that had been denied after June 2019 solely because of the employer errors.
Officials said they found that Prudential had improperly denied more than 200 claims in recent years, totaling as much as $7 million. During this period, the insurer said it processed more than 255,000 group-life claims and paid out approximately $12 billion.
The department’s probe focuses on supplemental life insurance, which is coverage beyond the basic life policies that many companies offer free to their employees. Workers pay for the extra coverage.
In some benefits programs, the employer rather than the insurer is in charge of many administrative tasks, including calculating premiums and ensuring that employees complete health forms required for extra coverage.
In a relatively small number of instances, employers fail to get workers to complete the forms, yet they deduct premiums from their paychecks for the coverage and send the money to the insurers, officials say.
This existing practice can leave “grieving families without the life insurance for which their loved ones had paid,” when employers drop the ball, Solicitor of Labor Seema Nanda said last month in announcing the action against Prudential.
Supplemental life-insurance policies typically require “evidence of insurability” questionnaires that ask about medical issues such as diabetes, liver disease and cancers. That enables insurers to avoid selling big policies to people in higher-risk health categories.
Handling of administrative chores by employers, not the insurers, “has been the norm” for decades and allows insurers to offer life insurance to workers at relatively low costs, the American Council of Life Insurers wrote in a 2021 friend-of-the-court brief in support of an insurer sued over a denial.
The premiums typically are aggregated rather than individually spelled out in programs administered by employers. Many insurers don’t have arrangements for determining if premiums are coming from workers whose health forms weren’t submitted and approved. They may sometimes get lists of insured workers.
Instead, some insurers run their checks when a death claim arrives, according to Labor Department officials and the insurance industry itself.
Lawsuits brought by families detail denials by a range of insurers. In a letter that is part of a lawsuit filed in federal court in Maine in 2019, Lorna Shields asked Mutual of Omaha to “honor your commitment” to pay benefits for her recently deceased husband, who died of cancer in 2018 after paying premiums for a decade.
“How can Mutual of Omaha wash their hands of this situation?” she wrote.
The insurer had paid $236,000 of the death benefit that hadn’t required proof of good health, while denying an additional $100,000 that did require such proof, according to one of her lawyers, Trevor Savage.
The insurer declined to comment. It said in its court filings that the employer, Duramax Marine, was responsible for the absence of the required “Evidence of Good Health” form.
Ms. Shields reached settlements with Duramax and the insurer. Christopher Taintor, another lawyer for Ms. Shields, said Duramax “behaved quite honorably” in the wake of Mr. Shields’ death, but declined to comment further. Tammy Simsa, chief financial officer of Duramax, said the company couldn’t comment because of a confidentiality agreement.
In the Prudential settlement with the Labor Department, the insurer agreed to notify its employer clients that they must confirm that Prudential has approved any required health forms for workers’ supplemental coverage before deducting premiums from paychecks. If the employers don’t do so, “they may be liable to the beneficiaries” of any such employees.
Typically, either the insurer or the employer notifies workers when their request for the additional coverage is approved or denied, and insurers often provide customer-service contact information on the health forms.
The denials identified by the Labor Department “represent a very small subset of supplemental group life insurance claims,” Prudential said in a statement, and the amounts at issue aren’t material to the company. “Where Prudential serves as record-keeper, we have excellent controls in place and have successfully avoided these issues,” it said.
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