American Association of Justice

Lapse Due to Missed Premium Payments

Life insurance denials can occur when the policyholder has not timely made premium payments for the policy. These are referred to as "lapse" cases.

Under New Jersey and New York life insurance laws, a policy cannot be cancelled immediately after a payment is late. State laws provide a grace period (often 31 or 61 days) after the payment due date before the policy can be terminated due to non-payment. Most life insurance policies, too, contain a similar grace period in their terms and conditions. The length of the grace period may be dependent upon whether the premiums are due on a monthly, quarterly or yearly basis, and on whether it is a term policy or a cash value policy.

The life insurance company may also be required to send a premium notice to the insured a sufficient amount of time before the due date. In New York, the applicable law that governs premium notices is Insurance Law § 3211.

Sometimes, even when the policyholder has not made a timely premium payment, there still may be a right to reinstate the policy or collect the death benefit. Here are some common scenarios where a knowledgeable life insurance attorney can defeat a policy lapse.

Mailing of the notice: on some occasions, life insurance companies do not actually mail the premium notice to their customers. In that case, the missed payment is the fault of the insurance company. Insurance companies have the burden of proof to show that they timely mailed a premium notice to the insured and that it was mailed to the correct address. They must do this by showing actual proof of mailing or providing a detailed description of the mailing process from a knowledgeable individual.

Inadequate timing: if the insurance company does not mail the premium notice a sufficient period of time in advance of the due date, the insured will be deprived of having a proper opportunity to pay it. In some cases, the failure to provide sufficient notice will render the premium notice invalid and keep the policy in force.

Vague or unclear notice: life insurance companies cannot just mail any notice to the insured, but rather, the notice must adequately inform the insured of the date and amount due, and where payment should be sent. Importantly, too, it must clearly inform the insured that the policy will lapse if payment is not timely made. When premium notices are vague, unclear, or insufficient in this regard, a lapsed policy can be revived by the courts.

Irregular payment history: most everyone has paid a bill late, and some people have a chronic history of making late payments. Sometimes insurance companies will forgive a history of late payments over a period of time, simply because they want to make a profit by receiving premiums from an insured who otherwise seems healthy and like he is a low risk. However, when the insured suffers an untimely death, insurers will often for the first time strictly enforce payment due dates. A skilled life insurance attorney can argue under the legal principles of waiver and estoppel that the premium due date should be relaxed in accord with the prior late payment history.

The Unfair Result of Lapsed Coverage

Insurance companies will not hesitate to terminate a life insurance policy due to a late or missed payment. In fact, doing so is part of their business model, because they are able to collect premiums from a customer for years and then terminate coverage with no responsibility to ever potentially pay a death benefit. It is a scenario that earns pure profit for the insurance company. For the consumer, however, it can mean thousands of dollars that have been wasted, not to mention the loss of an important death benefit to provide for a loved one. Moreover, the insured often cannot purchase a new policy, say if he is older at the time or in poor health, because he will be uninsurable or the premiums will be much more expensive. 

The position taken by insurance companies in lapse cases is often unduly harsh. We have litigated lapse cases where a payment was only one day late! We won that case by pointing out that the premium notices were unclear and even contradictory. 

In other contexts, the penalty for a late payment is not nearly so severe: a mortgage company cannot foreclose your home for one late payment, nor can an auto loan company repossess your vehicle if you are late on your car payment, and likewise, credit card companies can hit you with outrageous fees and penalties, but the harm they can inflict is not so severe as an insured who loses the thousands of dollars he paid for valuable life insurance coverage over a period of years.

Read Eric Dinnocenzo's New York Law Journal article entitled "Defenses to Life Insurance Lapses for Non-Payment of Premiums."

With vast experience as a New York and New Jersey life insurance attorney, Eric Dinnocenzo knows how to fight lapse cases and win. Please contact him at (212) 933-1675 for a free consultation to determine if you have a valid life insurance denial claim.

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