The Importance of a "Lapse Designee" on Long Term Care Insurance

A U.S. district court has ruled that the purchaser of a long-term care insurance policy may sue for breach of contract the insurance company that failed to notify the purchaser's son, as required in the contract, that the policy was in danger of lapsing. Waskul v. Metropolitan Life Insurance Company, (U.S. Dist. Ct., E.D. Mich., No. 17-13932, July 31, 2018).

Long term care insurance is a valuable tool in planning for long term care costs.  Policy lapse is a serious problem, though, given that an insured may experience periods of poor health or disability during which s/he may be unable to pay premiums.   If premiums are not paid timely, and the policy lapses, the financial investment in the policy is lost, and more importantly, the protection afforded by the insurance benefit is surrendered.  

Tools to prevent lapse include automatic payment, prepayment, and the appointment of a loss designee.  Automatic payment and prepayment work well to prevent policy lapse so long as funds are available and sufficient opportunity is afforded the family to recognize and fulfill the need to pay the premium.  This is uncertain, at best, especially over protracted periods of illness or disability.  A "loss designee" is an appointed person other than the insured who is notified of policy lapse, thereby helping to ensure that the premium is paid. 

Carl Waskul purchased a long-term care insurance policy from Metropolitan Life Insurance Company in 1996. The policy was guaranteed renewable, which meant that as long as Mr. Waskul paid the premiums, the company could not cancel the policy. In 2003, Mr. Waskul designated his son as "lapse designee" to receive notice if Mr. Waskul's policy was about to lapse for non-payment. In 2015, Mr. Waskul was diagnosed as cognitively impaired and failed to pay his premium in February 2016. The long-term care insurance company did not notify Mr. Waskul's son that the premium had not been paid.

When Mr. Waskul's children contacted the insurance company in 2017 for a coverage determination, they were told his policy had been cancelled. Mr. Waskul sued the insurance company for breach of contract and fraudulent misrepresentation. The insurance company filed a motion to dismiss.

The U.S. District Court for the Eastern District of Michigan, Southern Division, denied the motion to dismiss the breach of contract claim, but granted the motion to dismiss the fraudulent misrepresentation claim. The court ruled that Mr. Waskul successfully stated a claim that the insurance company did not meet its obligation under the contract "when it neglected to inform his son that [Mr. Waskul] had failed to pay his policy premium in February 2016." However, the court ruled that Mr. Waskul does not state a claim for fraudulent misrepresentation because the company did designate his son as lapse designee. According to the court, failure to follow through "does not show that [the insurance company] knowingly made the false representation that [Mr. Waskul] could appoint a lapse designee.

Although it is little consolation that an insured has a right to sue for the lapse if a policy lapses, the reality is that legal action may return to an insured and his or her family some of the investment in the policy.  Regardless, the case demonstrates why an insured should designate a lapse designee, whether or not such a designation is permitted by the terms of the policy.  Without a "lapse designee," there is no protection for the insured or the insured's family when illness or disability prevents payment of the premium.