Department of Mental Health v. Continental Sec. Life Ins. Co., WD
| Decision Date | 26 May 1992 |
| Docket Number | No. WD,WD |
| Court | Missouri Court of Appeals |
| Parties | DEPARTMENT OF MENTAL HEALTH, State of Missouri, Appellant, v. CONTINENTAL SECURITY LIFE INSURANCE COMPANY, Appellant, Missouri Life & Health Insurance Guaranty Association, Ted Sanditz, Steve Bledsoe, Mary K. Holdgraf, Thomas Ittner, Robert J. Banstetter, Bryan Cox, Robert O. Fleckenstein, Robert C. Corn, Stephen S. Duncan and William M. Symon, Respondents. 45373. |
William L. Webster, Atty. Gen., Lee Vardell, Asst. Atty. Gen., Jefferson City, for Department of Mental Health, State of Mo.
Jeffrey P. Ray, William R. Price, Jr., Kansas City, for Missouri Life & Health Ins. Guar. Co.
Ronald R. McMillin, Dana L. Frese, Jefferson City, for Continental Sec. Life Ins. Co.
Before LOWENSTEIN, C.J., and BERREY and SPINDEN, JJ.
The underlying question in this suit for declaratory judgment involves the responsibilities of the Missouri Life and Health Guaranty Association (MIGA) under §§ 376.715 .758, RSMo Cum.Supp.1991, to the owner-policyholder of a group policy issued by an insolvent insurance company. The policy in question is held by the Missouri Department of Mental Health on behalf of its patients, and gives the patients the right to convert the policy to an individual policy upon leaving the care of the Department. When the issuer, Continental Security Life (CSL), was declared insolvent in 1989, the majority of the premiums on the individual patients were paid-up, resulting in nearly $14,000,000 in benefits due DMH's patients upon their deaths. The appellant, the Department of Mental Health (DMH), on behalf of the individuals in the group, demands that respondent MIGA reinsure, replace or find substitute insurance coverage for the group death-benefits policy DMH bought from CSL, under §§ 376.715 .758, RSMo Cum.Supp.1991.
CSL was formed sometime in 1981. In May, 1981, DMH found it could utilize federal funds received by patients under the care of the mental health agency to fund no-cash value life insurance on the lives of those patients. Each policy was for $2000 and payable to the patient's estate; the sole purpose was to pay burial expenses of persons who died in the custody or the care of DMH. Under a stipulation which comprises the fact scenario, on January 27, 1982, DMH and CSL entered into a group contract, which was renewed in September, 1988. Under this contract DMH was the owner and could act on behalf of any person in the group. As per the policy, each person could convert to an individual policy on his or her being released from DMH, although the estate could not be replaced as the beneficiary, even if the person was no longer committed to the Department. The policy was therefore a "whole-life" policy, in that it could be paid-up years before the claim would come due upon the insured's death. Normally, group life policies are "term-life," with the policyholder paying members' premiums on an annual or semi-annual basis, and rights of conversion, once exercised, giving the individual the right to continue making regular premium payments. On October 20, 1988, a petition for receivership on behalf of CSL was filed. On July 7, 1989, the Order was entered. On August 31, 1989, CSL's receiver sent a letter to DMH stating that the policy was terminated immediately since claims after August 20, 1989 (45 days for CSL's being placed in receivership for liquidation) could not be paid. The patient certificate holders on whose behalf DMH has brought this suit are patients who were in the system on the date of insolvency; 7,490 persons in this group had fully paid up insurance (cost $2,935,373), while 693 patients had partially paid insurance (cost $119,951). The policy could be terminated by CSL on any "premium due date."
CSL, MIGA, and its board were made party defendants in DMH's declaratory judgment action. DMH's petition prayed for:
* MIGA to return unearned premiums to "client's of DMH formerly covered by group policy ..."
* MIGA to provide replacement coverage under § 376.724(5).
* MIGA to fund reserves of a replacement policy.
* MIGA "should be required to provide proper notification" to DMH.
DMH makes no requests for any former patient nor shows that any of the remaining patients could not qualify for an entirely new group policy acquired by DMH.
CSL filed a motion to dismiss, but stayed in the suit and has appealed along with DMH. The respondent is MIGA due to the trial court's entering summary judgment in its favor.
In ruling that MIGA had statutory authority to terminate the group policy without returning "unearned premiums or finding other insurance for DMH" the court ruled:
1) the individual directors of MIGA could not be personally sued, only the association itself. Section 376.715. This correct ruling has not been appealed.
2) The Missouri Act does not contemplate a "self-executory conversion privilege" to allow persons still in a group to convert to individual policies and thus eligible to receive substitute coverage from MIGA.
3) MIGA was only obligated to pay claims for forty-five days after CSL's going into receivership on person's still in DMH control (the only persons involved in this suit, not patient's who had been previously released).
4) The notice of termination to DMH met statutory muster.
5) Neither the act nor the CSL policy gives any remedy calling for a return of unearned premium to DMH, the policyholder.
The Missouri statutes setting up a guaranty association were adopted almost without change from the 1985 revised national act. In one form or another, forty-seven states have guaranty acts such as exists in Missouri. As originally adopted in 1970, by the National Association of Insurance Commissioners, and as applicable to the facts in the case at bar, the purpose of an insurance guaranty association is to protect covered persons against failure of performance of contractual obligations due to the insolvency of the carrier issuing the policy. See Dunham & Kinney, "Life and Health Insurance Guaranty Associations," Insurance Company Solvency 277-372, Practising Law Institute Course Handbook (1991), §§ 376.715-758 RSMo.1986; Clements v. Pittman, 765 S.W.2d 589, 590 (Mo. banc 1989). To protect policyholders and beneficiaries, MIGA is required to pay benefits and provide coverage, with limitations, to those whose insurance companies become insolvent. MIGA in effect steps into the shoes of the insolvent insurance company. To cover the cost of benefits and continued coverage, the Guaranty members are subject to an assessment, based upon the amount of premiums they write in the state that year. Unfortunately for the task of interpreting the finer points of the enabling act, there is a paucity of law in this state and elsewhere on the questions presented here as to the duties of a state guaranty association upon the insolvency of a company insuring a group with life insurance. Most judicial pronouncements cover the constitutionality of statutorily created associations, recovery of attorney fees and subrogation. Spencer, "Obligations of Guaranty Associations," Insurer Insolvency Revisited 535-543, ABA National Institute (Dec.1989).
Before addressing the points on appeal the controlling statute governing MIGA's responsibility is discussed. Under § 376.715.2, an association of insurers is created "to pay benefits and continue coverages as limited herein, and members of the association are subject to assessment to provide funds ..." § 376.715.3. The core of the MIGA act, controlling MIGA's actual responsibilities to the insured, is set out in only one section, § 376.724, which covers both impaired and insolvent carriers as well as group life and individual life policies. Those sub-sections pertaining to MIGA's duties to group life policies, § 376.724.4 and .5, are set out in full (emphasis added):
4. (1) If a member insurer is an insolvent insurer, the association shall, in its discretion, either;
(a) Guarantee, assume or reinsure, or cause to be guaranteed, assumed or reinsured, the policies or contracts of the insolvent insurer; or
(b) Assure payment of the contractual obligations of the insolvent insurer; and
(c) Provide such moneys, pledges, guarantees, or other means as are reasonably necessary to discharge such duties; or
(2) With respect only to life and health policies, provide benefits and coverages in accordance with subsection 5 of this section.
5. When proceeding under subsection 2 or 4 of this section, the association shall, with respect to only life and health insurance policies;
(1) Assure payment of benefits for premiums identical to the premiums and benefits, except for terms of conversion and renewability, that would have been payable under the policies of the insolvent insurer, for claims incurred:
(a) With respect to group policies, not later than the earlier of the next renewal date under such policies or contracts or forty-five days, but in no event less than thirty days, after the date on which the association becomes obligated with respect to such policies.
(b) With respect to individual policies, not later than the earlier of the next renewal date, if any, under such policies or one year, but in no event less than thirty days, from the date on which the association becomes obligated with respect to such policies;
(2) Make diligent efforts to provide all known insureds or group policyholders with respect to group policies thirty days notice of the termination of the benefits provided; and
(3) With respect to individual policies, make available to each known insured, or owner if other than the insured, and with respect to an individual formerly insured under a group policy who is not eligible for replacement group coverage, make available substitute coverage on an individual basis in accordance with the...
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