Changes could be on the horizon in South Carolina regarding the procedure for life insurers seeking to cancel policies due to material misrepresentations in the application. The South Carolina Legislature is considering adding a provision to the insurance code providing that cancellation cannot occur unless (a) there is a mutual cancellation agreement signed by all parties, or (b) the insurer initiates legal proceedings for annulment. This is consistent with the South Carolina Department of Insurance’s statement in Bulletin #2019-02 that unilateral terminations are prohibited under South Carolina law.
But the bill goes further. In its current form, if a life insurer wishes to terminate without initiating legal proceedings, it can send a letter to the policyholder or beneficiary by certified mail stating the basis for termination, but the letter must also include a disclosure of the rights, including the right to sue and seek legal advice. A premium refund check should accompany the letter, and wording should be included clearly stating that negotiation of the check signifies agreement to terminate the policy and that no death benefit will be payable. There was a debate in the Legislative Assembly about the level of detail that will be required regarding the perceived misrepresentations in the application and the basis for deciding that they were false.
The proposed legislation is reflected in House Bill H.4220 and Senate Bill S.744. The latest news on this legislation is that the House Labor, Trade and Industry Committee has advanced the bill out of committee to the full House for consideration, but many members of the House have demanded a debate, which resulted in the bill being put on the contested schedule. This will stall the bill and, as it is already March, it is unlikely that the bill can pass through both houses of the Legislative Assembly before they adjourn for the year. As this is the second year of a two-year session, the process of this legislation is expected to start all over again when the legislature reconvenes in 2023. Insurers should continue to monitor these bills , in case the legislature is able to push through before that term ends in May 2022.
Even without the enactment of the proposed law, life insurers in South Carolina must already avoid unilateral terminations. In the eyes of the Department of Insurance, an insurer would be prohibited from sending a termination letter with a refund check and then taking no further action. There must be some acknowledgment by the policyholder or beneficiary that they agree with the decision to cancel and, for the beneficiaries, that they will accept the refund of the premium in lieu of the benefit of death. In practice, this means that insurers must follow up and ask beneficiaries to sign and return a copy of the letter or a separate mutual termination agreement. Sometimes a letter from a South Carolina attorney can elicit a response. Ultimately, the silence of an insured or beneficiary will necessitate the filing of a declaratory judgment action to set aside, and often the mere service of the complaint helps insureds and beneficiaries understand the seriousness of the situation. , leading to a response to the insurer’s mutual cancellation request. .
Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 74