Appeals Court Clarifies ‘Time of Loss’ In Disability Coverage

A federal appeals court has reversed a judgement entered in favor of Northwestern Mutual, which rescinded a Wisconsin dentist’s disability policy. The dentist was later forced to give up his practice after suffering from neurological and autoimmune symptoms.

Evidence presented by Northwestern Mutual was insufficient and did not address the “specific insurance policy at issue in this case,” the 8th U.S. Circuit Court of Appeals wrote in a 2-1 decision earlier this month.

The dentist, Douglas G. Weiher, had applied on May 4, 2010, for a Northwestern Mutual policy that agreed to pay $8,400 in monthly benefits. Northwestern Mutual argued that Weiher promised he would cancel a disability policy he had with Great-West within three months of applying for the Northwestern Mutual policy.

When Northwestern Mutual discovered that the dentist had never canceled the contract with Great-West, it went to court to rescind Weiher’s policy. The district court ruled in favor of Northwestern Mutual. Weiher, who claimed he forgot the cancel the policy, appealed the judgement.

In a majority opinion, U.S. Circuit Judge Jane Kelly wrote that under Wisconsin law, the question wasn’t whether — as Northwestern Mutual argued — the carrier would not have issued the policy had it known Weiher would continue coverage under his Great-West policy.

The question is whether the failure to cancel the Northwestern Mutual policy “increased the risk at the time of the loss, i.e., when Weiher became disabled and made a claim for benefits in 2012,” three years after taking out the Northwestern Mutual contract.

Even if Northwestern Mutual had shown that Weiher schemed and intentionally overinsured himself in 2009 to collect from as many as three disability policies — one from Unum, another from Great-West and a third from Northwestern Mutual — Northwestern Mutual never addressed whether insuring Weiher in 2009 meant that the risk to the company had increased by 2012, the court said.

“Weiher, on the other hand, offered evidence showing that, based on his income in 2012, he was not over-insured at the time of loss,” Judge Kelly wrote. Weiher’s tax returns showed he had annual earned income of $271,500, according to court documents.

But in a dissenting opinion, U.S. Circuit Judge James B. Loken said Weiher’s decision to continue paying premiums on the Great-West policy amounted to breach of contract.

Canceling the Great-West policy was a condition of Northwestern Mutual’s issuing Weiher disability coverage, he wrote.

“His breach of that material promise increased the risk of enlarging his monthly disability benefit beyond what Northwestern’s financial underwriting standards allowed,” Loken wrote in his seven-page dissent.

The question isn’t whether Northwestern Mutual would have issued the same policy to Weiher in 2012 with the Great-West policy still in effect, but whether Weiher’s failure to cancel the Great-West policy increased Northwestern Mutual’s risk in 2012, Loken also said.

In 2012, Weiher could have easily increased his disability benefits by canceling the Great-West policy and applying to Northwestern Mutual for higher benefits under the policy at issue or through a second policy, Loken wrote.

Or, Weiher could have kept the Great-West policy, terminated the Northwestern Mutual policy at issue and applied once more to either carrier or still another carrier for higher disability benefits based on the income he earned in 2012.

Instead, Weiher chose to continue breaching his contractual commitment to Northwestern Mutual, the judge wrote.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].