This case involves an intoxication exclusion in an individual disability policy. Russell applied to Penn Life for the policy in 1999. The policy was issued with an intoxication exclusion, providing that Penn Life would “not be liable for any loss which result[ed] from [the insured] being: (1) intoxicated; or (2) under the influence of any narcotic unless taken on the advice of a Physician.”
In 2002, Russell increased his monthly disability benefit, and he received a receipt with similar language. Neither party disputed that the policy contained the intoxication exclusion.
In 2008, Russell was injured in a motorcycle accident and was issued a citation for driving under the influence. He applied for disability benefits under the policy, which Penn Life paid until it learned that alcohol may have been a factor in the accident.
Russell filed suit, alleging bad faith refusal to pay first-party benefits, breach of contract to procure insurance, and breach of contract. Penn Life filed a counterclaim for declaratory judgment that Russell's loss was not covered because of the intoxication exclusion.
The South Carolina Circuit Court held that a statute, S.C Code § 38–71–30, prevented Penn Life from enforcing the intoxication exclusion, because its proof of delivery of the policy was insufficient. That statute provides:
"Every insurer doing accident or health insurance business in the State shall deliver with each policy of insurance issued by it a copy of the application made by the insured so that the whole contract appears in the application and policy of insurance. If the insurer violates this requirement, no defense is allowed to the policy on account of anything contained in or omitted from the application. If the insurance policy is issued upon an oral application, no defense is allowed to the policy on account of anything contained in or omitted from the oral application."
On appeal, the South Carolina Court of Appeals reversed, finding that a violation of the statute only prohibits an insurer’s use of any defense “on account of anything contained in or omitted from the application.” The statute does not bar an insurer from asserting defenses based on the terms of the policy itself.
Because the intoxication exclusion was contained within the policy, rather than within the application, the Court of Appeals held that § 38–71–30 did not prohibit Penn Life from enforcing the exclusion.
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