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A federal district court in California has ruled that an insurer did not act in bad faith in its investigation of whether its insured had died by committing suicide where his body had not been found.

The Case

In October 2005, Lincoln Benefit Life Company issued a life insurance policy on the life of Paulo F. Fundament with a face amount of $1,000,000. Mr. Fundament named his wife, Paige K. Fundament, as the beneficiary of the policy.

In his application for the policy, Mr. Fundament disclosed his history of depression, which led to higher premiums.

The policy stated that Lincoln Benefit would pay the death benefit “when we receive due proof that the insured has died. Death must occur while this policy is in force.” The policy defined “due proof of death” as a certified original copy of the insured's death certificate, a certified copy of a decree of a court of competent jurisdiction as to the finding of death, a written statement by a medical doctor who attended the deceased at the time of death, or any other proof satisfactory to the company.”

On November 13, 2017, Lincoln Benefit received a letter from Ms. Fundament's lawyer informing the insurer that “the best evidence is that [Mr. Fundament] deceased on or about Saturday, October 1, 2016, or shortly thereafter.” The letter indicated that Mr. Fundament's business had recently collapsed, Ms. Fundament had filed for divorce, and Mr. Fundament was “suffering from depression,” “seeing a psychiatrist,” and “had been contemplating suicide.” The letter referred to Mr. Fundament's family history of depression, noting that his father had committed suicide and that his mother had attempted suicide at least once.

The letter to Lincoln Benefit indicated that at approximately 4:11 a.m. on October 1, 2016, Ms. Fundament received an email from Mr. Fundament attaching a three-page suicide note dated September 30, 2015. The note ended with Mr. Fundament stating that there was “nothing left for me”; that his final hope was that their children “get their fair share of [his] estate”; and that he was saying “[f]arewell to the one who truly loved you.”

According to the letter to Lincoln Benefit, later on October 1, 2016, Ms. Fundament found in their home Mr. Fundament's last will and testament dated September 30, 2016, which left “[n]othing to my spouse” and “[a]ll to my sons[.]” Ms. Fundament later found another letter dated October 1, 2016 that Mr. Fundament wrote to their two children, asking them to “understand [his] decision of self-determination”; noting that he has “felt lonely and alone for a number of years”; telling his children that he loved them “both beyond one could possibly imagine”; noting that “I have lived my future” and that “my life is lived”; telling his children that “you both will be better off with more resources available to Mom and you”; noting that “[t]here is only room for one of us” and that it was his “belief that you will be better off with Mom”; advising that he had “taken some measures that should secure your share of finances for college and the start of your professional lives”; and asking his oldest child to “please care” for the younger child. Mr. Fundament ended the letter by twice saying goodbye to his children: “[I]t is no doubt too sad to say farewell. But this is my time to go.”

The letter to Lincoln Benefit added that, on October 1, 2016, Ms. Fundament found Mr. Fundament's car, car keys, wallet, and cellphone at their home.

The letter explained that Ms. Fundament called the police to report that Mr. Fundament was missing and that she was concerned he may have left their home to kill himself. Police officers arrived at the house and instructed her to review any joint bank accounts for recent transactions. She complied and discovered that there had been no recent activity on any joint accounts.

According to the letter to Lincoln Benefit, since Mr. Fundament's disappearance there had been no activity on his credit cards.

Police officers observed that two firearms were missing from their cases. Police officers conducted a search of the home and the surrounding areas but were unable to locate Mr. Fundament. Ms. Fundament said that camera footage from the entrance gate of the neighborhood from earlier that morning showed Mr. Fundament leaving the community on foot.

Believing that Mr. Fundament had killed himself in a nearby nature preserve with coyotes, mountain lions, and other predators, police conducted searches of the areas surrounding the home on October 1, 4, 5, 6, 7, 15, and 30, and November 6, 2016. Police used at least five human remain detection K-9s but did not locate Mr. Fundament's remains. In the police file, the missing person information bulletin described Mr. Fundament as “suicidal” and the sheriff's department report noted that there was “reason to believe” that Mr. Fundament had “committed suicide.”

On November 20, 2017, Lincoln Benefit acknowledged receipt of the notice of the disappearance and possible death of Mr. Fundament. Lincoln Benefit advised that it needed a death certificate or court order to consider the claim.

On January 26, 2018, Ms. Fundament's lawyer wrote to Lincoln Benefit, asserting that his earlier letter and attached documents constituted satisfactory “proof of death” and that Lincoln Benefit should have processed and paid the claim without requesting any further documentation or information. The letter stated that Lincoln Benefit's refusal to process and honor the policy with the unrebutted information it had been provided was “wrongful, in bad faith, and in breach of the [p]olicy.”

Ms. Fundament's lawyer also submitted a copy of an “Order Establishing Fact of Death” from a California state court dated December 6, 2017 that provided:

It is therefore ordered, adjudged, and decreed that on the 1st day of October, A.D., 2016, the death of Paulo Fernando Fundament occurred at Newport Coast, County of Orange, State of California.

Ms. Fundament's lawyer demanded payment of the policy proceeds by February 9, 2018.

Despite receipt of the Order Establishing Fact of Death, Lincoln Benefit believed that Ms. Fundament's claim of suicide was plausible but not established. According to Lincoln Benefit, although death by suicide seemed plausible, the circumstances equally suggested a voluntary departure. It reasoned that the police did not find clothing or footwear belonging to Mr. Fundament and the police did not find the firearm Ms. Fundament believed Mr. Fundament had used to commit suicide. According to Lincoln Benefit, the circumstances surrounding Mr. Fundament's disappearance – particularly the lack of any direct evidence of actual death – left open the possibility that his disappearance was a voluntary departure rather than a suicide.

After referring the matter to outside counsel, Lincoln Benefit filed a declaratory judgment action. On December 4, 2018, at the close of discovery, Lincoln Benefit paid $1,027,480.24 to Ms. Fundament, which included the $1 million amount insured under the policy; $16,514 in statutory interest; and (3) $10,965.50 in refunded premiums paid after October 1, 2016.

Ms. Fundament counterclaimed for breach of the insurance contract and tortious breach of the implied covenant of good faith and fair dealing.

Lincoln Benefit moved for summary judgment.

The District Court's Decision

The district court granted the motion.

In its decision, the district court first found that, in viewing the facts in the light most favorable to Ms. Fundament, a jury could not determine that Lincoln Benefit had acted unreasonably by withholding payment of the policy benefit as it conducted an investigation of the claim.

The district court pointed out that, on December 4, 2018, Lincoln Benefit paid Ms. Fundament $1,027,480.24. The district court found that, in viewing the facts in the light most favorable to Ms. Fundament, “it was objectively reasonable for Lincoln Benefit to investigate the claim before ultimately paying this death benefit.”

First, the district court said, Lincoln Benefit's interpretation of the policy terms “was reasonable under the circumstances.” In the district court's opinion, upon receipt of the Order Establishing Fact of Death, it was reasonable for Lincoln Benefit to interpret its obligations under the policy such that it could investigate the claim further to determine that Mr. Fundament had in fact died during the life of the policy after it received due proof.

Regardless of whether Lincoln Benefit's interpretation of the contract was correct, the district court ruled, “it was not sufficiently arbitrary or unreasonable such that a jury could conclude it was adopted in bad faith.”

The district court added that Lincoln Benefit's conduct to confirm actual death by hiring a law firm and conducting discovery was “objectively reasonable” and it was an “objectively reasonable business decision to spend money investigating the odd circumstances surrounding the claim.” The district court noted that, ultimately that decision cost Lincoln Benefit more in interest, legal fees, and potential reputational harm and, the district court ruled, it did “not amount to bad faith.”

The district court also rejected Ms. Fundament's breach of contract claim, finding that Lincoln Benefit was entitled to summary judgment on all of her claims.

The case is Lincoln Benefit Life Co. v. Fundament, No.: 8:18-cv-00260-DOC-JDE (C.D. Cal. March 12, 2019). Attorneys involved include: For Lincoln Benefit Life Company, Plaintiff: Jason P Gosselin, PRO HAC VICE, Drinker Biddle and Reath LLP, Philadelphia, PA USA; John M Moore, Katherine L Villanueva, PRO HAC VICE, Drinker Biddle and Reath LLP, Philadelphia, PA USA; Alexandra N Burgess, Drinker Biddle and Reath LLP, Los Angeles, CA USA. For Paige Fundament, Defendant, Counter Claimant: Alejandro S Angulo, Corey Hayden Collins, Damon Daniel Mircheff, LEAD ATTORNEYS, Duke F Wahlquist, Rutan and Tucker LLP, Costa Mesa, CA USA. For Lincoln Benefit Life Company, Counter Defendant: Jason P Gosselin, Katherine L Villanueva, Drinker Biddle and Reath LLP, Philadelphia, PA USA; John M Moore, PRO HAC VICE, Drinker Biddle and Reath LLP, Philadelphia, PA USA; Alexandra N Burgess, Drinker Biddle and Reath LLP, Los Angeles, CA USA.