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Changing the rules
in midstream
A life insurance company’s attempt to cancel policies it issued
without a blood test leads to a wave of litigation
V
by Richard Shumate
or people living with HIV, the offer
from the Universal Guaranty Life In­
surance Company seemed too good to
be true.
They could get up to $l(X),0(X) in
life insurance coverage, and up to $ I ,(XX) a month
in disability coverage, without a blood test and
without having to answer any questions about their
seropositive status. In an era when almost all life
insurance companies routinely—and legally—
screen HIV-positive people from their coverage
pool, the existence of such a policy was quite a
surprise.
But Universal, based in Springfield, III., sold
the policy, called L-185, for nearly two years
through its network of independent agents across
the country. Seeing the potential benefit to people
who might be excluded by a blood test, a handful
of those agents began to publicize the policy in the
gay and HIV communities, a marketing strategy
that included advertising in gay publications.
When Universal officials caught wind of that,
they tried to back out of hundreds of L-185 poli­
cies. That touched off a legal battle now raging in
at least three states between the company, its
agents, and more than 300customers nationwide—
a battle that raises questions about whether Uni­
versal sought to deliberately exclude gay people as
a whole from coverage in order to protect itself
from claims made by people with HIV.
Last September, Universal canceled all pend­
ing applications for L-185 policies that were writ­
ten by five of its agents, unless the applicant would
agree to a blood test. It then sent a letter to 263
people already approved for coverage— whose
policies were written by those same agents—offer­
ing to buy back their policies for an amount of
money that was a fraction of the policy’s face
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value. If they did not agree to the settlement, the
company said it would cancel their policies.
The agents, the company claimed in the letter,
had engaged in fraud by “actively soliciting appli­
cations for insurance from prospective insureds
with health conditions that the agent knew the
company would not knowingly accept.” One of the
agents, Bryan Freeman of Atlanta, had advertised
L-185 in two local gay publications.
So far, at least 12 customers have filed suits
against the company in Illinois, Florida and Geor­
gia. In all three cases, the
attorneys are asking that
the suits be classified as
class action suits, which
could mean that all people
affected by Universal’s
actio n s— at least 320
people—could become
part of the cases. In addi­
tion, at least two of the
agents are suing Univer­
sal for defamation.
And because the company sent cancellation
notices to the customers of just five agents, and not
to all of the people who bought L-185, another
question has arisen from this case: Did company
officials seek to cancel those policies because they
believed those customers were likely to be gay and,
therefore, more likely to be HIV positive?
“The question is whether they would have
reacted the same way if [the policyholders] were a
bunch of little old ladies with cancer,” says Susan
Lewis, a Philadelphia attorney who specializes in
insurance law and represents a group of disgruntled
Universal customers. “The homophobic and AIDS-
phobic reaction kind of ups the ante.”
Universal asked only two questions of people
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who wanted to buy L-185—had they been hospi­
talized in the past five years, and did they have
heart trouble, diabetes or high blood pressure. If
they could truthfully answer no to both questions,
they qualified for coverage. The company had the
authority to check any existing medical or insur­
ance records for evidence of other diseases, but,
court documents claim, it did not routinely do so.
Freeman, who learned about the L-185 policy
in late 1993, says he twice checked with company
officials to confirm the company’s minimal under­
writing requirements. He says he was told that in
order to compensate the company for its additional
exposure, Universal was pricing the policy at a rate
higher than what it charged for policies requiring
more rigorous screening. (Court documents allege
that premiums for L-185 were up to twice as
much.) In the nine months before Universal low­
ered the boom, Freeman took 140 applications for
L-185.
What prompted the company to abruptly change
its mind? Universal officials apparently realized
their potential exposure when a prospective cus­
tomer, concerned the policy might be too good to
be true, called the company’s headquarters di­
rectly and asked if Uni­
versal was really selling
life insurance to people
who were HIV positive,
according to C hip
Rowan, an attorney with
the AIDS Legal Project
in Atlanta, who repre­
sents the plaintiffs in one
of the lawsuits.
Why Freeman and
the four other agents
were singled out is likely to be a key issue if any of
the cases go to trial. In his suit against Universal,
Freeman alleges that his advertising in the lesbian
and gay press played a direct role in the decision to
target his customers.
Universal’s president, James Melville, citing a
company policy about not commenting on pending
litigation, declined to be interviewed. But in its
response to Freeman’s defamation lawsuit (he’s
asking for $8 million in damages for being accused
of fraud), the company maintained that as a result
of his marketing efforts, Freeman “received appli­
cations from individuals that he knew or should
have known suffered from health conditions that
materially affected their insurability.”
The latest suit against Universal was filed in
February in U.S. District Court in Atlanta on
behalf of four of Freeman’s clients whose pending
applications for L-185 were rejected, despite the
fact that they met the criteria the company initially
set for acceptance. The suit claims that about 70
other people had their applications rejected in the
same manner.
Using an argument that will set a legal prece­
dent if successful, the plaintiffs claim that Univer­
sal violated the Americans with Disabilities Act by
treating them differently based on the perception
that they have HIV, and they want a federal judge
to force Universal to issue policies to them and all
the other rejected applicants.
Lewis’ three clients, on the other hand, were all
approved policyholders who received the letter
from Universal threatening cancellation. Theirsuit,
filed in state court in Illinois, alleges the company
acted in bad faith when it tried to extricate itself
from a mess of its own creation.
“We feel that both parties acted in good faith in
entering this contract, even if Universal Guaranty
acted foolishly,” she says. “It was just negligent to
be underwriting policies this way in the ’90s.”
The third suit filed against Universal, by five
people in federal court in Orlando, goes even
further, alleging that the company’s actions were
part of a deliberate scheme. That suit claims Uni­
versal violated the federal RICO statute, a rack­
eteering law originally designed to go after orga­
nized crime.
Because of the unusual circumstances of this
case— particularly the fact that Universal’s stan­
dards for issuing L-185 policies were so uniquely
lenient—the outcome of these suits probably won’t
be applicable to other situations, according to the
attorneys involved. The exception would be if the
argument about the ADA in the Atlanta lawsuit
prevails, which could set an important precedent.
In 1986, after negotiations with gay rights
groups, the insurance industry adopted voluntary
guidelines that say companies should not use fac­
tors unrelated to the health of applicants—such as
their sexual identity, where they live or their occu­
pation— in making decisions about who gets cov­
erage.
“Those factors are irrelevant. There is no rea­
son to deny coverage to someone who is healthy
and can pay the premium,” says Debbie Chase,
spokesperson for the American Council of Life
Insurance.
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