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Hamilton v. Prudential Ins. Co. of America

United States District Court, D. New Jersey

April 30, 2014

DELORES HAMILTON et al., Plaintiffs,
v.
PRUDENTIAL INSURANCE CO. OF AMERICA et al., Defendants

For DELORES D. HAMILTON, JESSE N. HAMILTON, DERRICK SEYMOUR, CYNTHIA SEYMOUR, JALISSA THOMAS, AS MOTHER AND GUARDIAN OF MASINE CAREY SEYMOUR, Plaintiffs: JOSEPH MARANO, LEAD ATTORNEY, LAYSER & FREIWALD, AUDUBON, NJ.

For PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant: LIZA M. WALSH, LEAD ATTORNEY, KATELYN O'REILLY, RUKHSANAH L. SINGH, TRICIA B. O'REILLY, CONNELL FOLEY, LLP, ROSELAND, NJ.

For ERIC K. SHINSEKI, IN HIS CAPACITY AS SECRETARY OF DEPARTMENT OF VETERANS AFFAIRS, THE DEPARTMENT OF VETERANS AFFAIRS, THE UNITED STATES OF AMERICA, Defendants: KIMBERLY LYNN HERB, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC.

OPINION

Page 572

Hon. Kevin McNulty, United States District Judge.

This matter comes before the Court on the motions of Defendants Prudential Insurance Co. of America (" Prudential" ), Secretary of Veteran Affairs Eric. K. Shinseki, the Department of Veteran Affairs (" VA" ), and the United States of America (" US" ), to dismiss the First Amended Complaint (" FAC" ). (Docket Nos. 29, 30). For the reasons to set forth below, these motions to dismiss are DENIED.

I. BACKGROUND

Plaintiffs Delores D. Hamilton, Jesse N. Hamilton, Derrick Seymour, Cynthia Seymour, and Jalissa Thomas [1] bring this

Page 573

FAC on behalf of beneficiaries of the Servicemembers' Group Life Insurance Act, 38 U.S.C. § 1968 (" SGLIA" ), alleging that Defendants have avoided paying the benefits of the insurance program to beneficiaries whose insureds were disabled at the time of deactivation from the armed forces and remained disabled until their deaths. (Docket No. 14). The FAC asserts claims against all Defendants under the Equal Protection Clause of the Constitution of the United States (Counts 1-2). Against Prudential only the FAC asserts claims of violations of 38 U.S.C. § 1968(a)(1)(A)(ii) and 38 C.F.R. § 9.1(j) (Count 5); violations of various state law contractual duties (Counts 3-4, 6, 7); and fraud (Counts 8-9). FAC ¶ ¶ 93-164.

As I must, I take the facts as alleged to be true solely for purposes of this motion to dismiss.

A. Statement of Facts

For military service members and veterans, and to provide special protection for their beneficiaries, Congress created two group life insurance programs: the Servicemembers Group Life Insurance (" SGLI" ) plan for active members, and the Veterans Group Life Insurance (" VGLI" ) plan for veterans. FAC ¶ ¶ 2, 4; 38 U.S.C. § 1965. Prudential Life Insurance has been the carrier for these policies since 1965. The policyholder is the VA. Id. The insurance premiums for SGLI are collected from service members by the United States; the premiums for VGLI are paid directly to Prudential by veterans. Id. ¶ 4.

SGLI and VGLI are guaranteed by the United States. Therefore, when service members die at higher rates than envisioned by Prudential's risk calculations (in particular, during wartime), the United States supplements the payouts in order to make sure that Prudential does not lose profits. Id. ¶ 3.

When service members leave the military, they can convert from SGLI to VGLI of equal value. Id. ¶ 5. To convert to VGLI, the service member must submit an application and pay the first premium within 120 days of ending active service. Id. ¶ 16. If the service member is disabled at the time of deactivation, however, SGLI remains in force, pursuant to 38 U.S.C. § 1968(a)(1)(A)(ii). Id. ¶ ¶ 5, 18. Under this provision, the service member is then provided with continuous SGLI coverage for two years or until the end of the disability--whichever is earlier. Id. ¶ 18. Disability is defined under 38 C.F.R. 9.1(j) as " any impairment of mind or body which continuously renders it impossible for the insured to follow any substantial occupation." Id. ¶ 19. The criteria for purposes of this section are established by the Secretary of Veteran Affairs (the " Secretary" ). Id.

The Secretary is required to issue guidelines determining who is disabled. A disability determination, of course, may determine whether beneficiaries are entitled to receive SGLI policy benefits where the service member did not convert to VGLI within 120 days of separation from the service. Id. ¶ 6. The Secretary has the power to declare that a particular service member is disabled for the purposes of an SGLI payment, and to direct Prudential to issue the benefit. Id. ¶ 7.

Plaintiffs allege, for example, that when the death of a veteran has resulted in significant negative publicity, the Secretary has ordered Prudential to pay the benefit to the service member's beneficiary under a policy created retroactively for that purpose. Id. ¶ 8. When the Secretary

Page 574

orders Prudential to pay benefits to such a beneficiary, it is allegedly acting as an agent of the Secretary, and not as an insurer. Id. ¶ 9. Such payments, Plaintiffs allege, are made " outside the statutory scheme [of the SGLIA] as well as outside the contract" between the VA/United States and Prudential. Id. ¶ 28.

The FAC cites several examples of such payments--including payments to former plaintiffs in this case who have since voluntarily dismissed their claims. Michael Ecker, whose survivor, Mathew D. Ecker, was formerly a plaintiff in this case, was discharged from active service in the United States Army on December 24, 2006, and committed suicide on August 28, 2009.[2] FAC ¶ 30. Ecker had been found 70 percent disabled: 50 percent for PTSD and Traumatic Brain Injury, ten percent for lumbosacral sprain, and ten percent for right ankle strain. Id. ¶ 35. Prudential initially denied the claim because Ecker was not covered by a VGLI policy when he died. Id. ¶ 33. Plaintiffs allege that he had not been notified that he could convert his SGLI policy to a VGLI policy after he was discharged. Id. ¶ 31. After the filing of the original complaint in this case, Prudential notified counsel that it would pay a SGLI benefit for Michael Ecker to his parents. Id. ¶ 47.

Chad Aaron Whiting, whose survivor, Jeremiah Whiting, was formerly a plaintiff in this case, served in the United States Army until March 16, 2008. On November 28, 2008, he committed suicide and killed his wife, Dana Marie Whiting.[3] Id. ¶ 50. Whiting had not converted his SGLI policy to a VGLI policy and his family had not been notified of the possibility of a payout of his SGLI policy at the time of his death. Id. ¶ 52-53. After the filing of the complaint, Prudential notified counsel that it would pay a SGLI benefit for Chad Aaron Whiting to his estate. Id. ¶ 59.

The FAC also refers to two other claims paid outside the statutory two year disability extension: (1) an SGLI payment for Jeff Hacket, who died 27 months after he was deactivated, and (2) a VGLI payment for Walter Scott Eiswert, who died 50 months after deactivation from active service and less than a year from his separation from the Individual Ready Reserves (" IRR" ). Docket No. 14-12.

Plaintiffs argue that these actions, resulting in payments to some beneficiaries and not to others, are arbitrary and capricious, that they are an abuse of discretion, and that they violate the Equal Protection clause. Id. ¶ 10. Of course they seek, not to invalidate payments that have been made, but to extend similar benefits to other potential beneficiaries. Plaintiffs allege that Prudential's refusal to pay the benefit to beneficiaries of SGLI policies who were entitled to the benefit because their insureds were disabled at the time of death (1) violates 38 U.S.C. § 1968 and (2) constitutes a breach of contract, the covenant of good faith and fair dealing, unjust enrichment, and a breach of fiduciary duty/constructive trust. Id. ¶ 12.

B. Parties

Defendant Prudential Insurance Company (" Prudential" ) is a corporation organized under New Jersey law and doing business throughout the United States. FAC ¶ 78. Prudential operates divisions entitled Office of Servicemembers' Group Life Insurance and Veterans' Group Life

Page 575

Insurance Services.[4] Id. Prudential is the insurer of the SGLI and VGLI programs, which are operated from Prudential's Roseland, New Jersey office. Id.

Defendant VA is a cabinet department in the Executive Branch which supervises and sets parameters for Prudential's administration of the SGLI and VGLI programs in compliance with 38 U.S.C. § 1965 et seq. Id. ¶ 80. Defendant Eric K. Shinseki is the Secretary of Veteran Affairs, with offices in Washington, D.C. Id. ¶ 79. Pursuant to 38 U.S.C. § 1965 et seq., the Secretary must provide criteria and must determine whether deactivated members of the armed forces or members on active duty for training are disabled for purposes of SGLI coverage. Id. Defendant U.S. is the ultimate policyholder of SGLI and VGLI and makes certain that the insurer is at all times sufficiently funded to cover the costs of the programs regardless of whether the United States is at war. Id. 81.

Plaintiffs Delores D. Hamilton and Jesse Hamilton are residents of California, and are the surviving mother and brother of the late William Elias Hamilton. FAC ¶ 70. William Hamilton served in the 82nd Airborne Unit stationed in Fort Bragg, North Carolina until he was discharged on September 16, 2005. Id. ¶ 71. He was hospitalized nine times in the local VA clinic following his discharge because of severe post-traumatic stress disorder (" PTSD" ). Id. He was not able to hold any job after the date of his discharge, and the VA determined that he was 100% disabled. Id. On May 16, 2010, after leaving the VA Hospital, he committed suicide by stepping in the path of a train. Id.

Delores Hamilton testified that her son did not receive any notice from Prudential that he could have converted his SGLI policy to a VGLI policy. Id. ¶ 72. Delores and Jesse Hamilton filed an application for SGLI or VGLI benefits with Prudential on August 31, 2011. Id. In the FAC, they allege that Prudential failed to acknowledge receipt of the application. Id. ; Compl. Exh. 3. After the filing of the FAC, Prudential responded to the Hamilton Plaintiffs by letter dated November ...


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