California Rulings Kick Off Parade of Life Insurance Lapse Notice Cases | Carlton Fields
In our May 2021 issue, we discussed the increase in life insurance policy lapse notice cases in California following the state’s 2013 enactment of California Insurance Code Sections 10113.71 and 10113.72. . These laws establish a 60-day grace period after a missed premium and require insurers to notify policyowners, as well as persons designated by policyowners to receive notice, at least 30 days before terminating a policy in due to late payment. The laws prevent an insurer from terminating a policy for an unpaid premium without the required 30-day notice. Whether the laws applied to existing policies was a matter that was before the California Supreme Court and the Ninth Circuit Court of Appeals. Both courts ruled in favor of the plaintiff policyowners.
In McHugh v. Protective Life Insurance Co., the California Supreme Court reviewed the Court of Appeals ruling that the 2013 forfeiture laws should only apply to new policies issued after the laws take effect. The Court of Appeals deferred to interpretations by California state regulators that the laws only applied to new policies issued after 2013, thereby avoiding retroactive application of the prohibited law by California case law. The California Supreme Court reversed the Court of Appeals’ decision, explaining that “[a]apply the provisions to policies already in force on [January 1, 2013] does not appear to impose new or different responsibilities based on past behavior. The court held that the 2013 disqualification laws did not make a “substantial change in the rights or obligations of the contracting parties” and therefore did not result in retroactive application.
After McHugh, the Ninth Circuit Court of Appeals, at Thomas v. State Farm Life Insurance Co., upheld a decision by the Southern District of California that dismissed the forfeiture of two policies and granted summary judgment in favor of the beneficiary. The district court had based its decision on the fact that the policies had been renewed after the 2013 forfeiture laws came into effect (avoiding retroactivity). On appeal, however, the Ninth Circuit upheld the district court on other grounds based on McHugh. The court held that under McHugh, an insurer’s failure to comply with the 2013 lapse laws prevented the policies from lapse. In doing so, the court rejected the insurer’s argument that McHugh should not apply in the absence of evidence that failure to comply with disqualification laws caused the disqualifications.
Given these recent rulings, California’s 2013 disqualification laws apply de facto retroactively. Unsurprisingly, three new lawsuits have now been filed in the Northern, Southern and Central Districts of California, and we expect significant additional litigation to arise.