Maybe you’ve heard (or experienced) the tragic story of someone becoming ill, forgetting or being unable to pay their life insurance premium, only to see the policy lapse at the time it is needed most. It’s more common than you may realize, and at our law firm we see it quite often. It is terribly unfortunate.
What most people don’t realize, however, is that there is law in California that may come to the rescue. That law is known as the “notice prejudice” rule. The rule emanates from a judicially created doctrine dating back to at least 1963, when the California Supreme Court decided Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 305. The rule is simple: it prohibits insurers from denying insurance benefits on the ground that the insured presented an untimely claim, unless the insurer can show it was prejudiced by the delay. It is expressly designed to prohibit insurance companies from disclaiming liability based on a “technical escape hatch,” and to protect insureds from the unfair forfeiture of their benefits on procedural grounds. (The rule is also widespread; the majority of states impose a similar requirement on insurers.)
So, how does the rule apply to lapsed life insurance? Well, it is important to state at the outset that it only applies in certain circumstances. One of the most common examples is when the life insurance policy also includes a provision that premium payments will be excused or “waived” in the event the insured becomes disabled. This is usually referred to as a “life waiver of premium provision” (LWOP) or something similar. Many policies have such provisions but policyholders just aren’t aware of the benefit.
And, sometimes Courts don’t quite understand the rule’s applicability either…
A few years ago, clients came to our firm after Farmers New World Life Insurance Company denied their claim for benefits under their deceased mother’s life policy. Farmers stated no benefits would be paid because the policy had lapsed shortly before their mother’s death, and that the insured never gave any notice of a disability in order to trigger the LWOP benefit. We tried to explain to Farmers the insured had a terrible illness which caused her to be disabled and that under the terms of the LWOP provision no premiums were due at the time they lapsed the policy, and so it should never have lapsed. We also explained that just because they were getting late notice of the LWOP claim, they could not deny the claim unless they could show some substantial prejudice from the delay. Farmer’s disagreed, so we sued them. Unfortunately, when the matter came before the Los Angeles Superior Court, the Court was persuaded by Farmers’ arguments about why the notice prejudice rule should not apply. We were so confident the Trial Court was wrong, we appealed the judgment against our client to the California Court of Appeal.
After considering all the briefs and listening to oral argument, the Court of Appeal, Second District, overturned the Trial Court and ruled that the notice prejudice rule will apply to prevent forfeiture – even though the policy had already lapsed, unless the insurance company can show it was prejudiced by getting late notice of the LWOP claim. Lat v. Farmers New World Life Ins. Co. (2018) 29 Cal.App.5th 191. Farmers was not happy with this outcome. It not only asked the California Supreme Court to take the matter up for a rehearing, but also asked the California Supreme Court to “de-publish” the Appellate Court decision so that it would not be available for the public to read and rely upon. On January 16, 2019, the Supreme Court refused both of Farmers’ requests, and the Court of Appeal decision in favor of our client is now final.
There are at least three important lessons here: 1) Always question an insurance company denial. If you are not satisfied with the answers you get, seek legal advice from attorneys experienced with the type of insurance in question; and 2) when a life insurance policy lapses for non-payment of premiums, take a close look to see if the policy includes a waiver of premium provision based on disability of the insured; and 3) whenever insurance benefits are denied based on a failure to give notice within the time limits required by the policy, be aware that the notice prejudice rule may protect you against those benefits being denied.
If you need counsel experienced with life, health, long term disability or long term care insurance, we can help, whether the matter is governed by ERISA or California bad faith laws. Call us for a free consultation. (877) 783-8686