In the October 26, 2018 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group’s Robert J. McKennon. The article addresses a recent case by the California Court of Appeal, which held that the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy. Insurers often attempt to argue that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. This recent opinion helps to reinforce the notice-prejudice rule in California and helps to protect insureds.
This article is posted with the permission of the Los Angeles Daily Journal.
Court says insurer can’t dodge coverage through ‘technical escape hatch’
A recent Court of Appeal opinion said the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy.
By Robert J. McKennon
Most first-party insurance policies, including life insurance, disability insurance, property insurance and liability insurance policies, require that an insured policyholder provide notice of a claim within a specified period of time, typically, “as soon as practicable,” “during the Elimination Period” or a similar formulation. See e.g. Ins. Code Section 10350.7 (requirement in disability policies). With respect to liability insurance policies, notice of a claim is required in both claims-made and occurrence policies. Notice generally must be given within a “reasonable time” or within a specified period. Insurance policies often specify that timely reporting of claims is a condition precedent to coverage.
In the case of claims-made policies, the requirement is considered a fundamental element of the insurance contract, and it typically is included in the policy’s insuring agreement. Failure to provide timely notice — especially failure to provide notice within the policy period or grace period of a claims-made policy — can result in a loss of coverage regardless of whether the insurer is prejudiced by the delay in giving notice.
This rule is different in occurrence policies and life and disability insurance policies. But even where a policy specifies that timely notice is a condition precedent to coverage, a policyholder-friendly rule known as the “notice-prejudice rule” has been adopted by the California courts. The rule provides that unless an insurer can demonstrate actual, substantial prejudice from late notice of a claim, the insured’s failure to provide timely notice will not defeat coverage. See, e.g., Northwestern Title Security Co. v. Flack, 6 Cal. App. 3d 134, 141-43 (1970); Scottsdale Insurance Co. v. Essex Insurance Co., 98 Cal. App. 4th 86, 97 (2002); Root v. American Equity Specialty Insurance Co., 130 Cal. App. 4th 926, 936 (2005).
In both first- and third-party cases, in the absence of prejudice from the delay, an insurer generally may not refuse a claim solely because of delayed notice from the insured: “(T)hough an insurer may assert a defense based upon an alleged breach of the notice requirements of the policy, the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby.” See Downey Saving & Loan Ass’n v. Ohio Casualty. Insurance Co., 189 Cal. App. 3d 1072, 1089 (1987) (emphasis added).
Further, the burden is on the insurer to prove actual and substantial prejudice: “An insured’s failure to comply with the notice or claims provisions in an insurance policy will not excuse the insurer’s obligations under the policy unless the insurer proves it was substantially prejudiced by the late notice …. Prejudice is not presumed from delayed notice alone …. The insurer must show actual prejudice, not the mere possibility of prejudice.” See Safeco Insurance Co. of America v. Parks, 170 Cal. App. 4th 992, 1003-1004 (2009) (internal quotes and citations omitted).
In Lat v. Farmers New World Life Ins. Co., 2018 DJDAR 10235 (Oct. 18, 2018), the California Court of Appeal held that the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy.
In December 1993, Maria Carada purchased an “occurrence” flexible premium universal life insurance policy from Farmers. The policy contained a “Waiver of Deduction Rider” under which Farmers agreed “waive the monthly deductions due after the start of and during [Carada’s] continued total disability,” if she provided Farmers with timely written notice and proof of her disability. The rider provided that Farmers needed to receive written notice of disability during the period of disability “unless it can be shown that notice was given as soon as reasonably possible.” The rider “will end when,” among other events, “the policy ends.”
In August 2012, Carada was diagnosed with cancer and became disabled. Carada did not pay the premiums due under the policy while she was disabled. On July 23, 2013, Farmers informed her that the policy had lapsed due to her failure to pay premiums. In August 2013, Carada contacted the insurance agent who had sold her the policy and advised the agent of her illness and disability and asked if the policy could be reinstated. The agent informed a Farmers representative that Carada was dying of cancer and asked if the policy could be reinstated. The representative told the agent that the policy had lapsed and could not be reinstated. The agent relayed this information to Carada. Carada died on Sept. 23, 2013.
Thereafter, the beneficiaries under the policy contacted Farmers to file a claim for the policy’s death benefits. Farmers told the beneficiaries they were not entitled to receive death benefits due to the lapse of the policy. The beneficiaries then sued Farmers alleging causes of action against Farmers for breach of contract, breach of the implied covenant of good faith and fair dealing, and vicarious liability for the alleged negligence of its agent.
Farmers moved for summary judgment, claiming that once the policy lapsed, the rider ended and could not be invoked by the policy’s beneficiaries. The trial court granted Farmers’ motion for summary judgment, and the beneficiaries appealed the ruling. The Court of Appeal reversed, holding that Farmers was not entitled to judgment as a matter of law and the trial court erred in granting the motion for summary judgment. The court found Farmers’ argument, that a lapse of the policy terminated the rider and termination of the rider precluded the beneficiaries’ claim, to be circular. The court determined that under application of the notice-prejudice rule, Farmers must prove that it suffered actual prejudice from the delayed notice of Carada’s disability, and Farmers failed to assert or prove it was prejudiced by the delayed notice. The court explained that if “Farmers had provided that benefit, Carada’s policy would have been in force at the time of her death. Indeed, the only reason Farmers terminated Carada’s policy was that it applied the deductions it had promised Carada it would waive.”
The court rejected Farmer’s analogy to claims-made policies, which are not subject to the notice-prejudice rule, stating that the insured’s policy “is an occurrence policy as to coverage for her disability as well as coverage for her death. Applying the notice-prejudice rule in this instance would not, therefore, transform a claims made and reported policy into an occurrence policy or … effectively rewrite the contract between the parties.” The court concluded that applying the rule would serve the purpose of preventing an insurance company from shielding itself from its contractual obligations through “a technical escape hatch.”
It is always best to provide notice of a claim or relevant event to an insurance company as soon as possible. However, it is not always possible for insureds to provide timely notice. The notice-prejudice rule allows insureds to fairly access their often much needed policy benefits in the face of insurer arguments that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. The Lat case is thus a welcome addition to the notice-prejudice rule jurisprudence in California.
Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith, ERISA and unfair business practices litigation. He can be reached at (949) 387-9595 or firstname.lastname@example.org. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.