On October 26, 2018, the Los Angeles Daily Journal published an article written by Robert J. McKennon of the McKennon Law Group PC. The article examines 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. For a full view of the article, read here.
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 rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.
On September 21, 2018, Feedspot created a list of the Top 50 Insurance Law Blogs, News Websites and Newsletters to Follow in 2018. McKennon Law Group PC | Insurance Litigation Blog was selected by the panelists at Feedspot as one of the Top 50 Insurance Law Blogs and was selected the 13th overall Law Blog among thousands on the internet. Feedspot ranked the Insurance Law Blogs on the web using Google reputation and search ranking, influence and popularity on social media, quality and consistency of posts and Feedspot’s own editorial team and expert review. The article is posted below:
This article is posted with the permission of Feedpost. Sep. 21, 2018.
In the September 21, 2018 issue of the Los Angeles Daily Journal, the Daily Journal published a list of its top “Verdicts & Settlements,” which included the McKennon Law Group’s case of Brian Wright v. AON Hewitt Absence Management LLC, et al. The judgment in Mr. Wright’s favor was rated as the third highest award of damages for a plaintiff for the period of time covered. The McKennon Law Group PC represented Mr. Wright in a dispute over the payment of short-term and long-term disability benefits. We won this ERISA case at trial and our client was awarded all of his disability insurance benefits, attorney’s fees, costs and interest. The list includes a summary of the case. To review the article, take a look at the blog, here.
In Nichols v. Reliance Standard Life Insurance Co., 2018 WL 3213618 (S.D. Miss. June 29, 2018), the court considered the actions of Reliance Standard Insurance Company (“Reliance”), one of the country’s largest disability insurers. The court addressed whether Reliance’s denial of disability benefits to the claimant Juanita Nichols (“Ms. Nichols”) was an abuse of discretion. In its ruling, the court discovered a decades-long pattern of arbitrary claim denials and other misdeeds, a pattern the court considered when assessing Reliance’s actions.
Ms. Nichols was a 62-year-old employee of Peco Foods’ (“Peco”) chicken processing factory in Sebastopol, Mississippi. Ms. Nichols’ duties included spending a minimum of twenty percent of her work day in processing areas, where temperatures at the factory were kept at eight degrees above freezing. After being diagnosed with circulatory system disorders that were exacerbated in cold environments, her doctors concluded that exposure to the cold could give her serious circulatory problems, including gangrene. As a result, Ms. Nichols stopped working at Peco, as she spent much of her day in near-freezing conditions.
Ms. Nichols applied for long-term disability benefits through the group insurance plan administered by Reliance. Reliance admitted that Ms. Nichols’ medical conditions prevented her from working in cold temperatures yet determined that Ms. Nichols’ occupation as it was performed in the national economy was “sanitarian,” an occupation with duties that do not require exposure to cold temperatures. Based on this determination, Reliance denied Ms. Nichols’ application for disability benefits. After a subsequent appeal of the claim denial that Reliance upheld, Ms. Nichols filed a lawsuit against Reliance to challenge her denial under ERISA. ERISA’s purpose is, in part, to protect workers by establishing standards of conduct for those who manage their benefit plans. ERISA allows employees to recover benefits due under a covered plan, like Pecos’ plan with Reliance.
The Nichols court considered whether Reliance based its denial of Ms. Nichols’ claim on substantial evidence. The court responded in the negative, finding that it was unreasonable for a vocational expert to define occupational duties by relying exclusively on a single Dictionary of Occupational Titles description that does not refer to important job duties.
The court also considered whether Reliance had a conflict of interest. As Reliance admitted, it “potentially benefits from every denied claim,” and therefore was operating under a conflict of interest. Id. at *5. The Supreme Court has held that, when an insurer is “operating under a conflict of interest,” that conflict “must be weighed as a factor in determining whether there is an abuse of discretion.” Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 117 (2008) (emphasis added). Such circumstances include when there is evidence that an insurer has a “history of biased claims administration.” Id. The question turned, however, to how much weight the court should give to Reliance’s conflict of interest. Glenn held that this evidence “can take many forms,” and “may be shown by a pattern or practice of unreasonably denying meritorious claims.” Id. at 123.
The court considered an approach delineated by the United States District Court for the District of Massachusetts in Radford Trust v. First Unum Life Ins. Co. of Am., 321 F.Supp.2d 226, 247 (D. Mass. 2004), which revealed a disturbing pattern of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics.
In its review addressing Reliance’s behavior in disability cases, the court found over 100 opinions in the last 21 years criticizing Reliance’s disability decisions, including over 60 opinions reversing a decision as an abuse of discretion or as arbitrary and capricious. The court found that judges describe the behavior underlying Reliance’s claims administration as “arbitrary,” “blind,” “conclusory,” “extreme,” “flawed,” “fraught,” “illogical,” “inadequate,” “inappropriate,” “incomplete,” “indifferent,” “lax,” “misguided,” “opportunisti[c],” “precursory,” “questionable,” “remarkable,” “selective,” “self-serving,” “skewed,” “tainted,” “troubling,” “unfair,” “unreasonable,” and “unreliable.” Nichols, 2018 WL 3213618 at *7.
The court noted these opinions revealed that Reliance takes a range of extraordinary steps to deny claims for disability benefits. Reliance makes “unreasonable” interpretations of benefit plan language, going so far as to “misconstru[e] the concept of occupational disability.” Reliance “selectively interpret[s]” evidence so it can “opportunistically deny [a] claim” for “selfserving reasons,” creating a “skewed administrative record discounting all of the substantial evidence of … disability.” Reliance’s denials are “overwhelmingly outweighed by evidence to the contrary,” “fraught with procedural irregularities,” and “blind or indifferent.” Those denials “rel[y] upon mere assumptions” and “demonstrate a pattern of arbitrary and capricious decision making.” Reliance uses “obfuscation and delay tactics,” “fail[s] to engage in ongoing communications with [claimants] to keep [them] informed of the process,” makes “misstatement[s]” to claimants, “miscalculate[s] the amount owed,” and generally exhibits behavior that “reeks of bad faith.” Reliance “regularly retain[s]” experts with “an incentive to [make] outcomes in [their] favor,” and uses expert reports that “betray a palpable bias in favor of rejecting the claim.” Despite being “[put] on notice of this bias issue” by “prior judicial criticism,” Reliance still tells courts that “it does not choose … third-party contractor[s] based on the outcomes.” Courts often conclude that Reliance’s denials are “greatly impacted” by “self-interest,” making it “clear that Reliance put[s] its own financial interest above its fiduciary duty.” Id.
The court went on to criticize the way Reliance used the Department of Labor’s Dictionary of Occupational Titles to ignore the actual duties of a claimant’s job. Further, the court criticized the vocational expert involved in Ms. Nichols’ appeal for her cursory methodology and paper reviews of claimant files. Ultimately, the court held that Reliance’s long past of biased and wrongful claims denials supported the court’s finding that the decision to deny Ms. Nichols’ claim was an abuse of discretion. Further, in deciding to award attorney’s fees to Ms. Nichols, the court found that Reliance had a severe degree of culpability and hoped that such an award would have some deterrent effect on Reliance and other insurers.
Conclusion
Opinions like Nichols give hope to victims of wrongful claim denials that the courts will seek justice in viewing the actions of insurance companies. Nichols highlights the inherent conflict of interest between insurance companies and insureds, as insurance companies decide when claimants receive benefits, and at the same time, benefit financially when benefit claims are denied. While Reliance was singled out by the court’s opinion, denials like these by insurance companies are a logical result of situations where “foxes guard the henhouse.” Hopefully this opinion evidences a trend of scrutiny toward insurance companies that also act as plan administrators.
Determining whether an insurance company wrongfully denied a benefit claim is a difficult task for most insureds. A claim denial can be an especially traumatic experience when an insured expects a life and disability insurance company like Reliance to provide benefits in a time of need. McKennon Law Group PC has extensive experience determining whether an insurer improperly denied a life, health or disability insurance claim. If you believe your insurer improperly denied your life, health or disability insurance claim, call us for a free consultation.
All too often, we see insurance companies deny insurance claims by attempting to opportunistically rescind insurance policies. This practice has become more prevalent in recent years as insurers look for ways to deny insurance claims.
Anyone who has purchased a disability, life or health insurance policy is likely familiar with the significant paperwork involved in the insurance application process. The paperwork includes policy notices, policy applications, supplemental policy applications, personal history questionnaires, policy warnings, medical examination documents, etc. These will include numerous and detailed questions relevant (and often not so relevant) to the risk being insured. An insurance agent or broker will ask questions on the policy application and often additional questions not on the application. Only after the applicant has answered countless questions, will the insurance company decide whether to issue the policy. Many applicants do not appreciate why insurance companies go to such great lengths before issuing a policy. The answer: they want to evaluate the risk that the applicant poses to them. If there exists too much risk of a payout under the policy, they will not underwrite that risk by issuing a policy. Throughout the application process, like the claims process, insurers often have a duty to investigate the information contained on the application. The failure to engage in such an investigation may result in the insurer being precluded under the law from later rescinding a policy that it decided to issue.
When insureds file claims under their policies, insurers often first look to determine if they can rescind the policy, asserting that the policy should be considered null and void as if it was never issued in the first place. As we explained in a previous blog article, rescission legally renders the contract as if it never existed and releases both parties from their obligations under the contract. An insurance company is often allowed to rescind a contract when there is a material misrepresentation on the insurance application. Many times, the omission was an honest mistake or it was excused by the broker or agent as immaterial. Regardless of the purposefulness of the omission, the insurance company may still have the right to rescind the contract.
There are exceptions however. One involves the insurer’s duty to investigate the information on the application at the time the application is submitted and its duty to investigate the possible basis for rescission when handling the claim. If there is an implication that the application was not completely accurate, and the insurer fails to investigate, then the insurer may have waived the right to rescind the policy. For example, the applicant fails to state that she had seen a doctor in the last five years, yet the application reveals she is on several prescription medications. Or, the evidence may arise from an outside source. For example, the insured may submit a claim for a treatment which strongly implies that the applicant had a non-disclosed pre-existing condition at the time the application was submitted. Insurance companies have a duty to explore such information or they may lose the right to rescind the policy. As one court stated, an insurance company “may not blindly ignore evidence of misrepresentation, collect premiums, and then opportunistically rescind once a claim is filed.” Star Insurance Co. v. Sunwest Metals, Inc., 691 F.App’x 358, 360 (9th Cir. 2017). The issue is not just whether the insurer had actual knowledge of the material misrepresentation, but also whether the insurer could have or would have obtained the information if it had exercised reasonable diligence in investigating the claim.
In DuBeck v. California Physicians’ Service, 234 Cal.App.4th 1254 (2015), the California Court of Appeal addressed an insurance company’s failure to diligently investigate an application. Bonnie DuBeck submitted an application for health insurance to California Physicians’ Service, doing business as Blue Shield of California. In her application, she failed to disclose that she had recently visited a doctor to have a lump in her breast examined. DuBeck’s application was approved. Five days after Blue Shield issued the policy, DuBeck underwent breast cancer surgery. She submitted bills for her treatments to Blue Cross. Blue Cross became suspicious that, given the timing of the billings, the condition had arisen before DuBeck’s enrollment. “Yet by its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year.” Id. at 1268. By the time Blue Cross had started its investigation, DuBeck had been diagnosed with leukemia. During that time, DuBeck submitted various bills to Blue Cross, some of which Blue Cross refused to pay. Ultimately, Blue Cross cancelled the policy. Of note is that Blue Cross did not rescind the policy – it only cancelled the policy. Two years after Blue Cross canceled the policy, DuBeck sued Blue Cross to force payment of the unpaid medical bills.
In the trial court, Blue Cross moved for summary judgment. It argued that it had the right to rescind the insurance contract because DuBeck had lied on the application. The trial court granted Blue Cross’s motion. DuBeck appealed.
The court of appeals reversed the trial court on several different grounds. One of those grounds was that Blue Cross failed to properly and promptly investigate the information in the application once it received information putting it on notice that DuBeck had omitted information from her application, thus waiving its right to rescind the policy. As the court of appeals explained:
By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind. Id.
Insurance companies have an affirmative duty to investigate the applications submitted to them. If they have failed to do so, then they may lose the right to rescind a contract that was less than complete. Insurers will still often attempt to rescind a policy, sometimes years after they had evidence that something was amiss. Determining whether an insurance company can properly rescind a policy is a difficult task for most insureds. McKennon Law Group PC has extensive experience determining whether an insurer can deny your life, health or disability insurance claim by rescinding your policy. Some of the issues we examine: was there actually a misrepresentation? Was the misrepresentation innocent or intentional? Was it material and how can the insurer prove it was material? What did the agent/broker know or say in the application process? Was there some information in the claim file that should have led the insurer to suspect a material misrepresentation? We expertly determine and often are able to successfully challenge an insurer’s attempted rescission. If you have a denied life, health or disability insurance claim that is the subject of an attempted rescission, call us for a free consultation.