Many people acquire life insurance in order to guarantee that their loved ones are provided for in the event of their death.  For most people, the policy is acquired, and it just becomes another monthly bill they rarely think about.  However, on occasion, life takes a tragic turn and the insured who just applied for a life insurance policy but before the policy is issued, dies.  Such a scenario calls into question when a temporary life insurance policy can be created which would cover an insured applicant’s beneficiaries.  Paying death benefits under these types of temporary policies can be complicated and insurers love to fight paying beneficiaries in the situations.  One of our clients had this very situation occur. 

In State Farm Insurance Co. v. Landfried, No. 5:19-cv-01845, (C.D. Cal. June 25, 2020) (Slip op.), our client’s uncle applied for life insurance.  He completed the insurance application over the phone with an insurance agent.  When completing the application, he designated his nephew, our client, as the beneficiary.  The insurance agent offered the uncle the opportunity to “bind” the policy.  This meant that our client’s uncle could pay the initial month’s premium while he was still undergoing the application process and, should he die before the insurance company had completed the underwriting process, his family would still be entitled to the death benefits he was applying for.  Insurance companies in California offer the opportunity to bind a policy because California law, both by California statute and case law, provides for the creation of a temporary policy under certain circumstances.  The insurance agent informed the uncle that he needed to provide a payment of $217 to bind the policy.  The uncle placed the money in his bank account and gave the agent his debit card information to pay the premium.  The agent did not immediately process the payment.  In fact, she waited three days before even attempting to process the payment.  During the intervening three days, the uncle died.

State Farm denied the claim and filed a declaratory relief action against our client in federal court, seeking a court order declaring that the insurer did not owe our client the death benefits under the life insurance policy.  Our client brought a counterclaim, seeking the death benefits as well as bad-faith damages above and beyond the face value of the policy.  The insurer was sufficiently confident that it did not owe our client the death benefits that it brought a motion to dismiss the claims under Federal Rule of Civil Procedure 12(b)(6).  The motion argued that, even if everything our client asserted was true, the insurer still would not owe our client any death benefits.  After requesting additional briefing on the matter, the court denied the motion.

Whereas under California Insurance Code Section 11015 two parties can create a temporary insurance policy under certain enumerated circumstances, the court focused on a different manner of creating a temporary policy that covers the insured during the application process.  The court stated in an order dated June 25, 2020 that:

The Court previously raised this issue with the parties at the February 10, 2020 hearing on these motions, and requested additional briefing on the application of State Farm Mut. Auto. Ins. Co. v. Khoe, 884 F.2d 401, 405 (9th Cir. 1989) and Metro. Life Ins. Co. v. Wood, 302 F.2d 802, 802–03 (9th Cir. 1962). Dkt. 28. As the Court stated at the hearing, these cases focus their inquiry on the possibility that a temporary insurance contract may be formed if a party completes an application, makes a payment of a first premium, and “the language of the application would lead an ordinary layperson to conclude that coverage was immediate.” State Farm Mut. Auto. Ins. Co. v. Khoe, 884 F.2d 401, 405 (9th Cir. 1989). This possibility for coverage exists entirely outside of the statutory conditions which create temporary insurance coverage under Cal. Ins. Code § 11015. See, e.g. Hodgson v. Banner Life Ins. Co., 124 Cal. App. 4th 1358, 1372-73 (Ct. App. 2004) (distinguishing between Section 11015’s statutory obligations and formation of a temporary insurance contract under California law based on the reasonable expectation of the parties and relevant language in any conditional receipt provided).

[. . .]

The Court finds that the Counterclaim’s factual allegations regarding (1) [the uncle’s] submission of a written application for life insurance, and (2) his express attempt to bind the policy by having a payment processed, as State Farm’s agent Jones allegedly told him he was able to, may plausibly have resulted in the creation of a temporary insurance contract under California law, dependent upon the language of the application itself, which is not before this Court. See State Farm v. Khoe, 884 F.2d at 405.

Id.  The district court’s ruling relied heavily on State Farm Mutual Automobile Insurance Co. v. Khoe, 884 F.2d 401 (9th Cir. 1989) and Metropolitan Life Insurance Co. v. Wood, 302 F.2d 802 (9th Cir. 1962). These cases address the creation of temporary insurance policies via avenues that are different from those listed in the California Insurance Code.  Given the significance of these cases, they each warrant at least a brief discussion.

In Wood, the insurance applicant delivered an application and a check for the first premium to the insurer’s agent.  The applicant was examined by the insurer’s physician, but he died later that same day.  The court held that an insurer’s obligation to pay had matured before the applicant died.  See Wood, 302 F.2d at 803.  The court relied upon jurisprudence that established that, when the application is ambiguous, the receipt of the application and initial premium payment results in the creation of a temporary insurance policy.  The Wood court also explained that the insurability of the applicant did not matter.  If the insurance company determines that the applicant is uninsurable, then it can merely refund the premiums and inform the applicant that it is not interested in providing insurance.  It loses that right the moment the applicant dies.

The other case, Khoe, addressed a separate important issue relevant to the creation of temporary insurance policies: the insurance agent’s obligation to address limitations on temporary insurance during the application process.  In Khoe, the Khoes applied for health insurance, and the application contained a conditional receipt “which stated that no insurance would be effective unless a policy was issued. The clause also stated that if a policy was issued, coverage would date back to the day the application was signed.”  Khoe, 884 F.2d at 403.  The parties disputed whether the insurance agent had explained the clause to the applicant.  The applicant also contended that he was informed by the agent that, if he paid right away, he would receive immediate coverage.  Subsequent to signing the application and submitting the required premium, the applicant was hospitalized, and the insurer attempted to avoid paying the medical bills.  See id. at 404.  It claimed that the parties never entered into an insurance contract.  Litigation ensued.

The Khoe court first concluded that the application clause that limited temporary insurance was not ambiguous and, therefore, a contract for temporary insurance could not have arisen under the clause.  See id. at 405-07.  However, the Khoe court then addressed whether the clause had been explained to the insured.  As the Khoe court stated, “In Young v. Metropolitan Life Ins. Co., 272 Cal.App.2d 453 (1969), a California Court of Appeal imposed an obligation on the insurer to call an unambiguous conditional receipt clause to the insured’s attention and explain it to the insured.”  Id.  Applying this principle, the Khoe court held that “the conditional receipt clause is unambiguous and thus the language of the clause would not give rise to a contract of temporary insurance. Triable issues of fact exist, however, as to whether the clause adequately was read and explained to the Khoes.  If the clause was not explained adequately to Nena Khoe, a contract for temporary insurance did arise on April 21, 1986.”  Id. at 408‑09.

Temporary insurance contracts in California are very complicated.  There are multiple avenues to create one.  Temporary insurance policies are also often the policies that are most intensely contested by insurance companies because the insurers are now obligated to pay a significant sum of money even though they barely collected any premiums.  However, one thing that the case law makes clear is: even if a policy has not been issued, if the application was completed and the initial premium was paid, then there is a chance that a temporary insurance contract was created. 

If you have a life insurance question, our firm specializes in handling these types of insurance claims and we can help you.  Call us for a free consultation today or complete the contact form on our website.