Life Insurance Policyholders Beware: California’s Statutory Lapse Safeguards Do Not Apply to Policies Issued Prior to January 1, 2013

Life insurance lapse generally refers to coverage ending for insufficient or nonpayment of policy premiums. If premiums are not paid during the grace period to sustain the policy, then the life insurance ends.  The lapse of a life insurance policy at the wrong time could have disastrous consequences for persons or families because policyholders could easily lose their life insurance if a single premium is accidentally missed, even if they have been paying premiums on time for years. On January 1, 2013, California added new sections 10113.71 and 10113.72 to the Insurance Code, as a way of providing consumer safeguards against life insurance policy lapse.

California Insurance Code Sections 10113.71 and 10113.72 primarily do three things: (1) mandate that life insurance policies issued or delivered in California have a 60-day grace period; (2) set forth notice of pending lapse and termination requirements; and (3) require insurers to provide notice to applicants and annual notice to policyholders of their right to designate someone other than themselves to receive lapse notices. The latter requirement, which applies only to individual life insurance policies, was an important addition to the California Insurance Code because it allows policyholders to designate persons who can receive lapse notices so that if the policyholder is too sick to read a premium notice and/or pay a premium, he may still be protected.  While both statutes went into effect on January 1, 2013, a question remained as to whether these safeguards would apply to life insurance policies issued or delivered prior to January 1, 2013. As discussed below, the answer to this question is “no.”

In a recent decision, McHugh v. Protective Life Insurance, 40 Cal.App.5th 1166 (2019) (“McHugh”), the California Court of Appeals ruled that Insurance Code Sections 10113.71 and 10113.72 only apply to policies issued or delivered after January 1, 2013. William Patrick McHugh (“Insured”) purchased a life insurance policy (“Policy”) from Protective Life Insurance Company (“Protective Life”) on January 9, 2005, that provided for a 31-day grace period. The insured failed to make his 2013 premium payment; therefore, on February 9, 2013, the Policy lapsed per its express terms.  Protective Life never received an additional premium payment or reinstatement application from the insured. The insured died in August 2013.  Plaintiffs, the policy beneficiaries, sued Protective Life for breach of contract and insurance bad faith, alleging that Protective Life did not provide the insured with a 60-day grace period per code section 10113.71 and therefore, the lapse notices and subsequent termination of the policy were void.  The court found that the 2013 statutes did not apply retroactively to the Policy, stating:

Sections 10113.71, subdivision (a)(1) and 10113.72, subdivision (a)(1), refer to term life insurance policies “issued or delivered,” a term that in California case law imports prospective application: “the terms ‘issued’ and ‘delivered’ must refer to the original issuance and delivery of the policy; they are fixed as to time and do not stretch into infinity.” (Ball v. California State Auto Assn. Inter-Ins. Bureau (1962) 201 Cal.App.2d 85, 87.) Therefore, as this policy was issued and delivered to McHugh in 2005, it could not incorporate the statutory amendments that became effective in 2013. Id.

Since the Policy was issued in 2005, Protective Life was not obligated to comply with California Insurance Code Sections 10113.71 and 10113.72. Thus, the express terms in the Policy dictated the duration of the grace period and any terms as to notice to the insured regarding the termination of the Policy.  The court also rejected the contention that the statutes applied if the Policy was renewed after January 1, 2013.

This is an unfortunate ruling that does not protect insureds who have paid premiums for years and who may become too sick to pay a premium, thus allowing a policy lapse at the time the insured needs the life insurance the most.  Policyholders need to be aware of the date their life insurance policy was first issued and/or delivered. If the policy was issued or delivered prior to January 1, 2013, a policyholder needs to carefully read the express terms of the policy to make sure they understand how their policies can lapse and they should take steps to protect themselves. When it comes to life insurance policies, a lack of knowledge can lead to big problems.

If you have questions about the lapse of a life insurance policy, McKennon Law Group PC has significant experience with most issues involving life insurance and we may be able to assist you.  Please contact us for a free consultation.

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