Retroactive Application of California’s Life Insurance Notification Statutes

The battle over the retroactive application of the 2013 amendments to the California Insurance Code (§§ 10113.71 and 10113.72) continues in California state and federal courts, even after the Court of Appeals’ October 2019 decision in McHugh v. Protective Life Insurance held that the amendments did not apply to policies issued prior to the 2013 effective date of the legislation. In the first two quarters of 2020, multiple new putative class complaints have been filed in California alleging that carriers failed to apply the amendments’ new grace period, lapse and termination notice, and third-party designation requirements to policies that were issued before 2013. The new filings may stem from two federal district court decisions — the most recent in December 2019 — holding that pre-2013 term life insurance policies were “renewed” by the payment of premiums after the amendments, and that upon such “renewal” the policies incorporated prior changes in the law, including provisions that effectively rewrite the contract terms. Of particular note is that the proposed classes in most of the new actions are defined broadly enough to include permanent life insurance policies, which are not considered or characterized as “renewable.”

In the near future, the California Supreme Court and the Ninth Circuit can be expected to resolve both the retroactivity issue and the application to life insurance policies of a so-called “renewal principle,” which the district courts based primarily on decisions involving property and casualty policies and the interpretation of statutes or government settlement agreements that specifically applied to policy renewals, unlike the 2013 amendments. The California Supreme Court has accepted a petition to review the McHugh decision. And both federal decisions applying the “renewal principal” to term life policies have been appealed to the Ninth Circuit. Several federal district courts have stayed cases revolving around the same issues pending the decisions of the appellate courts.

Though California is currently the center of litigation over the application of new lapse statutes to existing policies, insurers may see similar challenges in other states. Connecticut, Florida, Idaho, Massachusetts, Maine, Montana, New Jersey, New York, North Carolina, Rhode Island and Vermont also have statutes allowing a policy owner and/or insured to designate a third party to receive lapse notices. While these statutes generally make clear that the requirements are prospective only, the laws are not identical. Because of this, insurers should be sure to recognize potential differences. For example, in North Carolina, the applicable statute (effective since 1945) prohibits lapse for nonpayment of premium unless written notice is provided to the insured, the assignee or owner “or to the person designated in writing by such insured. . .” However, the North Carolina statutes do not provide any guidance about how a policy owner and/or insured can designate the third party. In contrast, the Maine statutes provide more specific direction about the process for third-party designation, including timing and the form to be provided.

Carriers should evaluate their third-party notification processes for compliance with the statutes in the states in which they operate. And, at least for life insurance policies that expressly incorporate contractual renewal provisions, that review should extend to policies issued prior to the effective date of lapse notification statutes, as there is some limited precedent outside of California for applying new statutes to existing term life policies with specific renewal terms if renewal occurs after the statute’s effective date.