Life insurance ruling highlights legislative awareness

In 2013, the California Legislature passed a consumer-friendly law requiring life insurers to comply with enhanced notice requirements before they could terminate coverage for nonpayment of premiums.

Insurance Code Sections 10113.71 and 10113.72, enacted Jan. 1, 2013, extended grace periods from 30 to 60 days, increased notice requirements, and obligated insurers to invite policyholders to designate a third party to receive lapse notifications.

In the years that followed, policyholders filed dozens of lawsuits -- many of them class actions -- arguing that 10113.71 and 10113.72 did not just govern policies issued after Jan. 1, 2013; they governed in force life insurance policies issued before 2013.

The insurance industry uniformly dismissed this "retroactive" interpretation, and did not apply the statutes to pre-2013 policies.

Some of these cases enjoyed success at the trial court level. See Estate of Bentley v. United of Omaha, 15-7870 (C.D. Cal. 2016); see also Flynn-Thomas v. State Farm, 20-55231 (9th Cir. 2020). Others, less so. All told, it was a mixed bag for insureds.

The recent, unanimous 63-page opinion by the California Supreme Court in McHugh v. Protective Life Insurance Company, 2021 DJDAR 9020 (Aug. 30, 2021), however, decisively settled the debate: the statutes extend to in force policies issued before 2013.

Heralded as a significant victory for consumers, the opinion is remarkable for its rejection of the prospective-only statutory presumption.

The McHugh case arose from an all-too-common lapse scenario. In McHugh, the life insurer issued a $1 million policy to William McHugh, who paid premiums for seven years, then missed a payment due in January 2013. McHugh did not respond to two letters from the carrier reminding him his policy was about to terminate. In February 2013, McHugh's policy lapsed. Four months later, McHugh died. McHugh's beneficiaries then sued Protective Life for breach of contract and bad faith.

At trial, the jury concluded the statutes did not govern McHugh's pre-2013 policy. The Court of Appeal agreed, applying a prospective-only interpretation of 10113.71 and 10113.72, and relying on correspondence from Department of Insurance counsel and instructions in the DOI's System for Electronic and Form Filing, which seemed consistent with this interpretation.

In reversing the Court of Appeal, the Supreme Court explained that applying 10113.71 and 10113.72 to pre-2013 policies did not constitute a retroactive application of the statutes. Insurers would only have to impose grace period and notice requirements to missed premium payments occurring after the statutes' effective date.

"The grace period and notice obligations added by sections 10113.71 and 10113.72 do not impact a life insurer's liability for past, pre-enactment defaults," Justice Mariano-Florentino Cuéllar wrote on behalf of the majority.

Although imposing grace period and notice requirements on pre-2013 policies would retroactively alter insurance contracts insurers and insureds had already entered into, in some cases decades ago, the court considered these alterations minimal. "Nothing in our cases calls on us to apply the presumption for any conceivable type of pre-enactment impact, however slight."

Having side-stepped the presumption against retroactivity, the court proceeded to parse the language of 10113.71 and 10113.72. In doing so, it concluded the sections could be interpreted more than one way. Some subsections supported McHugh's interpretation. At least one favored Protective Life. Still others could be read either way.

Take subsections 10113.71 (b)(1), (3) and 10113.72(c) for example, which deal with the issue of notice. They use sweeping language, references to "policy owners," and no stated limitation on the date of issuance -- all of which supports a broader interpretation of the statutes.

Section 10113.72(a), on the other hand, which addresses the third-party designation, refers to the insurance "applicant," not the "policy owner." It states that a policy "shall not be issued or delivered ... until" an applicant has been given the opportunity to designate a third party. This language favors a prospective interpretation.

Subsection 10113.72(b), however, makes no reference to "applicant(s)" and does not contain the "shall be" language. Instead, it requires insurers to annually notify "policy owner(s)" of their third-party designation right.

Still other subsections can be read either way. Subsection 10113.71(a), for instance, includes future-oriented language such as "shall contain" and "shall provide." On the other hand, the word "shall," the court reasoned, can also be construed as a mandatory directive for all policies.

Ultimately, it did not matter that some subsections supported contradicting interpretations. On balance, the court concluded, the more reasonable interpretation of 10113.71 and 10113.72 was the broader one.

"In view of how these provisions interact, the broadly applicable language found in most of the relevant statutory passages tends to cut in favor of plaintiffs' interpretation," Cuéllar wrote.

Because the statutes were, in places, ambiguous, the court next considered contextual indicia of legislative intent.

The intent to create an overarching pre-termination notice scheme was unmistakable. New and existing policy owners had to be given the opportunity to designate a third party. Policy owners and third parties had to receive notice within 30 days of a missed premium. Every policy had to contain a 60-day grace period. Having created this kind of comprehensive scheme, it seemed inconceivable to the court that the Legislature would permit insurers to apply a vastly different scheme to pre-2013 policies.

Legislative history provided further hints the statutes were intended to govern all policies. Assembly and Senate statements describing the proposed legislation in broad terms: "consumer safeguards from which people who have purchased life insurance coverage, especially seniors, would benefit." And, later, "the protections provided by [Assembly Bill] 1747 are intended to make sure that policy owners have sufficient warning that their premium may lapse due to nonpayment."

These passages, and others like them, demonstrated a legislative awareness that consumers generally hold life insurance for years and a concern about the harm that results when a single premium payment is inadvertently missed. "It would certainly be consistent with the legislature's awareness and concern for it to seek to protect all policy owners from losing coverage," the court concluded.

Finally, the court considered how DOI attorneys described the statutes in written correspondence to insurers, and the instructions the DOI provided insurers in its internet-based system to submit rate and form filings, called SERFF. These were indicia the Court of Appeal found supported a prospective-only interpretation of the statutes.

The court, however, decided these writings should be given little, if any, weight. Neither represented "official guidance on the agency's construction of Sections 10113.71 and 10113.72, and as a result neither merited any measure of presumptive deference." An amicus brief submitted by the insurance commissioner said as much.

For all of these reasons, the Supreme Court concluded, that Sections 10113.71 and 10113.72 "are best read to extend protections to policies issued before these sections went into effect."