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An appellate court in California has ruled that an amendment to the insurance law providing a 60-day grace period before a life insurer may terminate a life insurance policy for nonpayment of premiums that came into effect on January 1, 2013 did not apply to term life insurance policies issued before that date.

The Case

In 2005, Chase Insurance Life Company (which later was acquired by Protective Life Insurance Company) issued William Patrick McHugh a 60-year term life policy that provided for a 31-day grace period before it could be terminated for failure to pay the premium.

Mr. McHugh failed to pay the premium due on January 9, 2013 and his policy lapsed 31 days later.

He died in June 2013.

Thereafter, Mr. Mchugh's daughter, Blakely McHugh, the designated beneficiary under the policy, and her mother, Trysta M. Henselmeier, sued Protective Life for breach of contract and breach of the implied covenant of good faith and fair dealing, claiming that Protective Life failed to comply with the requirement under Insurance Code Sections 10113.71 and 10113.72, which came into effect on January 1, 2013, that it provide a 60-day grace period before it terminated the policy for nonpayment of premium.

Protective Life, relying largely on interpretations of the California Department of Insurance ("DOI"), argued that the statutes did not apply retroactively to Mr. McHugh's policy and the claim.

The trial court ruled that the statutes applied to the claim but, after a jury trial, Protective Life prevailed.

The dispute reached the court of appeal.

There, among other things, Protective Life requested that the appellate court affirm the verdict on the additional ground that the statutes did not apply to the policy and find that the trial court had erred by ruling to the contrary.

California Law

Section 10113.71 states:

(a) Each life insurance policy issued or delivered in this state shall contain a provision for a grace period of not less than 60 days from the premium due date. The 60-day grace period shall not run concurrently with the period of paid coverage. The provision shall provide that the policy shall remain in force during the grace period.

(b)(1) A notice of pending lapse and termination of a life insurance policy shall not be effective unless mailed by the insurer to the named policy owner, a designee named pursuant to Section 10113.72 for an individual life insurance policy, and a known assignee or other person having an interest in the individual life insurance policy, at least 30 days prior to the effective date of termination if termination is for nonpayment of premium.

Section 10113.72 states:

(a) An individual life insurance policy shall not be issued or delivered in this state until the applicant has been given the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium.

The Appellate Court's Decision

The appellate court granted Protective Life's request and ruled that the statutes did not apply retroactively but applied only to policies issued or delivered after January 1, 2013.

In its decision, the appellate court explained that the DOI concluded that Sections 10113.71 and 10113.72 applied only to insurance policies issued after January 1, 2013, declaring that, "All life insurance policies issued or delivered in California on or after [January 1, 2013] must contain a grace period of at least 60 days."

Moreover, the appellate court added, senior DOI personnel consistently communicated its position in response to inquiries from representatives of the insurance industry seeking advice about the statutes' applicability.

Noting that it was required to give deference to the DOI's interpretation, as long as it was reasonable and consistent with the language of the statutes, the appellate court concluded that the DOI's interpretation that the statutes applied only to term life insurance policies issued after January 1, 2013 was "reasonable and correct."

The case is McHugh v. Protective Life Ins., No. D072863 (Cal. Ct. App. Oct. 9, 2019). Attorneys involved include: Winters & Associates and Jack B. Winters, Jr., Georg M. Capielo, Sarah D. Ball; Williams Iagmin and Jon R. Williams for Plaintiffs and Appellants. Law Offices of Daniel D. Murphy and Daniel D. Murphy for California Advocates for Nursing Home Reform, Inc., as Amicus Curiae on behalf of Plaintiffs and Appellants. Grignon Law Firm and Margaret M. Grignon; Maynard Cooper & Gale and C. Andrew Kitchen, Alexandra V. Drury, John C. Neiman, Jr.; Noonan Lance Boyer & Banach and David J. Noonan for Defendant and Respondent. Alston & Bird and Thomas A. Evans for American Council of Life Insurers, as Amicus Curiae on behalf of Defendant and Respondent.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.