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California Supreme Court Answers Long-Awaited Question About Retroactive Application of 60-Day Grace Period and Notice Requirements for Life Insurance Policies

as published on International Claim Association website

Recently, the California Supreme Court clarified that the 2013 California legislation affecting grace periods and notice requirements for life insurance policies applies universally to all existing and future policies.

Effective January 1, 2013, the California Legislature codified Insurance Code Sections 10113.71 and 10113.72 to protect life insurance policyholders.  Section 10113.71 extended the grace period to 60 days and required that the policies remain effective during the extended grace period.  For policy lapse and termination, Section 10113.71 required insurers to notify policyholders, designees, and assignees at least 30 days prior to the termination date.

Section 10113.72 required insurers to give policyholders and policy applicants the right to appoint designees for notice of lapse or termination.  Section 10113.72 also required insurers to provide policyholders and policy applicants with a form to name designees for notifications, and required insurers to notify policyholders annually of their right to add or change designees.

Sections 10113.71 and 10113.72 stated that their requirements applied to every life insurance policy issued or delivered in California.  However, the statute did not specify whether the requirements should apply retroactively to all life insurance policies.  Arguably, the requirements could have applied: (1) retroactively to policies existing before the statute’s effective date of January 1, 2013, or (2) only to policies issued after January 1, 2013.  Until this decision by the California Supreme Court, it was unknown which point of view was correct.

In McHugh v. Protective Life Insurance Company, Protective Life Insurance Company (“Protective Life”) lapsed William McHugh’s one-million-dollar life insurance policy after he failed to pay his 2013 premium on January 9, 2013.  When McHugh’s beneficiaries’ death benefit claim was denied, they sued Protective Life in a California trial court for breach of contract and breach of implied covenant of good faith and fair dealing.  Prior to the due date for McHugh’s 2013 premium, Sections 10113.71 and 10113.72 went into effect.  McHugh’s beneficiaries alleged that Sections 10113.71 and 10113.72 applied retroactively to policies issued before the effective date of January 1, 2013, and that Protective Life failed to observe the 60-day grace period and provide the required notice.  In response, Protective Life argued that Sections 10113.71 and 10113.72 did not apply to policies issued before the effective date, such as McHugh’s policy issued in 2005.

The California trial court held that Sections 10113.71 and 10113.72 applied to McHugh’s policy; however, the jury rendered a verdict for Protective Life.

Upon appeal, the California Court of Appeal affirmed and held that Sections 10113.71 and 10113.72 applied only to policies issued after the effective date of January 1, 2013.

The California Supreme Court reversed and remanded the Court of Appeal’s ruling.  It held that Sections 10113.71 and 10113.72 applied universally to policies that were in force on January 1, 2013, and policies issued after.  This meant that insurers should implement the 60-day grace period and notice requirements beginning January 1, 2013 and onward.

The California Supreme Court found that Sections 10113.71 and 10113.72 were retroactive, but only minimally, because they did not significantly impact existing policies.  Insurers were not required to reinstate past terminated policies or impose new contractual duties on policyholders.  Instead, insurers only needed to devote minimal resources to meet the new requirements, such as sending designation notices along with annual billing statements and sending copies of lapse or termination notices to designees and assignees.

The California Supreme Court also acknowledged that the Insurance Code Sections could cause potential issues, such as the concern raised by the American Council of Life Insurers in its amicus curiae brief regarding policyholders leaving premiums unpaid if they passed away during the 60-day grace period.  In response, the Court stated this burden was somewhat offset since insurers could deduct the unpaid premium amount from the death benefit.

The California Supreme Court’s recent opinion, however, left several questions unanswered:

  • Will insurers’ premium calculations now be incorrect or unaccounted for, in light of the 60-day grace period requirement?
  • What financial effect, if any, will there be on insurers’ funds for paying valid claims?
  • Will insurers be able to adequately consider the risk for future defaults when setting premiums?

These are likely the questions that a lower court will have to determine, since the California Supreme Court remanded the case to a lower court for proceedings consistent with its opinion.

Despite the unanswered questions, one thing is certain – going forward, in light of the California Supreme Court’s recent ruling, insurers should make sure that their procedures on grace periods and notice requirements for California life insurance policies are up to date and in compliance with Insurance Code Sections 10113.71 and 10113.72.

Posted By:
Geoff Tong

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as published on International Claim Association website

Recently, the California Supreme Court clarified that the 2013 California legislation affecting grace periods and notice requirements for life insurance policies applies universally to all existing and future policies.

Effective January 1, 2013, the California Legislature codified Insurance Code Sections 10113.71 and 10113.72 to protect life insurance policyholders.  Section 10113.71 extended the grace period to 60 days and required that the policies remain effective during the extended grace period.  For policy lapse and termination, Section 10113.71 required insurers to notify policyholders, designees, and assignees at least 30 days prior to the termination date.

Section 10113.72 required insurers to give policyholders and policy applicants the right to appoint designees for notice of lapse or termination.  Section 10113.72 also required insurers to provide policyholders and policy applicants with a form to name designees for notifications, and required insurers to notify policyholders annually of their right to add or change designees.

Sections 10113.71 and 10113.72 stated that their requirements applied to every life insurance policy issued or delivered in California.  However, the statute did not specify whether the requirements should apply retroactively to all life insurance policies.  Arguably, the requirements could have applied: (1) retroactively to policies existing before the statute’s effective date of January 1, 2013, or (2) only to policies issued after January 1, 2013.  Until this decision by the California Supreme Court, it was unknown which point of view was correct.

In McHugh v. Protective Life Insurance Company, Protective Life Insurance Company (“Protective Life”) lapsed William McHugh’s one-million-dollar life insurance policy after he failed to pay his 2013 premium on January 9, 2013.  When McHugh’s beneficiaries’ death benefit claim was denied, they sued Protective Life in a California trial court for breach of contract and breach of implied covenant of good faith and fair dealing.  Prior to the due date for McHugh’s 2013 premium, Sections 10113.71 and 10113.72 went into effect.  McHugh’s beneficiaries alleged that Sections 10113.71 and 10113.72 applied retroactively to policies issued before the effective date of January 1, 2013, and that Protective Life failed to observe the 60-day grace period and provide the required notice.  In response, Protective Life argued that Sections 10113.71 and 10113.72 did not apply to policies issued before the effective date, such as McHugh’s policy issued in 2005.

The California trial court held that Sections 10113.71 and 10113.72 applied to McHugh’s policy; however, the jury rendered a verdict for Protective Life.

Upon appeal, the California Court of Appeal affirmed and held that Sections 10113.71 and 10113.72 applied only to policies issued after the effective date of January 1, 2013.

The California Supreme Court reversed and remanded the Court of Appeal’s ruling.  It held that Sections 10113.71 and 10113.72 applied universally to policies that were in force on January 1, 2013, and policies issued after.  This meant that insurers should implement the 60-day grace period and notice requirements beginning January 1, 2013 and onward.

The California Supreme Court found that Sections 10113.71 and 10113.72 were retroactive, but only minimally, because they did not significantly impact existing policies.  Insurers were not required to reinstate past terminated policies or impose new contractual duties on policyholders.  Instead, insurers only needed to devote minimal resources to meet the new requirements, such as sending designation notices along with annual billing statements and sending copies of lapse or termination notices to designees and assignees.

The California Supreme Court also acknowledged that the Insurance Code Sections could cause potential issues, such as the concern raised by the American Council of Life Insurers in its amicus curiae brief regarding policyholders leaving premiums unpaid if they passed away during the 60-day grace period.  In response, the Court stated this burden was somewhat offset since insurers could deduct the unpaid premium amount from the death benefit.

The California Supreme Court’s recent opinion, however, left several questions unanswered:

  • Will insurers’ premium calculations now be incorrect or unaccounted for, in light of the 60-day grace period requirement?
  • What financial effect, if any, will there be on insurers’ funds for paying valid claims?
  • Will insurers be able to adequately consider the risk for future defaults when setting premiums?

These are likely the questions that a lower court will have to determine, since the California Supreme Court remanded the case to a lower court for proceedings consistent with its opinion.

Despite the unanswered questions, one thing is certain – going forward, in light of the California Supreme Court’s recent ruling, insurers should make sure that their procedures on grace periods and notice requirements for California life insurance policies are up to date and in compliance with Insurance Code Sections 10113.71 and 10113.72.

Posted By:
Geoff Tong
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California Supreme Court Answers Long-Awaited Question About Retroactive Application of 60-Day Grace Period and Notice Requirements for Life Insurance Policies

as published on International Claim Association website

Recently, the California Supreme Court clarified that the 2013 California legislation affecting grace periods and notice requirements for life insurance policies applies universally to all existing and future policies.

Effective January 1, 2013, the California Legislature codified Insurance Code Sections 10113.71 and 10113.72 to protect life insurance policyholders.  Section 10113.71 extended the grace period to 60 days and required that the policies remain effective during the extended grace period.  For policy lapse and termination, Section 10113.71 required insurers to notify policyholders, designees, and assignees at least 30 days prior to the termination date.

Section 10113.72 required insurers to give policyholders and policy applicants the right to appoint designees for notice of lapse or termination.  Section 10113.72 also required insurers to provide policyholders and policy applicants with a form to name designees for notifications, and required insurers to notify policyholders annually of their right to add or change designees.

Sections 10113.71 and 10113.72 stated that their requirements applied to every life insurance policy issued or delivered in California.  However, the statute did not specify whether the requirements should apply retroactively to all life insurance policies.  Arguably, the requirements could have applied: (1) retroactively to policies existing before the statute’s effective date of January 1, 2013, or (2) only to policies issued after January 1, 2013.  Until this decision by the California Supreme Court, it was unknown which point of view was correct.

In McHugh v. Protective Life Insurance Company, Protective Life Insurance Company (“Protective Life”) lapsed William McHugh’s one-million-dollar life insurance policy after he failed to pay his 2013 premium on January 9, 2013.  When McHugh’s beneficiaries’ death benefit claim was denied, they sued Protective Life in a California trial court for breach of contract and breach of implied covenant of good faith and fair dealing.  Prior to the due date for McHugh’s 2013 premium, Sections 10113.71 and 10113.72 went into effect.  McHugh’s beneficiaries alleged that Sections 10113.71 and 10113.72 applied retroactively to policies issued before the effective date of January 1, 2013, and that Protective Life failed to observe the 60-day grace period and provide the required notice.  In response, Protective Life argued that Sections 10113.71 and 10113.72 did not apply to policies issued before the effective date, such as McHugh’s policy issued in 2005.

The California trial court held that Sections 10113.71 and 10113.72 applied to McHugh’s policy; however, the jury rendered a verdict for Protective Life.

Upon appeal, the California Court of Appeal affirmed and held that Sections 10113.71 and 10113.72 applied only to policies issued after the effective date of January 1, 2013.

The California Supreme Court reversed and remanded the Court of Appeal’s ruling.  It held that Sections 10113.71 and 10113.72 applied universally to policies that were in force on January 1, 2013, and policies issued after.  This meant that insurers should implement the 60-day grace period and notice requirements beginning January 1, 2013 and onward.

The California Supreme Court found that Sections 10113.71 and 10113.72 were retroactive, but only minimally, because they did not significantly impact existing policies.  Insurers were not required to reinstate past terminated policies or impose new contractual duties on policyholders.  Instead, insurers only needed to devote minimal resources to meet the new requirements, such as sending designation notices along with annual billing statements and sending copies of lapse or termination notices to designees and assignees.

The California Supreme Court also acknowledged that the Insurance Code Sections could cause potential issues, such as the concern raised by the American Council of Life Insurers in its amicus curiae brief regarding policyholders leaving premiums unpaid if they passed away during the 60-day grace period.  In response, the Court stated this burden was somewhat offset since insurers could deduct the unpaid premium amount from the death benefit.

The California Supreme Court’s recent opinion, however, left several questions unanswered:

  • Will insurers’ premium calculations now be incorrect or unaccounted for, in light of the 60-day grace period requirement?
  • What financial effect, if any, will there be on insurers’ funds for paying valid claims?
  • Will insurers be able to adequately consider the risk for future defaults when setting premiums?

These are likely the questions that a lower court will have to determine, since the California Supreme Court remanded the case to a lower court for proceedings consistent with its opinion.

Despite the unanswered questions, one thing is certain – going forward, in light of the California Supreme Court’s recent ruling, insurers should make sure that their procedures on grace periods and notice requirements for California life insurance policies are up to date and in compliance with Insurance Code Sections 10113.71 and 10113.72.

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