United States: Lat v. Farmers New World Life Insurance Company

In Lat v. Farmers New World Life Ins. Co. (2018) 28 Cal.App.5th 212 (October 16, 2018), the Second District Court of Appeal reversed the trial court's entry of judgment in favor of Farmers New World Life Insurance Company ("Farmers") in connection with the payment of life insurance benefits under a policy issued to the deceased, Maria Carada ("Carada"). In December of 1993, Carada purchased a flexible premium universal life insurance policy, (the "policy") from Farmers. Under the policy, Farmers agreed to pay a death benefit to Carada's beneficiaries, the Lats, if Carada died while the policy was in force. The policy established an "accumulation account" to which Carada's premium payments and interest were added and from which monthly costs of insurance and other amounts were deducted. If the accumulation account was reduced below the amount needed to cover the next month's deductions, a 61-day grace period began within which Carada could pay the premium needed to cover the deduction if the grace period expired before Farmers received the necessary premium payment, the policy was terminated and could not be reinstated.

The policy also included a "Waiver of Deduction Rider" (the "Rider") which provided that if Farmers received proof that Carada was totally disabled, Farmers would waive the monthly deductions due after the start of and during Carada's continued disability. The policy defined total disability as including the inability to work for "a continuous period of at least six months." The deduction waiver is thus based upon the occurrence of Carada's total disability, as defined in the Rider.

The Rider further provided that Farmers needed to receive written notice of disability during the period of disability "unless it can be shown that notice was given as soon as reasonably possible." The Rider will end when "among other events, the policy ends."

In August 2012, Carada was diagnosed with Stage 4 colon cancer. Illness and its treatment rendered her unable to work and totally disabled as of August 2012.

On May 20, 2013, Farmers sent a letter to Carada advising her that the "premium payments received to date are insufficient to pay for the insurance coverage provided under the policy." The letter warned Carada that the policy was "in danger of lapsing" and stated that if Farmers did not receive payment by the end of the grace period - July 20, 2013, the policy would lapse and all coverage will terminate. On July 23, 2013, Farmers sent Carada a letter stating that the policy's "grace period has expired" and that the coverage under the policy was no longer in force.

In August 2013, Carada contacted the insurance agent who had sold her the policy. She advised the agent of her illness and disability and asked if the policy could be reinstated. The agent informed the Farmers' representative that Carada was dying of cancer and asked if the policy could be reinstated. In response, Farmers took the position that the policy had lapsed and could not be reinstated.

Carada died on September 23, 2013. Thereafter, the Lats submitted a claim to Farmers for the policy's death benefits. Farmers rejected the Lats' claim explaining that the policy had lapsed. Subsequently, the Lats sued Farmers and its agent. In response, Farmers moved for summary judgement which the trial court granted in March 2017. The court explained that "the policy provides that it will lapse upon the expiration of a 61-day grace period following a delinquency in premium payments. The Rider provides that it ends when the policy ends. In this case, it is undisputed that Carada did not make her premium payments within the 61-day grace period, and that she did not make a disability claim or offer proof of her disability until after the grace period elapsed. Consequently, the policy lapsed and so too did the Rider."

In reversing the trial court's decision, the Court of Appeal held that the "notice prejudice rule" applied to coverage under the policy. Hence, because Farmers did not sustain any actual prejudice as a result of Carada's late notice of her disability until the policy lapsed, benefits under the policy were owed to the Lats as a result of Carada's death.

In reversing the trial court's decision, the Court of Appeal reason as follows:

Because Farmers does not assert that it was prejudiced by the delayed notice of Carada's disability and there is no dispute that Carada was totally disabled within the meaning of the Rider, Carada was entitled to the benefit promised under the Rider: to have the deductions charged to her account waived. Because the deductions should have been waived and Farmers' denial of coverage was based solely on those deductions, Farmers has not established that, as a matter of law, Carada's policy had lapsed or that it was justified in denying her beneficiaries' claim under the policy.

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