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Ninth Circuit:
Plaintiffs Suing Over Lapsed Life Insurance Must Show Harm Caused by Faulty Notice
Opinion Addresses Split Over What Standard Applies When Party Seeks Redress Under California Law Requiring Procedural Safeguards Before Terminating Life Insurance, Declines to Adopt Strict Liability
By Kimber Cooley, associate editor
The Ninth U.S. Circuit Court of Appeals yesterday addressed a disagreement in district courts over what standard applies in lawsuits seeking redress for an insurer’s failure to comply with California Insurance Code provisions which require certain procedural safeguards before a life insurance policy is terminated for lack of premium payments, concluding that the plaintiff must show that she was actually harmed by the violation.
Declining to adopt a strict compliance view, the court reversed an order certifying two subclasses—one representing those whose policies were canceled while the insured was still living (the “Living Insured Subclass”) and the other of family members denied benefits after the insured died (the “Beneficiary Subclass”)—saying the question of harm is too individualized for class-wide determination.
At issue are California Insurance Code §§10113.71 and 10113.72, effective Jan. 1, 2013. The sections create three primary procedural rules to safeguard against the unintentional lapse of life insurance policies.
Sec. 10113.71 provides that all life insurance policies must “contain a provision for a grace period of not less than 60 days from the premium due date” and that “[a] notice of pending lapse and termination of [the] policy shall not be effective unless mailed…at least 30 days prior to the effective date…if termination is for nonpayment of premium.”
According to §10113.72, all life insurance policyholders must be “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.”
In 2021, the California Supreme Court declared in the McHugh v. Protective Life Insurance Company (referred to in the opinion as “McHugh II”) that §§10113.71 and 10113.72 “apply to all life insurance policies in force when [the statutes] went into effect, regardless of when the policies were originally issued,” effectively engrafting the safeguards as terms into all policies in force as of 2013.
Failure to Comply
In 2020, plaintiff LaWanda Small, a beneficiary of her late husband’s $75,000 life insurance policy with Allianz Life Insurance Company of North America, sued the insurer for failure to comply with §10113.72. According to Small, the couple timely paid the premiums for 26 years until they missed a single payment in August 2016.
The policy was terminated for nonpayment before Small’s husband died in December 2018. Allianz denied the plaintiff’s claim for death benefits despite having failed to provide the required notification of the right to designate a third party to receive any notices of impending termination. Small moved to certify a class of approximately 1,800 members consisting of “owners or beneficiaries of life insurance policies issued before 2013 whose policies were terminated for nonpayment of premiums without receiving an opportunity to designate one or more persons to receive notices of unpaid premiums.”
Senior District Court Judge Terry J. Hatter Jr. of the Central District of California granted certification and sua sponte divided the class into the two subclasses, with those in the Living Insured Subclass designated as seeking reinstatement of the policy and those in the Beneficiary Subclass seeking monetary damages.
Hatter found that both subclasses satisfied the requirements of Federal Rule of Civil Procedure 23(a) and certified the Living Insured Subclass under Rule 23(b)(2) and the Beneficiary subclass under Rule 23(b)(3).
He also granted summary judgment in favor of the plaintiffs in both subclasses, finding that the Living Insured Subclass members are entitled to a declaration that their policies had been improperly terminated and those in the Beneficiary Subclass are entitled to monetary damages.
Senior Circuit Court Judge Richard C. Tallman authored the opinion reversing the certification and vacating the summary judgment orders. Circuit Judges Daniel A. Bress and Ryan D. Nelson joined in the opinion.
Intentional Lapses
Tallman pointed out that “it is a life insurance industry norm that policyholders [may] intentionally cancel their policies (or intentionally allow the policies to lapse) before the Insured dies and the death benefit is payable.” Given this norm, he remarked:
“Here, we face the problem of what to do with a class of Insureds that contains many of these people. How can they recover for procedural violations of Statutes meant to prevent unintentional lapse when the Insureds intended for their policies to lapse?”
He noted that “[b]ecause the California Supreme Court has not declared what is required to recover for violations of the Statutes, we ‘must predict how the highest state court would decide the issue’ ” and said:
“District courts faced with this issue have split between two competing theories of recovery—the ‘violation-only’ theory (sometimes called ‘strict compliance’) and what we now term the ‘causation’ theory. For the reasons stated below, we believe that the California Supreme Court would adopt the ‘causation’ theory. This means a plaintiff must not only show an Insurer’s violation, but that the violation caused them harm.”
Breach of Contract
Tallman wrote that the “California Insurance Code classifies an insurance policy as a contract” and reasoned that “nothing in California law convinces us that a breach of contract claim in this context should operate any differently than it usually would: by requiring a breach that caused the plaintiff’s injury.”
He continued:
“We think it significant that the California Supreme Court in McHugh II had the opportunity to…clarify that only a violation is required to recover, but it did not. We also think it significant that on remand, the California Court of Appeal…proceeded under a breach of contract analysis. The court notably affirmed the trial court in declining to instruct the jury on strict compliance….Then, it clearly stated that ‘[i]n addition to proving [the Insurer] breached the contract, plaintiffs had the burden of proving they were harmed by the breach.’…This statement supports the ‘causation’ theory because ‘[i]mplicit in the element of damages is that the defendant’s breach caused the plaintiff’s damage.’ ”
He declined to follow the unpublished 2021 Ninth Circuit opinion in Thomas v. State Life Insurance Company applying a “violation only” standard, saying “[b]ecause Thomas is non-precedential and did not fully analyze the issues raised above, we respectfully decline to adhere to it here.”
Class Certification
Rule 23(b)(3) provides that “questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”
Because the Beneficiary Subclass was certified under Rule 23(b)(3), Tallman said “[w]e first assess whether [Rule 23(b)(3)’s] requirements of commonality and predominance are met” as to the Beneficiary Subclass and reasoned that “the…question—whether Allianz had a corporate policy to terminate life insurance policies for non-payment of premiums without first complying with the Statutes—does satisfy commonality.”
Turning to whether common questions predominate over those affecting individual members as required for a class certified under Rule 23(b)(3), he declared:
“It is clear to us that determining whether a policyholder intentionally lapsed their policy is an individual inquiry that cannot be determined at a class-wide level….We thus hold that individual questions of causation and injury predominate over the common question of whether Allianz violated the Statutes.”
As to the Living Insured Subclass, he commented:
“Because members of a class certified under Rule 23(b)(2) cannot opt-out, …forced reinstatement of policies means reinstating policies for Insureds who intentionally [canceled] and who cannot show that the inadvertent policy lapse caused harm. Further, reinstatement would mean that all members of the Subclass must pay back lost premiums for the policies to be reinstated, and perhaps at much higher rates.”
Under those circumstances, he concluded that “[t]he Living Insured Subclass does not meet the standard for class-wide equitable relief under Rule 23(b)(2) and that Subclass cannot be certified.”
The case is Small v. Allianz Life Insurance, 23-55821.
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