LOS ANGELES (Legal Newsline) - Life insurance companies doing business in California face billions of dollars in potential liability as plaintiff lawyers seize upon a state Supreme Court ruling that applies a 2012 law to tens of thousands of policies sold years before.
The law requires insurers to give customers a 60-day grace period before canceling their policies for lack of payment, as well as the opportunity to name another person to receive a separate warning of impending cancellation. Despite language suggesting the law applied only to policies sold after it went into effect on Jan. 1, 2013, the California Supreme Court last year decided the legislature intended it to apply retroactively to all policies held by customers in the state.
That exposed insurers to the risk of paying the full value of billions of dollars lapsed policies if they lose any of some 30 potential class actions now working their way through California courts. One company estimated it had more than 50,000 policies issued before 2013 that subsequently lapsed due to non-payment, 47,000 of which without the required 60-day grace period. California is the world’s fourth-largest insurance market, generating more than $300 billion in premiums per year.
“Because the statutes operate through the insertion of mandatory policy terms, applying them to existing contracts would necessarily rewrite the terms of a private contract,” the American Council of Life Insurers argued, unsuccessfully, before the California Supreme Court handed down its decision in McHugh v. Protective Life. “Courts have long recognized that the insurer’s right to contractually determine when coverage shall terminate is an essential right under the policy.”
The insurers argued they were told by officials at the California Department of Insurance that the new law wouldn’t apply to existing policies. But the California Supreme Court dismissed their evidence as irrelevant, even while acknowledging parts of the law explicitly applied to new policies alone. The language referring to new policies “introduces some ambiguity into our reading of the notice provisions.” But “other indicia of purpose, gleaned from context, resolve any latent ambiguity,” the court said in the opinion by Justice Mariano-Florentino Cuéllar.
Life insurers are still fighting over the meaning of the law and the potential penalties for failing to revise existing policy language to fit the new rules. American General Life Insurance is opposing a proposed “sprawling, nationwide class” in U.S. District Court in San Diego seeking the face value of tens of thousands of policies that were cancelled before the 60-day grace period expired or without the required notice provisions in the policy agreement.
The lead plaintiff is an heir to a man who missed a $107 monthly payment on a policy in March 2016 and died a little more than two months later. AGIC argues it notified the policyholder and his wife 60 days before cancelling the policy – a finding the judge agreed with – but plaintiff lawyers say the company still violated the law by failing to mail a separate 30-day warning to the wife or to comply with the third-party designation rules.
Jack Winters represents the plaintiff in the proposed class action, as well as in the McHugh case that went to the California Supreme Court. He said most companies are complying with the law but a group of companies are resisting, because they profit by selling multi-year level-premium policies in hopes that the customers will cancel them before the term ends. That allows them to collect above-market premiums when the customers are younger and avoid paying benefits after the risk of death increases, he said.
"There are 300 life companies in California, and in my opinion 250 of them have been complying" since the law went into effect, Winter said. "There is a real strong public policy argument that a life policy should not terminate until everyone with an interest in it has notice and a chance to decide whether to keep it in effect."
The law will undergo another test next month, when the McHugh case is argued again before the Fourth Appellate District Court in California. While they won at the Supreme Court on the key question of whether the law applies to policies sold before 2013, the plaintiffs are appealing a jury decision that awarded them nothing. The policyholder in the McHugh case stopped making premium payments after suffering medical problems that ultimately led him to commit suicide, a fact that may have led jurors to award no damages to his heirs even though they found the policy violated the law.
Regardless of how that appeal turns out, California insurers face a multibillion-dollar problem because of the ruling subjecting them to a law that went into effect years after they sold life policies to customers in the state. In federal court, AGIC argues it would be impossible to bundle all policyholders into a class action, since customers allow policies to lapse for a variety of reasons and each case would have to be examined to determine why.
More broadly, the insurers challenge the idea the state legislature could write a law that instantly made tens of thousands of existing insurance contracts illegal.
“The retroactive application of new statutes and regulations can destroy settled expectations and undermine the predictability and stability on which the flow of commerce depends,” the U.S. Chamber of Commerce argued in a brief urging the California Supreme Court not to rule the way it ultimately did. Legal Newsline is owned by the U.S. Chamber Institute for Legal Reform.