9th Circuit: proof of harm required in California life insurance lapse lawsuit

If a federal appeals court interpretation of California life insurance lapse laws stands, it could "undermine" regulations nationwide, the plaintiff claims.

LaWanda D. Small initially won a partial summary judgment and class certification from the U.S. District Court for the Central District of California. Small sued Allianz Life Insurance Co. of North America after the insurer terminated a life insurance policy for a missed premium payment.

A 2012 California law requires life insurers to give a 60-day grace period and notification of termination at least 30 days prior to any action. The law also gives consumers the right to designate a third party to receive notices of unpaid premiums or impending termination.

However, in December, the Ninth Circuit Court of Appeals overturned the summary judgment and class certification rulings and sent the case back to the district court. Small filed for an en banc review Thursday.

An en banc review is heard by all of the judges of a particular court and is generally reserved for complex or important issues.

Small claims the Ninth Circuit decision could threaten the entire system of life insurance oversight.

“Nothing is stopping [the decision] from undermining similar anti-lapse statutes in other states,” the Small motion reads. “So long as [the Ninth Circuit decision] may be cited as persuasive authority, it could undermine insurance regulations nationwide.”

Every year, 500,000 older Americans lapse their life insurance policies, according to a survey by the Insurance Studies Institute.

Allianz Life sent InsuranceNewsNet this statement: "The Small case is one of the many almost identical cases filed against life insurance companies operating in California, many of which are pending before the Ninth Circuit. The suits all are similar in that they are attempting to challenge the life insurance companies’ implementation of the 2013 California grace and lapse statutes. In December, the Ninth Circuit issued its opinion reversing class certification in the Small case.

"The Court held that the plaintiff’s breach of contract claim, premised on a statutory violation, requires proof of each of the elements of a breach of contract claim, including causation and harm to the plaintiff. The Court concluded that because individual questions will predominate on proof of the elements of the claim in the case it is not suitable for class-wide treatment. We believe that the Ninth Circuit’s opinion was thoughtful and well-reasoned."

Causation over violation

The Ninth Circuit ruled that the “causation” theory of harm applies to the Small case. In other words, simply violating the statute isn’t enough to hold Allianz liable.

“Given the lack of a private cause of action in the Statutes, 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,” wrote Judge Richard C. Tallman, writing for a three-judge panel.

In her request for an en banc hearing, Small’s attorneys say that judicial interpretation could render insurance lapse laws useless. There are six other cases before the Ninth Circuit that "involve the same issues" with the California lapse statute, Small's motion noted.

“A rule that required plaintiffs to prove they lost coverage due to an insurer’s failure to provide a notice required by the Statutes would effectively gut the Statutes,” the motion reads. “This would in turn strip 10 million consumers of critical protection in an industry with $229 billion in insurance coverage sold each year.”

The district court had certified two subclasses in their Small ruling: First, it certified a subclass of owners of policies with living insureds, for whom a judicial declaration their policies were wrongfully terminated constituted relief. Second, it certified a subclass of beneficiaries on policies with deceased insureds, for whom death benefits may be due.

Paid for 26 years

In 1990, LaWanda and her husband Carl purchased a $75,000 universal life policy from Allianz’s predecessor, LifeUSA Insurance Co. LaWanda Small was named the beneficiary. For 26 years, the Smalls timely paid premium before missing a payment in August 2016.

Small claims that “Allianz unilaterally took the Smalls off auto-pay.” Allianz canceled the policy, one of 1,800 policies canceled in California for unpaid premium between 2013 and 2022, the Small motion alleges. All were canceled in violation of the 2012 state law, the motion notes.

In December 2018, Carl died and LaWanda filed a death claim a month later. Allianz denied the claim as the policy was no longer in force.

“It is undisputed that Allianz did not notify Small, or her late husband, of the right to designate a third party to receive notices of unpaid premiums or impending termination,” Judge Tallman wrote. “In fact, Allianz originally took the position that the Statutes did not apply to policies like Small’s that were issued before 2013.”

The 2012 statute, which took effect on Jan. 1, 2013, was silent on the question of retroactive application of the lapse rules. Many insurers applied the lapse rules to new business only. In 2021, the California Supreme Court held that the statutes “apply to all life insurance policies in force when [the statutes] went into effect, regardless of when the policies were originally issued.”

© Entire contents copyright 2025 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.