California court to decide whether lapse law applies to out-of-state policies

The California Supreme Court is tackling the thorny question of whether the state’s life insurance lapse laws apply to policies that originated in other states.

In a two-sentence notice on April 16, the court agreed to a request from the Court of Appeals for the Ninth Circuit in Pitt v. Metropolitan Tower Life Insurance Co. The case originates with plaintiff Susan A. Pitt, a beneficiary whose claim was denied following the insurer’s stance that California lapse laws did not apply because the policy was initially issued in Illinois.

Pitt is supported by the Life Insurance Advocacy Center, a group that advocates for consumer protections in the life insurance industry.

“These consumer protections are vital, especially for elderly or vulnerable Californians who may unintentionally miss a premium payment due to illness, forgetfulness, mail delays, or other disruptions,” said Brian P. Brosnahan, executive director of LICAC. “We strongly support the court’s review of this case and hope it affirms that California’s Lapse Statutes apply to all life insurance policies renewed in California, regardless of where they were first issued.”

California’s 2012 insurance code update 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.

The law is a frequent source of lawsuits from aggrieved policyholders.

Term life policy

The disputed policy is a $2 million term life policy that Michael A. Pitt took out in 2003, court documents say. The policy is described as a “Level Benefit Term Life Insurance
Annually Renewable to Age 95,” the lawsuit stated, with a “total Premium Payable at Annual Intervals” of $7,290.

In 2014, Michael Pitt and his wife, Susan, moved to California, became permanent residents, and began to make premium payments to Tower from their new home.

"In January of 2016, after making premium payments consistently for more than 12 years, Plaintiff believes Mr. Pitt may have inadvertently missed the one payment due on January 6, 2016," the lawsuit said. "Mr. Pitt was 67 years old and had begun to suffer from a progressive medical condition which would soon take his life."

On Feb. 7, 2016, Tower informed the Pitts that the policy was terminated. The insurer did not grant a 60-day grace period as required by California statute, the lawsuit said. Michael Pitt died on May 23, 2018, with Tower refusing to reinstate the original policy, the lawsuit claimed.

Susan Pitt filed the lawsuit in April 2020.

In its motion for summary judgment, Tower said the Pitt lawsuit failed in several ways. The California lapse statute applies only to individual life insurance policies “issued or delivered” in California, Tower attorneys noted.

"Plaintiff’s policy was applied for, issued, and delivered in Illinois," the motion read. "Under black-letter California law, a life insurance policy is issued and delivered only once."

In addition, the lapse laws provide for no private right of action. Finally, even after the Pitts had actual notice of the missed payment, neither called Tower in March 2016, nor attempted to pay the premium, Tower claimed, "even though doing so would have enabled coverage to continue without interruption.

"Nor did either of them attempt to contact Tower in April, May, June, July, or August," the motion read. "Mr. Pitt did not seek to reinstate his policy until September 2016, over 240 days after his missed payment."

Summary judgment

On June 5, 2023, District Judge Robert S. Huie granted Tower's motion for summary judgment. Pitt appealed to the Ninth Circuit, which lamented the lack of "controlling precedent" from California state courts. Further proceedings in the Ninth Circuit are stayed until the California Supreme Court answers the policy origination question, court documents say.

LICAC submitted an amicus brief in March urging it to accept the Ninth Circuit’s request. The center noted that an estimated 200,000 consumers move to California each year with life insurance policies purchased elsewhere.

“We are concerned that without guidance from the California Supreme Court, federal courts may continue to interpret these laws too narrowly, placing policyholders at unnecessary risk,” Brosnahan said. “California residents deserve the full benefit of the state’s consumer protection laws when they renew or maintain coverage here.”

If the California Supreme Court does decide the issue, it will not be the court's first extension of the lapse law.

The lapse statute did not address 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.”

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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.