California Judge: Grace Period On Missed Payment Applies Retroactively

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By John Hilton

The California Supreme Court recently ruled that statutes making it harder for an insurer to cancel a policy for nonpayment of premiums apply to policies that went into effect before the legislation was passed.

But that might not be the final word on the subject.

There are several federal lawsuits that were waiting on the decision before proceeding. Notably, a proposed class-action lawsuit filed in the Eastern District of California against Lincoln Benefit Life.

Both sides in that case agreed to wait until the California court settled Blakely McHugh v. Protective Life Insurance.

The case began with a $1 million policy issued in March 2005 by Chase Life Insurance Company -- now Protective Life Insurance.

"A grace period of 31 days will be allowed for payment of each premium after the first. This policy will continue in force during the grace period. If the premium remains unpaid at the end of the grace period, coverage will cease," the policy, issued to William Patrick McHugh, reads.

McHugh failed to pay the premium that was due on Jan. 9, 2013, and the policy lapsed 31 days later. McHugh died in June 2013.

60-Day Grace Period

In the meantime, California passed a statute, effective Jan. 1, 2013, requiring life insurance policies to provide for a 60-day grace period on missed premium payments. The law also requires notification of impending cancellation to the insured and beneficiaries 30 days before termination.

Blakely McHugh, the beneficiary under the McHugh policy, and Trysta M. Henselmeier, McHugh's widow and the contingent beneficiary, sued Protective Life in state courts. Citing the new statute, they alleged breach of contract and bad faith in disclaiming a duty to pay the benefits.

The case moved through the courts, with the insurer winning a decision and appeal. Supreme Court Justice Mariano-Florentino Cuéllar explained the decision to overturn those rulings:

The statutes "apply to all life insurance policies in force when these two sections went into effect, regardless of when the policies were originally issued," he wrote. "This interpretation fits the provisions’ language, legislative history, and uniform notice scheme, and it protects policy owners—including elderly, hospitalized, or incapacitated ones who may be particularly vulnerable to missing a premium payment—from losing coverage, consistent with the provisions’ purpose.”

Same Issue, Different Court

In December 2020, plaintiff Deana Farley filed a federal lawsuit against Lincoln Benefit Life. Farley's case concerned a $125,000 policy she took out on her then-minor son, Ellis-Redd Bates, on or about 2011.

Her $122.43 monthly payments were made by automatic withdrawal, the lawsuit said. In 2016, a payment "was inadvertently missed" and the policy was lapsed, the lawsuit said. Reinstatement was granted on Nov. 4, 2016, the lawsuit said, but another payment was missed in October 2018 and the policy was lapsed -- at least as far as Lincoln Benefit is concerned.

"At no point relevant to this matter has Defendant, complied with or attempted to comply with The Statutes regarding the subject Policy," the lawsuit reads. "Defendant violated [California law] by failing to provide notice of a right to designate an alternative notice recipient. As such, termination of the policy was ineffective and the policy remains in force."

With the California Supreme Court ruling issued, the judge in the Lincoln Benefit case scheduled a pretrial conference for November. Lincoln Benefit filed a motion to dismiss or stay the case in February, before both sides agreed to pause the case.

Kuvare, which owns Lincoln Benefit, could not be reached for comment.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.