Coverage Alert: Lat v. Farmers New World Life Ins. Co. – Insurer that issued life insurance policy including a notice of disability requirement under the “Waiver of Deduction Rider” could not deny coverage based on a failure of the policyholder to provide such notice unless it could also show resulting prejudice.
Lat v. Farmers New World Life Ins. Co. (2nd Dist. Ct. App. 2018) ___ Cal. App. 5th ___, 2018 DJDAR 10235, Case No. B282008.
Maria Carada purchased an “occurrence” life insurance policy from Farmers and listed her sons (collectively “the Lats”) as beneficiaries. The policy established an accumulation account from which monthly costs were deducted. If the account was ever below the amount needed to cover the next month’s deductions, a 61 day grace period began. If this period expired before a premium payment was received, the policy would be terminated and could not be reinstated. The policy included a “Waiver of Deduction Rider” which provided that if Farmers received notice that Carada was totally disabled, Farmers would waive monthly deductions due during the disability. The Rider would end when the policy ended. In August 2012 Carada was diagnosed with Stage 4 colon cancer. As a result, she became totally disabled as of August 2012 but notice was not given to Farmers. In May of 2013 Farmers sent Carada a notice advising that the premium payments made to date were insufficient and that the policy would lapse if a payment was not made by the end of the grace period, July 20, 2013. A similar notice was sent on June 19, 2013. On July 23, 2013, Farmers sent Carada a letter informing her that the grace period had expired and that the policy was no longer in force. In August 2013 Carada contacted her agent, explained that she was dying of cancer and asked if the policy could be reinstated. Farmers refused. Carada died on September 23, 2013 and the Lats made a claim to Farmers for the death benefits. Farmers denied the claim and the Lats filed suit alleging breach of contract, bad faith and vicarious liability for the negligence of the Farmers agent. Farmers moved for summary judgment, which motion was granted by the trial court on the grounds that Carada had failed to give notice of her disability to Farmers and, therefore, the policy, along with the Rider, had lapsed. The Lats appealed.
APPELLATE COURT’S RULING
On appeal, the Lats argued that although Carada had not given notice of her disability to Farmers as required by the Rider, the requirement was excused under California’s notice prejudice rule. The court of appeal agreed, noting that, under this rule, “an insurance company may not deny an insured’s claim under an occurrence policy based on lack of timely notice or proof of claim unless it can show actual prejudice from the delay. (Citations.)” Furthermore, “the burden of establishing prejudice is on the insurance company (citation), and prejudice is not presumed by delay alone (citation). To establish prejudice, the “’”insurer must show it lost something that would have changed the handling of the underlying claim.”’ (Citations.)” In the present case, there was no dispute that Carada was totally disabled and she would have been entitled to the deduction waiver benefit had she given timely notice. However, Farmers could not deny the benefit absent showing it suffered some actual prejudice as a result of the delayed notice. Because Farmers failed to show any prejudice, summary judgment in its favor was improper. The court of appeal noted: “When, as here, the insurance company discovers facts showing that its declaration of lapse should not have been made, the declaration of lapse is ineffective and the policy’s terms may be enforced. (Citation.)” The court of appeal concluded that, because the deductions should have been waived and the denial was based on those deductions, Farmers had failed to show, as a matter of law, that the policy lapsed or that it was justified in denying the claim. As such, the court of appeal reversed the judgment.
EFFECT OF THE COURT’S RULING
This case follows established California law that an insured’s violation of a notice provision in an occurrence based policy will not void coverage absent a showing of prejudice on the part of the insurer. The difference here is that the notice prejudice rule is applied not to a standard notice of claim provision, but instead to a requirement in a life insurance policy that notice of disability be provided in order to receive a deduction waiver. Insurers intending to rely on such a notice provision as a basis for denial should be prepared to point to actual prejudice suffered before denying a claim for failure to pay premiums.