By: Benjamin C. West
Lat v. Farmers New World Life Ins. Co., No. B282008, 2018 WL 5004763 (Cal.App.2d Oct. 16, 2018)
The notice prejudice rule is a principle of insurance law that prevents an insurer from using lack of timely notice or proof of claim as a reason to deny an insured’s claim under an “occurrence”[1]life insurance policy, unless the insurer can show actual prejudice from the delay. Recently, the California Court of Appeal was asked to address whether the notice prejudice rule applies to a notice provision contained in an “occurrence” policy’s accompanying rider.[2]
As to the case before the court, in 1993, the Insured purchased an “occurrence” life insurance policy from Farmers New World Life Insurance Company (“Farmers”), naming her two sons (collectively “Beneficiaries”) as beneficiaries. Pursuant to the policy, Farmers agreed to pay a death benefit to Beneficiaries if Insured died while the policy was in force. Among other things, the policy included a rider (“Rider”) under which Farmers agreed to waive the policy’s monthly premiums while Insured was disabled, so long as Insured provided Farmers with timely notice and proof of her disability. The Rider provided, among other things, that it would end when the policy did.
In August of 2012, as a result of being diagnosed with “stage 4” colon cancer, Insured became unable to work and totally disabled. Insured did not provide Farmers with notice of her disability and, despite letters from Farmers warning that the policy was in danger of lapsing, made no payments on the policy after June of 2013. Thereafter, in September of 2013, Insured died.
After Beneficiaries made a claim for benefits under the policy, Farmers denied the claim on the ground that the policy had lapsed prior to Insured’s death. Beneficiaries subsequently brought suit against Farmers, asserting that Insured was totally disabled within the meaning of the Rider, and that the missed monthly payments that caused Farmers to declare a policy lapse were therefore waived. According to Beneficiaries, although Insured failed to give Farmers the notice of her disability that the Rider required, such requirement was excused by California’s notice prejudice rule. Conversely, Farmers contended that the lapse of the policy terminated the Rider, and that the termination of the Rider precluded Insured (and thus Beneficiaries) from receiving the monthly premium waiver benefit.
In granting summary judgment in favor of Farmers, the trial court found that the policy had lapsed prior to Insured’s death and, because of its language, “so too did the Rider.”
On appeal, the California Court of Appeal noted that there is no dispute that Insured was totally disabled while the policy was in force and that she would have been entitled to the monthly premium waiver benefit under the Rider if she had given Farmers timely notice of her disability. For the court, therefore, the issue was whether the notice prejudice rule applied to the notice provision contained in the policy’s Rider.
In answering this question in the affirmative, the court acknowledged that Farmers was seemingly innocent in making its initial declaration that the policy had lapsed, as it was unaware of Insured’s disability at the time. The court continued, however, that where, 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. Moreover, according to the court, and contrary to Farmers’ arguments, the policy lapse was immaterial; if the notice prejudice rule is applied in an insured’s favor, he or she is entitled to the policy’s benefits regardless of whether the insurer has declared it to have lapsed.
The court continued by asserting that applying the notice prejudice rule to the notice provision of the policy’s Rider would serve its purpose of preventing an insurance company from shielding itself from its contractual obligations through “a technical escape-hatch.” In finding the notice prejudice rule applicable to the notice provision of the policy’s Rider, the court maintained that, under a straightforward application of the notice prejudice rule, Farmers could not deny Insured the benefit of the monthly premium waiver contained in the Rider unless Farmers suffered actual prejudice from the delayed notice. According to the court, as prejudice could not be presumed by delay alone, Farmers made no such showing of prejudice.
In reversing the trial court’s granting of summary judgment, the court concluded by providing that Farmers had not established that, as a matter of law, Insured’s policy had lapsed or that it was otherwise justified in denying Beneficiary’s claim under the policy.
From this case, we learn that the notice prejudice rule applies not only to the notice provision of an “occurrence” insurance policy, but also to the notice provision of any accompanying rider of such policy. Insurance companies must be cognizant of this rule, and of the fact that, should this rule be applied in an insured’s favor, any prior declaration of policy lapse by the insurer will be treated as immaterial.
Benjamin C. West recently joined Wanger Jones Helsley as a cum laudegraduate of the University of California, Hastings College of the Law and is currently awaiting bar results. This article is intended to notify our clients and friends of changes and updates to the law and provide general information. It is not intended, nor should it be used, as legal advice, and it does not create an attorney-client relationship between the author and the reader.
[1] An “occurrence” life insurance policy provides coverage for incidents that arise during the policy period, even if the resulting claim is made after the policy has expired. This differs from a common “claims made” insurance policy, which only provides coverage for claims made while the policy is in effect.
[2]As an insurance term, a rider is a provision of an insurance policy that adds to or amends the coverage or terms.