Lat v. Farmers New World Life Ins. CA2/1 ( 2021 )

Filed 8/24/21 Lat v. Farmers New World Life Ins. CA2/1
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on
opinions not certified for publication or ordered published, except as specified by rule 8.1115(b).
This opinion has not been certified for publication or ordered published for purposes of
rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
MARTY LAT et al., B305755
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC528211)
v.
FARMERS NEW WORLD LIFE
INSURANCE COMPANY,
Defendant and Respondent.
APPEAL from an order of the Superior Court of Los Angeles
County, Stephanie M. Bowick, Judge. Affirmed.
Kantor & Kantor, Glenn R. Kantor and Alan E. Kassan for
Plaintiffs and Appellants.
Hinshaw & Culbertson, Royal F. Oakes and Michael A. S.
Newman, for Defendant and Respondent.
________________________________
Marty Lat and Mikel Lat are beneficiaries of a life
insurance policy Farmers New World Life Insurance Company
(Farmers) issued to Marta Carada. After Carada’s death,
Farmers refused to pay the policy benefits to the Lats on the
ground that the policy had lapsed before Carada died. The
Lats sued Farmers for breach of contract, tortious breach of
the implied covenant of good faith and fair dealing, and the
negligence of its agent. The trial court granted Farmers’ motion
for summary judgment on the ground that the policy had lapsed.
We reversed in a published decision. (Lat v. Farmers New
World Life Ins. Co. (2018) 29 Cal.App.5th 191 (Lat).) Farmers
thereafter paid the Lats the amount due them under the policy
and moved for summary judgment. The Lats voluntarily
dismissed the third cause of action for negligence. The court
determined that the breach of contract action was rendered
moot by Farmers’ payment and that summary adjudication of
the cause of action for breach of the implied covenant of good
faith and fair dealing was proper.1 Accordingly, the court
granted the summary judgment motion and entered judgment
for Farmers. The Lats appealed. For the reasons that follow,
we affirm.
FACTUAL SUMMARY
In 1993, Carada purchased a life insurance policy (the
policy) from Farmers. The policy established an “accumulation
account” to which Carada’s premium payments and interest
1 The Lats do not assert any argument with respect to the
breach of contract cause of action and have therefore abandoned
or waived any issue concerning that ruling. (See Wurzl v.
Holloway (1996) 46 Cal.App.4th 1740, 1754, fn. 1.)
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were added and from which the monthly costs of insurance
and other amounts were deducted. If the accumulation account
was reduced below the amount needed to cover the next month’s
deductions, a 61-day grace period would begin within which
Carada could pay the premium needed to cover the deduction.
If the grace period expired before Farmers received the
necessary premium payment, the policy would terminate and
could not be reinstated.
The policy included a “Waiver of Deduction Rider” (the
rider), which provided that if Farmers “receive[d] proof that
[Carada was] totally disabled,” Farmers would “waive the
monthly deductions due after the start of and during [Carada’s]
continued total disability.” According to the rider, Farmers
must receive written notice of Carada’s disability during her
disability or as soon as reasonably possible. The rider further
provided that the “monthly deduction must be paid until the
claim is approved,” and that the “rider will end when,” among
other events, “the policy ends.”
In August 2012, Carada was diagnosed with stage four
colon cancer. Farmers does not dispute the Lats’ allegation
that her illness and treatment rendered her totally disabled for
purposes of the rider.
On May 20, 2013, Farmers sent a letter to Carada
advising her that the “premium payments received to date are
insufficient to pay for the insurance coverage provided under
the policy.” Farmers warned Carada that the policy was “in
danger of lapsing” and stated that if Farmers did not receive
a payment by the end of the grace period—July 20, 2013—the
policy would “lapse and all coverage will terminate.” Farmers
sent a similarly worded letter to Carada on June 19, 2013.
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On July 23, 2013, Farmers sent Carada a letter stating
that the policy’s “grace period has expired” and that the
coverage under the policy was “no longer in force.”
In August 2013, Carada contacted the insurance agent
who had sold her the policy and advised him of her illness. The
agent informed Carada that her coverage had lapsed and could
not be reinstated.
Carada died on September 23, 2013.
The Lats thereafter contacted Farmers to inquire about
the policy’s death benefits. Farmers informed them that
Carada’s policy had lapsed.
In November 2013, the Lats sued Farmers and its agent.
The Lats filed the operative second amended complaint in
February 2016, alleging causes of action against Farmers
for breach of contract, breach of the implied covenant of good
faith and fair dealing, and vicarious liability for the alleged
negligence of its agent.
In December 2016, Farmers moved for summary judgment
on the ground that the policy had lapsed. In opposing the
motion, the Lats contended that the benefit to Carada provided
by the rider—specifically, Farmers’ waiver of deductions while
she is disabled—is governed by California’s notice prejudice
rule. Under that rule, the Lats argued, Farmers could not
deprive Carada of that benefit merely because Carada’s notice
of her disability was untimely; Farmers was required to show
that it had been prejudiced by the delay, and it failed to make
such a showing.
Although Farmers acknowledged the notice provision in
the rider and conceded that California courts apply the notice
prejudice rule to notice provisions in insurance policies, it
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argued that the rider’s notice provision “plays no role in this
case [because] Farmers did not deny the claim because of
failure to abide by that provision. Rather, Farmers denied
the claim because the [p]olicy—together with the . . . [r]ider—
had both ended when the grace period ended without payment
of premium.” (Italics and boldface omitted.) Under Farmers’
view of the rider, proof of the insured’s disability acted “as
a substitute premium” and, “[a]s with any other method for
satisfying premium, timely ‘payment’ is essential, and late
payment results in lapse.” Such a lapse, Farmers reasoned,
is not subject to the notice prejudice rule.
The trial court granted Farmers’ motion for summary
judgment. The court explained that “the policy provides that
it will lapse upon [the] expiration of [a] 61-day grace period
following [a] delinquency in premium payments. The [r]ider
provides that it ends when the policy ends. In this case, it is
undisputed that [Carada] did not make her premium payments
within the 61-day grace period, and that she did not make a
disability claim or offer proof of her disability until after the
grace period elapsed. Consequently, the policy lapsed, and so
too did the [r]ider.” The court rejected the Lats’ reliance on
the notice prejudice rule because that rule “cannot expand the
scope of coverage . . . under the policy.”
We reversed. (See Lat, supra, 29 Cal.App.5th at p. 202.)
“Under a straightforward application of the notice prejudice
rule,” we explained, “Farmers could not deny Carada the
benefit of the deduction waiver unless Farmers suffered actual
prejudice from the delayed notice. Farmers has made no such
showing and, therefore, Carada was entitled to the deduction
waiver benefit. If Farmers had provided that benefit, Carada’s
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policy would have been in force at the time of her death. Indeed,
the only reason Farmers terminated Carada’s policy was that it
applied the deductions it had promised Carada it would waive.
[¶] The fact that Farmers was unaware of Carada’s disability
when it declared the policy had lapsed explains why it declared
the policy lapsed—indeed, Farmers appears to have been
entirely innocent in making that determination—but once it
learned of Carada’s disability and, therefore, her entitlement
to the deduction waiver, Farmers’ continued refusal to honor
its contractual obligations to Carada and her beneficiaries
precludes summary judgment in its favor. 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.” (Lat, supra,
29 Cal.App.5th at p. 197.)
After our remittitur issued, Farmers paid the sums due
under the policy to the Lats.
In July 2019, Farmers filed a motion for summary
judgment. Farmers argued that the Lats could not establish a
cause of action for breach of contract because Farmers had paid
them the amount due under the policy. As to the second cause
of action for tortious breach of the implied covenant of good faith
and fair dealing, Farmers argued that its initial refusal to pay
policy benefits was, as a matter of law, not unreasonable.2
In February 2020, the court granted Farmers’ motion,
stating that “Farmers has met its burden, based on the
2 Farmers also sought summary adjudication of the Lats’
third cause of action for vicarious liability for negligence of its
agent. Prior to the hearing on the motion, the Lats dismissed
that cause of action.
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undisputed facts, that there was a genuine disagreement
between the parties regarding the applicability of the notice
prejudice rule based on California law at the time the claim
was denied. In other words, as a matter of law, there was a
reasonable dispute between the parties as to whether the notice
prejudice rule applied to the circumstances.” The court further
explained that “prior to the appellate decision in Lat, reasonable
minds could have differed on whether the notice prejudice rule
applied to the lapsed insurance policy under California law.
Thus, there was a ‘genuine issue’ as to Farmers’ liability under
California law.”
After the court entered judgment in Farmers’ favor, the
Lats appealed.
DISCUSSION
A “motion for summary judgment shall be granted if
all the papers submitted show that there is no triable issue
as to any material fact and that the moving party is entitled
to a judgment as a matter of law.” (Code Civ. Proc., § 437c,
subd. (c).)
Although the reasonableness of an insurer’s claims-
handling conduct is ordinarily a question of fact, it becomes
a question of law amenable to summary judgment where
the evidence is undisputed and only one reasonable inference
can be drawn from the evidence. (Morris v. Paul Revere Life
Ins. Co. (2003) 109 Cal.App.4th 966, 977; Chateau Chamberay
Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90
Cal.App.4th 335, 347 (Chateau Chamberay).)
“Every contract imposes on each party an implied duty
of good faith and fair dealing.” (Chateau Chamberay, supra,
90 Cal.App.4th at p. 345.) In the insurance context, the
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“implied covenant of good faith and fair dealing exists to assure
prompt payment of claims made by the insured.” (Gourley v.
State Farm Mut. Auto. Ins. Co. (1991) 53 Cal.3d 121, 127.) An
insurer’s breach of the implied covenant may support an action
in tort, as well as contract. (Kransco v. American Empire
Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 400; Foley v.
Interactive Data Corp. (1988) 47 Cal.3d 654, 684.)
The test of whether an insurer’s refusal to pay policy
benefits constitutes a tortious breach of the covenant of good
faith and fair dealing—that is, bad faith—is whether the refusal
was unreasonable or without proper cause. (Mosley v. Pacific
Specialty Ins. Co. (2020) 49 Cal.App.5th 417, 435−436 (Mosley);
Dalrymple v. United Services Auto. Assn. (1995) 40 Cal.App.4th
497, 519−520 (Dalrymple); Opsal v. United Services Auto. Assn.
(1991) 2 Cal.App.4th 1197, 1205 (Opsal).) “[T]he reasonableness
of the insurer’s decisions and actions must be evaluated as of
the time that they were made.” (Chateau Chamberay, supra,
90 Cal.App.4th at p. 347.)
An insurer’s refusal to pay benefits under a policy is
reasonable if the refusal is based on a legitimate dispute or
a genuine issue as to the insurer’s liability under the policy
and the law. (Dalrymple, supra, 40 Cal.App.4th 497, 520;
Opsal, supra, 2 Cal.App.4th at p. 1205.) A legitimate dispute
or genuine issue may exist when, at the time of the insurer’s
decision to deny benefits, there was “no clear, controlling
California law” on the issue (Mosley, supra, 49 Cal.App.5th
at p. 436), where law on the issue is “still developing,” or there
exists “uncertainties in controlling case law” (Dalrymple, supra,
40 Cal.App.4th at p. 523).
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Here, at the time Farmers made its decision to deny
the Lats the benefits of Carada’s policy, there was no clear,
controlling California law on the dispositive issues—whether
the notice prejudice rule applied to notice of an insured’s
disability for purposes of a deduction or premium waiver and, if
so, whether the waiver is applied after the insurer has declared
a lapse in the policy.
The absence of controlling law is evident in our prior
opinion. Although we stated that “[u]nder a straightforward
application of the notice prejudice rule, Farmers could not deny
Carada the benefit of the deduction waiver unless Farmers
suffered actual prejudice from the delayed notice” (Lat, supra,
29 Cal.App.5th at p. 197), we relied entirely on “analogous”
federal cases. (Id. at pp. 197−199 [citing Carrington Estate
Planning v. Reliance Standard (9th Cir. 2002) 289 F.3d 644;
Ward v. Management Analysis Co. (9th Cir. 1998) 135 F.3d
1276, affirmed in part and reversed in part on other grounds
sub nom. UNUM Life Ins. Co. of America v. Ward (1999)
526 U.S. 358; and Doe v. Life Ins. Co. of North America (LINA)
(N.D.Cal. 2010) 737 F.Supp.2d 1033 (Doe)].) Although these
authorities provided apt support for our conclusion, they are
not binding on California courts and Farmers could legitimately
contend, as it did, that they were either distinguishable or
should not be followed. (See Lat, supra, 29 Cal.App.5th at
p. 199.)
Farmers also presented nonfrivolous arguments,
supported by California authorities, for its view of the notice
prejudice rule. (See Lat, supra, 29 Cal.App.5th at pp. 200−201
[discussing Slater v. Lawyers’ Mutual Ins. Co. (1991) 227
Cal.App.3d 1415, Pacific Employers Ins. Co. v. Superior Court
9
(1990) 221 Cal.App.3d 1348, and Industrial Indemnity v.
Superior Court (1990) 224 Cal.App.3d 828].) We distinguished
these authorities on the ground that they were concerned
with claims made and reported policies, whereas the rider to
Carada’s policy was “analogous to occurrence-based policies, to
which the notice prejudice rule has been applied.” (Lat, supra,
29 Cal.App.5th at p. 200.) The rider, we explained, “provides a
benefit—Farmers’ waiver of deductions—for an act—Carada’s
disability—that arises during the policy period even though
the claim for the waiver of deductions is made after the [r]ider
and the policy have expired. Applying the notice prejudice rule
in this instance would not, therefore, transform a claims made
and reported policy into an occurrence policy or, as in Slater,
effectively rewrite the contract between the parties.” (Ibid.)
Although the distinction we drew follows from the rationale of
Slater and the other cases Farmers relied on, there was no prior
California decision directly addressing their inapplicability to
the kind of provision in the Carada policy rider; we relied again
on the Ninth Circuit’s decision in Carrington. (Lat, supra, 29
Cal.App.5th at pp. 200−201.)
Farmers also relied on Venoco, Inc. v. Gulf Underwriters
Ins. Co. (2009) 175 Cal.App.4th 750, which addressed the
application of the notice prejudice rule “to a policy that
provides ‘special coverage for a particular type of claim
[that] is conditioned on express compliance with a reporting
requirement.’ ” (Lat, supra, 29 Cal.App.5th at p. 201.) We
rejected Farmers’ reliance on Venoco on the ground that Venoco
provided a narrow exception to the notice prejudice rule that
did not apply to the instant case. Until we distinguished
10
Venoco, however, no California court had limited it or given
it any negative treatment.
Even if California law was clear as to the application
of the notice prejudice rule to premium or deduction waivers
generally, there was no California case addressing Farmers’
additional argument that the deduction waiver could not
be invoked after the policy had lapsed due to nonpayment.
According to Farmers, once the grace period for payment had
expired, the policy and the rider terminated and could not be
revived or reinstated by the late notice of disability. Farmers
supported the argument with language from the policy and
rider. In particular, the policy provided that it will terminate if
the “grace period ends before [Farmers] receive[s] the necessary
premium payment,” and the rider stated that Carada’s “monthly
deduction must be paid until the [disability waiver] claim is
approved,” and the rider “will end when” “the policy ends.” We
rejected Farmers’ argument by characterizing the purported
termination of the policy as Farmers’ “declaration of lapse,” and
explained that an insurer’s declaration of lapse, even if “entirely
innocent,” will be ineffective when, as here, it discovered “facts
showing that its declaration of lapse should not have been
made.” (Lat, supra, 29 Cal.App.5th at p. 197.) For this point,
we cited a single federal district court decision, Doe, supra, 737
F.Supp.2d at pp. 1042−1043, as an example of a case where
an insured was entitled to coverage under a disability policy
even though he gave notice of his disability after the insurer
cancelled its policy. (Lat, supra, 29 Cal.App.5th at p. 197.)
Although we rejected Farmers’ argument, its reliance on the
policy’s text and the absence of controlling California law
11
establish that its position, though erroneous, was nevertheless
not unreasonable.
In short, the issues we addressed in Lat were issues of
first impression under California law. We decided the issues by
applying the reasoning of analogous federal cases and, although
we distinguished or rejected Farmers’ purported California
authorities, Farmers’ arguments addressed legitimate disputes
and genuine issues. Thus, its denial of policy benefits prior
to the resolution of those disputes in Lat did not constitute
bad faith as a matter of law. Farmers was therefore entitled to
summary judgment.
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DISPOSITION
The judgment is affirmed. Farmers is awarded its costs
on appeal.
NOT TO BE PUBLISHED.
ROTHSCHILD, P. J.
We concur:
BENDIX, J.
CRANDALL, J.*
* Judge of the San Luis Obispo County Superior Court,
assigned by the Chief Justice pursuant to article VI, section 6
of the California Constitution.
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