Lat v. Farmers New World Life Ins. Co. ( 2018 )

Filed 10/16/18
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
MARTY LAT et al., B282008
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC528211)
v.
FARMERS NEW WORLD LIFE
INSURANCE COMPANY,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Stephanie M. Bowick, Judge. Reversed.
——————————
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.
——————————
In 1993, Maria Carada purchased an “occurrence”
life insurance policy from Farmers New World Life Insurance
Company (Farmers) and named her sons Marty and Mikel Lat
(collectively the Lats) as beneficiaries. The policy included
a rider under which Farmers agreed to waive the cost of the
insurance while Carada was disabled if Carada provided Farmers
with notice and proof of her disability. Carada was diagnosed
with cancer in September 2012 and became disabled as a result.
She did not provide Farmers with notice of her disability and
made no payments on the policy after June 2013. In September
2013, Carada died.
After the Lats made a claim for benefits under the policy,
Farmers denied the claim 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 and entered judgment in its
favor.1
1 The Lats’ notice of appeal was filed on April 13, 2017,
after the court granted Farmers’ motion for summary judgment
but before it entered judgment. Because the order granting
summary judgment is a nonappealable order, the appeal was
subject to dismissal. (Modica v. Merin (1991) 234 Cal. App. 3d
1072, 1073-1075.) We provided the Lats with an opportunity
to cure this defect, and they filed a copy of a judgment entered
on July 6, 2017. Although the judgment revealed that the notice
of appeal was premature and, therefore, still defective, we
deem the notice of appeal to have been filed on the date of the
judgment. (See Mukthar v. Latin American Security Service
(2006) 139 Cal. App. 4th 284, 288.)
2
For the reasons given below, we reverse the judgment.
BACKGROUND
In December 1993, Carada purchased a flexible premium
universal life insurance policy (the policy) from Farmers. Under
the policy, Farmers agreed to pay a death benefit to Carada’s
beneficiaries, the Lats, if Carada died while the policy was in
force.
The policy established an “accumulation account” to which
Carada’s premium payments and interest 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 began 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
was terminated 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.” The policy defined total disability as
including the inability to work for “a continuous period of at least
six months.” The deduction waiver is thus based upon the
occurrence of Carada’s total disability, as defined in the Rider.
The Rider further provided that Farmers needed to receive
written notice of disability during the period of disability “unless
it can be shown that notice was given as soon as reasonably
possible.” The Rider “will end when,” among other events, “the
policy ends.”
3
In August 2012, Carada was diagnosed with “stage 4”
colon cancer. The illness and its treatment rendered her unable
to work and totally disabled as of August 2012.
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.” The
letter 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.
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. She advised the agent of her
illness and disability and asked if the policy could be reinstated.
The agent informed a Farmers representative that Carada was
dying of cancer and asked if the policy could be reinstated. The
representative told the agent that the policy had lapsed and could
not be reinstated. The agent relayed this information to Carada.
Carada died on September 23, 2013.
The Lats thereafter contacted Farmers to claim the policy’s
death benefits. Farmers advised them that they were not
entitled to receive the death benefit because the policy had
lapsed.
In November 2013, the Lats sued Farmers and its agent.
In February 2016, the Lats filed the operative second amended
complaint, alleging causes of action against Farmers for breach
of contract, breach of the implied covenant of good faith and fair
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dealing, and vicarious liability for the alleged negligence of its
agent.
Farmers moved for summary judgment, which the trial
court granted in March 2017. 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 Rider 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 Rider.”
DISCUSSION
I. Standard of Review
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).) “We
apply a de novo standard of review to an order granting summary
judgment, when on undisputed facts, the order is based on the
interpretation of the terms of the insurance policy.” (Morris v.
Employers Reinsurance Corp. (2000) 84 Cal. App. 4th 1026, 1029.)
“Interpretation of an insurance policy is a question of
law and follows the general rules of contract interpretation.”
(MacKinnon v. Truck Ins. Exchange (2003) 31 Cal. 4th 635, 647.)
Courts are mindful, however, of the “disparate bargaining status
of the parties” in the insurance context (Gray v. Zurich Insurance
Co. (1966) 65 Cal. 2d 263, 270), and, accordingly, “ ‘coverage
clauses are interpreted broadly so as to afford the greatest
5
possible protection to the insured [while] exclusionary clauses are
interpreted narrowly against the insurer.’ ” (Reserve Insurance
Co. v. Pisciotta (1982) 30 Cal. 3d 800, 807-808.)
II. Analysis
Farmers contends that Carada’s policy terminated in
July 2013 when her accumulation account fell to a level that
was insufficient to pay for coverage and she failed to make a
premium payment within the 61-day grace period. “Once the
[p]olicy ended,” Farmers argues, “the Rider ended” and could
not be invoked by Carada or the Lats. (Boldface and underlining
omitted.)
The Lats assert that Carada was totally disabled within
the meaning of the Rider and that the deductions that caused
Farmers to declare a policy lapse were therefore waived.
Although Carada had not given to Farmers the notice of her
disability that the Rider required, that requirement was excused
by California’s notice prejudice rule.
We agree with the Lats.
A. The Notice Prejudice Rule Applies to
the Rider
Under the notice prejudice 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.2 (Campbell v. Allstate Ins. Co.
2 “ ‘[A]n “occurrence” policy provides coverage for any acts
or omissions that arise during the policy period even though the
claim is made after the policy has expired.’ ” (Pacific Employers
Ins. Co. v. Superior Court (1990) 221 Cal. App. 3d 1348, 1356.) It
is distinguished from a claims made policy in which “ ‘the carrier
6
(1963) 60 Cal. 2d 303, 305-306; Joyce v. United Ins. Co. (1962)
202 Cal. App. 2d 654, 662; Cisneros v. UNUM Life Ins. Co. of
America (9th Cir. 1998) 134 F.3d 939, 944; see Root v. American
Equity Specialty Ins. Co. (2005) 130 Cal. App. 4th 926, 930 [notice
prejudice rule does not apply to claims made and reported policy];
see generally 13 Couch on Insurance (3d ed. 2018) § 193:66.)
The rule is based on the rationale that “ ‘[t]he primary and
essential part of the contract [is] insurance coverage, not the
procedure for determining liability[]’ [citations], and that ‘the
notice requirement serves to protect insurers from prejudice, . . .
not . . . to shield them from their contractual obligations’ through
‘a technical escape-hatch.’ ” (Carrington Estate Planning v.
Reliance Standard (9th Cir. 2002) 289 F.3d 644, 647
(Carrington).)
The burden of establishing prejudice is on the insurance
company (Campbell v. Allstate Ins. Co., supra, 60 Cal.2d
at p. 306), and prejudice is not presumed by delay alone (Shell
Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal. App. 4th
715, 761). To establish prejudice, the “ ‘insurer must show it
lost something that would have changed the handling of the
underlying claim.’ ” (Belz v. Clarendon America Ins. Co. (2007)
158 Cal. App. 4th 615, 632; see Croskey et al., Cal. Practice Guide:
Insurance Litigation (The Rutter Group 2018) ¶ 6:37, p. 6A-6
[“insurer would presumably have to show that the delayed notice
agrees to assume liability for any errors, including those made
prior to the inception of the policy as long as a claim is made
during the policy period.’ ” (Id. at pp. 1356-1357.) A “ ‘claims
made and reported’ ” policy is further distinguished by a
requirement that the claim be reported to the insurer within the
reporting period. (Helfand v. National Union Fire Ins. Co. (1992)
10 Cal. App. 4th 869, 888.)
7
and proof of loss impaired its ability to investigate and settle the
claim”].)
Under the Rider in this case, there could be no deduction
from Carada’s accumulation account while she was totally
disabled, provided she gave Farmers timely notice and proof
of her disability. There is no dispute that Carada was totally
disabled while the policy was in force and that she would have
been entitled to the deduction waiver benefit under the Rider
if she had given Farmers timely notice of her disability. Under
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. Farmers has made no such showing and, therefore,
Carada was entitled to the deduction waiver benefit. If Farmers
had provided that benefit, Carada’s 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. (See Doe v. Life Ins.
Co. of North America (LINA) (N.D.Cal. 2010) 737 F. Supp. 2d
8
1033, 1042-1043 (Doe) [notice of disability given after insurance
company cancelled policy was not prejudicial, and insured was
entitled to coverage under the policy].)
The notice prejudice rule has been applied with similar
results in analogous cases. In Carrington, supra, 289 F.3d 644,
the insured, Zipoy, was covered under his employer’s group life
insurance policy, which included a premium waiver provision
analogous to the Rider in the instant case. (See id. at p. 646,
fn. 2.) Zipoy left his employer due to a disability and failed
to notify the insurance company of the disability, as required
to continue coverage. (Id. at p. 646.) After Zipoy died, the
insurance company denied the death beneficiary’s claim based
in part on Zipoy’s failure to notify the insurance company of
his disability. (Ibid.) The district court granted the insurance
company’s motion for summary judgment on the ground that
the notice prejudice rule did not apply to the notice of disability
requirement. (Id. at p. 645.) The Ninth Circuit reversed and,
applying the notice prejudice rule, stated: “If late notice of
Zipoy’s disability did not prejudice [the insurance company] in
its ability to investigate the basis of [the beneficiary’s] claim that
the substantive requirements of the disability waiver were met,
the reason behind the notice provision is lacking and it follows
neither logic nor fairness to relieve [the insurance company] of
its obligations under the policy.” (Id. at p. 648.)3
3 Carrington’s application of the notice prejudice rule was
based on Rhode Island and Arizona law. (Carrington, supra,
289 F.3d at pp. 646-647.) The notice prejudice rule in those
states is indistinguishable from the California rule. (Compare
id. at p. 646 [“[u]nder Rhode Island and Arizona law, an insurer
may not ‘rely on any of the so-called “notice” provisions of its
9
In Ward v. Management Analysis Co. (9th Cir. 1998)
135 F.3d 1276, 1280 (Ward), 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, an insurance company denied benefits
under a disability policy because the insured failed to file a
timely claim. (Ward, supra, 135 F.3d at p. 1279.) After the
insured sued, the trial court granted the insurance company’s
motion for summary judgment. (Id. at p. 1278.) On appeal, the
Ninth Circuit observed that the insurance policy “logically and
unambiguously establish[ed] that . . . timely submission of proof
[of claim] is a condition precedent to payment of benefits.” (Id. at
p. 1280.) The court nevertheless reversed because the condition
was subject to California’s notice prejudice rule and triable issues
of fact remained as to whether the insurance company suffered
actual prejudice as a result of the late claim. (Ibid.)
In Doe, supra, 737 F. Supp. 2d 1033, Doe was insured under
an employer-provided life insurance policy that provided for a
waiver of premiums and continued coverage if the employee
becomes disabled and gives the insurance company proof of his
or her disability within a certain time. (Id. at pp. 1039-1040.)
Doe became disabled and did not pay the policy premiums. After
the insurance company informed him that his policy had lapsed,
Doe sued and filed a motion for summary judgment seeking a
judicial determination that he was covered by the policy and not
policy unless it . . . demonstrate[s] that it ha[s] been prejudiced
by the lack of notice’ ”] with Shell Oil Co. v. Winterthur Swiss
Ins. Co., supra, 12 Cal.App.4th at p. 760 [under California
law, insurance company must prove that it suffered actual,
substantial prejudice by the insured’s failure to give timely notice
of claim].)
10
required to pay premiums because of his disability. Although
there was some evidence that the insurance company received
notice of the insured’s disability, the court explained that even
if it had not, the insurance company had “not shown prejudice
under the notice-prejudice rule.” (Id. at p. 1043.) In particular,
the court rejected the insurance company’s argument that
providing coverage under a policy that had lapsed nine years
earlier was itself prejudicial. (Id. at pp. 1042-1043.) There was
“nothing,” the court explained, that suggested that the insurance
company’s “ability to investigate [the insured’s] disability was
compromised by late notice.” (Id. at p. 1043.)
Farmers does not meaningfully distinguish these cases.
Ward, Farmers states, “simply applied the ‘notice prejudice’ rule
where it belongs—i.e., to a notice provision of a policy,” (boldface
and italics omitted) and Carrington is “simply a garden variety
‘notice prejudice’ case,” and “an ordinary and unremarkable
application of the ‘notice prejudice’ rule to a notice provision of a
policy.” (Italics omitted.) As in Ward and Carrington, however,
we also apply the notice prejudice rule in an unremarkable
manner, and where it belongs: to the notice provision in the
Rider. Farmers’ attempt to distinguish Doe begins with a plea to
ignore it because it is a federal trial court ruling, and follows with
a discussion of factual differences between Doe and the instant
case, none of which are legally relevant.
Because Farmers does not assert that it was prejudiced by
the delayed notice of Carada’s disability and there is no dispute
that Carada was totally disabled within the meaning of the
Rider, Carada was entitled to the benefit promised under the
Rider: to have the deductions charged to her account waived.
Because the deductions should have been waived and Farmers’
11
denial of coverage was based solely on those deductions, Farmers
has not established that, as a matter of law, Carada’s policy had
lapsed or that it was justified in denying her beneficiaries’ claim
under the policy.
B. Farmers’ Arguments Are Unavailing
Farmers presents a fundamentally different view of
the case. It contends that Carada’s failure to pay the policy
deductions in 2013 resulted in a lapse of the policy in
July 2013; that the lapse of the policy terminated the Rider;
and that the termination of the Rider precluded Carada (or her
beneficiaries) from receiving the deduction waiver benefit. The
argument is circular: Its premise that the policy lapsed because
Carada failed to pay the deduction assumes Farmers’ conclusion
that Carada was not entitled to the deduction waiver benefit
because the policy had lapsed. If, of course, Carada was entitled
to that benefit, she was excused from paying the deductions
while she was disabled and the policy would not have lapsed.
If Farmers’ view was accepted, the courts in Carrington
and Doe could not have arrived at their results. In each case,
the insured not only failed to give timely notice of his disability
as required under the terms of the policy, but failed to give
the notice until after the insurance company determined that
the policy had lapsed. (Carrington, supra, 289 F.3d at p. 646
[in the absence of notice of disability, policy lapsed when
insured discontinued employment]; Doe, supra, 737 F.Supp.2d
at pp. 1036-1037 [same].) If, as Farmers contends, the ostensible
lapsing of the policy precludes an insured’s subsequent invocation
of a disability-based waiver, the analysis in those cases would
simply have been as Farmers proposes here: Because the policy
had lapsed, the insureds could not invoke the disability-based
12
benefit and their claims were properly denied. In each case,
however, the court considered the policy lapse immaterial; if the
notice prejudice rule was applied in the insured’s favor, he was
entitled to the policy’s benefits regardless of whether the insured
had declared it to have lapsed.
Farmers’ reliance on Slater v. Lawyers’ Mutual Ins. Co.
(1991) 227 Cal. App. 3d 1415 (Slater) is misplaced. In that case,
a lawyer (Slater), had a professional liability policy that covered
him for claims made and reported to the insurance company
within the policy period. (Id. at pp. 1419-1420.) After the
expiration of the policy period, Slater tendered to his insurance
company a complaint against him for legal malpractice. (Id.
at p. 1418.) The Court of Appeal rejected Slater’s reliance on
the notice prejudice rule because that rule applies to notice
requirements in policies that provide coverage based on the
occurrence of an identifiable event, or “occurrence” policies, not
policies that define coverage based on the making and reporting
of a claim to the insurance company, or claims made and reported
policies. (Id. at pp. 1421-1424.) Applying the notice prejudice
rule to a claims made and reported policy such as Slater’s,
the court explained, would effectively convert the policy into
an occurrence policy, thereby extending coverage beyond the
parties’ agreement. (Id. at p. 1423; see Root v. American Equity
Specialty Ins. Co., supra, 130 Cal.App.4th at p. 947 [applying
notice prejudice rule to claims made and reported policies would
“effectively obliterate[] the ‘and reported’ part of the ‘claims made
and reported’ policy”].) The court therefore rejected Slater’s
claim. Similar reasoning and results are found in other cases
Farmers relies upon. (See, e.g., Pacific Employers Ins. Co. v.
13
Superior Court, supra, 221 Cal.App.3d at p. 1357; Industrial
Indemnity v. Superior Court (1990) 224 Cal. App. 3d 828, 830.)
These cases are inapplicable to Carada’s policy because
her policy is an occurrence policy as to coverage for her disability
as well as coverage for her death. 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.
(Slater, supra, 227 Cal.App.3d at p. 1423.) Rather, applying
the rule here would serve its purpose of preventing an insurance
company from shielding itself from its “ ‘contractual obligations’
through ‘a technical escape-hatch.’ ” (Carrington, supra, 289 F.3d
at p. 647.)
For the foregoing reasons, Farmers was not entitled to
judgment as a matter of law, and the court erred in granting its
motion for summary judgment.
14
DISPOSITION
The judgment is reversed. The Lats are awarded their
costs on appeal.
CERTIFIED FOR PUBLICATION.
ROTHSCHILD, P. J.
We concur:
JOHNSON, J.
BENDIX, J.
15