California Decisions Kick Off Parade of Life Insurance Lapse Notice Cases

In McHugh v. Protective Life Insurance Co., the California Supreme Court reviewed the Court of Appeal’s decision that the 2013 lapse laws should apply only to new policies issued after the laws went into effect. The Court of Appeal deferred to interpretations of California state regulators to the effect that the laws applied only to new policies issued after 2013, thereby avoiding retroactive application of law prohibited by California jurisprudence. The California Supreme Court reversed the Court of Appeal’s decision, explaining that “[a]pplying the provisions to policies already in effect on [January 1, 2013] does not appear to impose new or different liabilities based on earlier conduct.” The court viewed the 2013 lapse laws as not having a “substantial change in the contracting parties’ rights or obligations” and thus not entailing retroactive enforcement.

In the wake of McHugh, the Ninth Circuit Court of Appeals, in Thomas v. State Farm Life Insurance Co., affirmed a decision by the Southern District of California that had rejected the lapse of two policies and entered summary judgment in favor of the beneficiary. The district court had based its ruling on the fact that the policies had been renewed after the 2013 lapse laws went into effect (avoiding retroactivity). On appeal, however, the Ninth Circuit affirmed the district court on other grounds based on McHugh. The court held that under McHugh, an insurer’s failure to comply with the 2013 lapse laws precluded the policies’ lapse. In so doing, the court rejected the insurer’s argument that McHugh should not apply absent evidence that the noncompliance with the lapse laws had caused the lapses.

Given these recent decisions, the California 2013 lapse laws de facto apply retroactively. Not surprisingly, three new lawsuits have now been filed in the Northern, Southern, and Central Districts of California, and we expect significant additional litigation to come.