In Lat v. Farmers New World Life Ins. Co. (No. B282008, filed 10/16/18), a California appeals court held that the notice-prejudice rule precluded a denial of life insurance benefits based on the insured’s failure to give notice of disability as required under a disability premium waiver rider.

In Lat, premiums for the insured’s life insurance policy were accumulated in an account from which the cost of the insurance was deducted monthly. If the account balance fell below the next month’s deductions, a 61-day grace period was triggered, after which the policy lapsed with no right of reinstatement. The policy also attached a waiver of deduction rider providing that if the insured submitted proof of total disability, the monthly deductions would be waived. The insured was required to give written notice during the period of disability “unless it can be shown that notice was given as soon as reasonably possible.”

The insured became disabled in August 2012 and stopped paying. In May 2013 the insurer sent notice that the accumulated amount was insufficient to pay the next monthly deduction and the policy would lapse at the end of the grace period, on July 20, 2013. A second letter was sent a month later. On July 23, 2013, notice was sent that the grace period had expired and the policy was no longer in force.

In August 2013 the insured contacted her agent, who notified the insurer of the disability and requested reinstatement. Reinstatement was turned down and the insured died in September. Her beneficiaries made a claim, then sued alleging bad faith and agent negligence when the claim was denied.

Although the trial court granted summary judgment for the insurer the appeals court reversed, saying that notice of the disability was excused under the notice-prejudice rule. The court said “[t]he policy included a ‘Waiver of Deduction Rider’ (the Rider), which provided that if Farmers ‘receive[d] proof that [the insured was] totally disabled,’ Farmers would ‘waive the monthly deductions due after the start of and during [the insured’s] continued total disability.’ … The deduction waiver is thus based upon the occurrence of [the insured’s] total disability.”

After citing cases applying the notice-prejudice rule to occurrence-based insurance, the Lat court stated that: “Under the Rider in this case, there could be no deduction from [the insured’s] accumulation account while she was totally disabled, provided she gave Farmers timely notice and proof of her disability. There is no dispute that [she] 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 [the insured] the benefit of the deduction waiver unless Farmers suffered actual prejudice from the delayed notice. Farmers has made no such showing and, therefore, [the insured] was entitled to the deduction waiver benefit. If Farmers had provided that benefit, [the insured’s] policy would have been in force at the time of her death. Indeed, the only reason Farmers terminated [the] policy was that it applied the deductions it had promised [the insured] it would waive.”

The court rejected any analogy to claims-made insurance, which is not subject to the notice-prejudice rule, saying that the insured’s 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 … effectively rewrite the contract between the parties. [] 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.’”

The Lat court also found the insurer’s secondary argument circular, that once the policy lapsed the insured could no longer stand on the waiver provision, because the court concluded that the policy should not have lapsed in the first instance.

While the Lat court cited cases for the proposition that prejudice can be a question of fact, the court’s statements that the waiver would have applied automatically on notice of disability appeared to leave the insurer little room to nonetheless prove prejudice on the reversal of summary judgment.