Trends in California Lapse Litigation Over a decade has now elapsed since California enacted Sections 10113.71 and 10113.72 of its Insurance Code. For life insurance policies issued or delivered in California, those statutes mandate a 60-day grace period after a missed premium, a 30-day notice before terminating due to nonpayment, and the insured’s right to select a designee to receive a notice of a pending lapse (in addition to a notice to the policyholder, any known assignee, and any person with an interest in the policy). Two important rulings in 2021 shaped the course of California lapse litigation. The California Supreme Court held that the statutes apply to all in-force policies, regardless of whether the policies were first issued before the statutes’ enactment in 2013. And the Ninth Circuit held that an insurer’s failure to comply with the statutory requirements means that the policy cannot lapse. As a result, an insurer who does not adhere to the notice and grace period requirements may be liable for a breach of contract for failing to pay benefits under a policy it deemed lapsed—even if the policy would have lapsed anyway due to the insured’s continued failure to make payments. Those rulings seemingly cleared a pathway for litigants to recover for statutory violations. However, doing so on a classwide basis has not been so easy. Several putative class actions have been filed in California district courts by named plaintiffs who were owners or beneficiaries of policies that lapsed. Plaintiffs have typically sought damages for breach of contract, as well as injunctive relief and monetary restitution under California’s Unfair Competition Law. Courts have denied motions for class certification in at least five of those cases within the past two years. In their denials, courts have found that plaintiffs must show that their damages were caused by the statutory violation. Accordingly, when some putative class members voluntarily allowed their policies to lapse, courts have found atypicality and a predominance of individualized issues that precluded class certification. As one court recently noted, the district courts that have certified classes claiming violations of the statutes “have done so only in distinguishable circumstances,” such as when typicality was not challenged, damages were not sought, or the class excluded individuals who affirmatively canceled their policies. Despite the growing number of recent class-certification denials, new putative class actions continue to be filed under the statutes. One Cost-of-Insurance Challenge Is Dissected on Appeal … Advance Trust & Life Escrow Services LTA v. Protective Life Insurance Company, No. 22-12991 (11th Cir. Mar. 1, 2024). The Eleventh Circuit affirmed in part and reversed in part a district court’s dismissal of an insured’s breach-of-contract claim related to cost-of-insurance rates for universal life insurance policies. The policy language at issue stated: “Monthly cost of insurance rates will be determined by us, based on our expectations as to future mortality experience.” The insured contended that this language required the insurer to reassess and redetermine its costof-insurance rates monthly or periodically based on improved mortality expectations and experience, but that Protective Life never redetermined cost-of-insurance rates despite nationwide mortality rates improving at 1% per year. It was also alleged that the initial cost-ofinsurance rate scale improperly considered factors other than expectations as to future mortality experience, such as expenses and lapse rates, while the policy language required it to exclusively consider“expectations as to future mortality experience.” Finally, and alternatively, the insurer contended that Protective Life actually had redetermined cost-of-insurance rates and the redetermination ignored “expectations as to future mortality experience.” After a robust review of cost-of-insurance jurisprudence in the Eleventh Circuit and beyond, and applying South Carolina law, the court affirmed the district court’s decision that the phrase “[m]onthly cost of insurance rates will be 3 Insurance Insights Spotlight Welcome to our first edition of Insurance Insights! We started this publication as a place to gather notable legal developments and trends relevant to the insurance industry. It helps us to share these reports within our team, and we hope they will be a helpful reference to you. Our focus areas are legal trends and developments in life insurance, coverage, annuities, and property and casualty, as well as privacy and AI issues impacting the insurance industry. In this issue, we look back at developments from the past few months. The California Supreme Court weighed in on whether the presence of COVID-19 constitutes a “direct physical loss or damage to property” for coverage under commercial property policies, joining a developing consensus across the nation in addressing coverage claims for COVID-related business losses. Courts in the Golden State are also riding a wave of class actions related to a pair of statutes that mandate certain notice requirements before life insurance policies can lapse. On the opposite coast, a Georgia bill went into effect to rein in “Holt demands”—a practice that has ensnared motor vehicle insurers in multimillion-dollar bad-faith litigation. And the Eleventh Circuit offered its interpretation of what the policy language “[m]onthly cost of insurance rates will be determined by us, based on our expectations as to future mortality experience” requires life insurers to do. Tiffany Powers, Andy Tuck, Sam Park, Tania Rice Welcome to Insurance Insights 2 Life Insurance
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