This is a fascinating life insurance policy case, if there is such a thing, where the trial court ruled for Farmers New World Life Insurance Company, but the ruling was overturned by the Second District Court of Appeal in California, who ruled in favor of the insured.
1993 LIFE INSURANCE POLICY
In December 1993, Maria Carada purchased an occurrence life insurance policy from Farmers New World Life Insurance Company and named her sons, the Lats, as beneficiaries.
The policy included a rider under which Farmers agreed to waive the cost of the insurance while Carada was disabled, meaning she did not have to keep paying premiums if Carada provided Farmers notice and proof of her disability.
Almost 20 years later, September 2012, Carada was diagnosed with “stage 4 colon cancer” and became disabled as a result. She did not provide Farmers with notice of her disability.
In May, June and July of 2013, Farmers sent letters to Carada informing her that the policy would lapse and terminate if she did not resume payments.
Carada died in September 2013 and when the Lats attempted to claim the policy’s death benefits, Farmers declined because the policy had lapsed.
BENEFICIARIES SUE UNDER POLICY
In November 2013, the Lats sued Farmers claiming breach of contract and breach of the implied covenant of good faith and fair dealing and claiming Farmers’ agent was negligent.
The trial court ruled for Farmers, and the Lats took this case to the Court of Appeal.
Farmers contended that Carada’s policy terminated because she failed to continue paying premiums. Cut and dried. The Lats countered that their mom was totally disabled which caused her not to give notice that she was disabled, which excused Carada from failing to give notice.
NOTICE PREJUDICE RULE
In California there is a legal principle applicable with occurrence (versus claims made) policies called the Notice Prejudice Rule. An insurance company may not deny an insured’s claim based on lack of timely notice or proof of claim unless it can show actual prejudice from the delay.
The insurer must show that it lost something that would have changed the handling of the underlying claim.
The most common use of the Notice Prejudice Rule is when the insured does something that interferes with the insurance company’s ability to investigate the insured incident. For example, failing to timely put in a claim to the insurance company which prejudiced the company’s ability to investigate and defend.
RULING AGAINST FARMERS
The Court of Appeal ruled for the Lats requiring Farmers to pay under the policy. Farmers was not prejudiced and suffered no loss from her failing to give notice of her disability especially when she was unable to do so because of her cancer.
The Court discussed the Notice Prejudice Rule: “Rather, applying [the Notice Prejudice Rule] here would serve its purpose of preventing an insurance company from shielding itself from its contractual obligations through “a technical escape-hatch.”
The Lats are entitled to stay in court and pursue their recovery from Farmers. Given the Notice Prejudice Rule they should prevail.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at firstname.lastname@example.org or www.portersimon.com.
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