In 2012, the California Legisla­ture enacted changes to the California Insurance Code that provide protections intended to shield consumers from los­ing life insurance coverage due to late or missed insurance premium payments. See Cal. Ins. Code §§ 10113.71 and 10113.72. (Several other states have similar statutes.) These changes went into effect on Janu­ary 1, 2013. Last year, on August 30, 2021, the Supreme Court of California held that these changes applied to all life insurance policies that were in force when the statutes became effective. McHugh v. Protective Life Ins. Co., 494 P.3d 24 (Cal. 2021). Thus, life insurance policies issued or delivered in California even before January 1, 2013, can­not lapse or be terminated for nonpayment of premiums unless the insurer first com­plies with the grace period and notice pro­visions created by the legislation.

In reaching its decision, the California Supreme Court defined the procedure for determining whether a statute or statutory change is retroactive, and thus whether to invoke the presumption against retro­activity. In doing so, the Court concluded that it must first answer a threshold ques­tion: does the statutory change operate ret­rospectively or prospectively by targeting pre- or post-enactment conduct? While the Court acknowledged this is not always an easy question to answer, it determined that the new statutory protections targeted pro­spective, post-enactment conduct and did not otherwise raise significant problems traditionally associated with retroactively applying a new statute. The soundness of the Court’s reasoning may come under scrutiny, however, as the results of the McHugh decision in subsequent case law, and the interplay of new statutes, may have created a liability trap for unsuspecting life insurance companies.

McHugh v. Protective Life Insurance Company

In McHugh, a life insurance company issued a $1 million term life insurance policy (the “Policy”) to William McHugh in March of 2005. See McHugh, 494 P.3d at 28. The Policy premiums were due to be paid every January 9th on an annual basis, and the Policy terms provided for a 31-day grace period before the policy could be terminated for failure to pay pre­miums. McHugh paid the premium every year through January 2012, which kept the Policy in force until February 9, 2013 – 31 days after the January 9, 2013, premium deadline. Id. When McHugh did not pay the premium on time, the insurer sent a letter on January 29, 2013, warning him that the Policy would lapse if the payment were not received by February 9. Id. After the grace period expired, the insurer sent another letter granting him through March 12, 2013, to pay the premium and reinstate the Policy. Id. McHugh did not pay, and the insurer terminated the Policy. McHugh died in June 2013. Id.

“The Statutes” – California’s (not so) New Grace Period and Notice Requirements for Life Insurance Policies

Before the lapse and termination of McHugh’s Policy, the California Legis­lature passed new protections to shield consumers from losing their life insur­ance coverage due to missed premium pay­ments. These protections were codified in California Insurance Code §§ 10113.71 and 10113.72 (hereinafter, “the Statutes”) which became effective on January 1, 2013, – almost 8 years after McHugh’s Policy was issued, but while it was still in force.

(a) Each life insurance policy issued or delivered in this state shall contain a provision for a grace period of not less than 60 days from the premium due date. The 60-day grace period shall not run concurrently with the period of paid coverage. The provision shall provide that the policy shall remain in force dur­ing the grace period.

(a) Each life insurance policy issued or delivered in this state shall contain a provision for a grace period of not less than 60 days from the premium due date. The 60-day grace period shall not run concurrently with the period of paid coverage. The provision shall provide that the policy shall remain in force dur­ing the grace period.

(b)(1) A notice of pending lapse and termination of a life insurance policy shall not be effective unless mailed by the insurer to the named policy owner, a designee named pursuant to Section 10113.72 for an individual life insurance policy, and a known assignee or other person having an interest in the indi­vidual life insurance policy, at least 30 days prior to the effective date of termi­nation if termination is for nonpayment of premium.

• This subdivision shall not apply to nonrenewal.
• Notice shall be given to the policy owner and to the designee by first-class United States mail within 30 days after a premium is due and unpaid. However, notices made to assignees pursuant to this section may be done electronically with the consent of the assignee.

(c) For purposes of this section, a life insurance policy includes, but is not limited to, an individual life insurance policy and a group life insurance policy, except where otherwise provided.

Cal. Ins. Code § 10113.71 (West)

(a) An individual life insurance pol­icy shall not be issued or delivered in this state until the applicant has been given the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termina­tion of a policy for nonpayment of pre­mium. The insurer shall provide each applicant with a form to make the des­ignation. That form shall provide the opportunity for the applicant to submit the name, address, and telephone num­ber of at least one person, in addition to the applicant, who is to receive notice of lapse or termination of the policy for nonpayment of premium.

Section 10113.71(a) requires each life insurance company issued or delivered in California to include a 60-day grace period after the premium due date before a life insurance policy can lapse due to non­payment. Additionally, “notice of pending lapse and termination of a life insurance policy shall not be effective unless mailed by the insurer to the named policy owner [and] a designee named pursuant to Section 10113.72” at least 30 days before any termination for nonpayment. Cal. Ins. Code § 10113.71(b)(1).

Section 10113.72(a) prevents the issu­ance of any life insurance policy in Cali­fornia unless and until the policy applicant has been given the right to designate at least one other person to receive notice of pend­ing lapse or termination of a policy, if the lapse or termination is due to nonpayment of premium. Id. at § 10113.72(b). It also requires the insurer to notify policy owners annually of this right and further provides that no “life insurance policy shall lapse or be terminated for nonpayment of premium unless the insurer, at least 30 days prior to the effective date of the lapse or termina­tion, gives notice to the policy owner and to the person or persons designated in subdi­vision (a).” Id. at § 10113.72(c). Notice also must be given “within 30 days after a pre­mium is due and unpaid.” Id.

McHugh at Trial

Shortly after McHugh’s death, his daugh­ter (the Policy beneficiary) and her mother (McHugh’s successor in interest and Pol­icy contingent beneficiary) contacted the insurer to determine whether a claim could be made under the Policy. Id. When the insurer advised that the Policy had been terminated, the beneficiaries sued for breach of contract and bad faith, arguing that sections 10113.71 and 10113.72 applied to the Policy even though it was issued before the effective date and that, therefore, the Policy could not have been terminated because the insurer did not satisfy the stat­utes’ requirements. The insurer argued that the statutes could not retroactively apply to policies issued before January 1, 2013, and relied heavily on alleged agency interpreta­tions for support.

The trial court rejected the insurer’s argument. Rather than rule that the insurer’s noncompliance with the Statutes prevented their lapse as a matter of law, however, the court allowed the issue to go to the jury. The jury then determined that McHugh was excused from having to per­form his duties under the Policy; that all other conditions in the Policy were satis­fied; and that the insurer did something the Policy prohibited (i.e., terminating the policy inconsistent with the statutes). The jury ultimately returned a special verdict for the insurer, however, finding that the plaintiffs were not harmed by the insurer’s action. McHugh v. Protective Life Ins. Co., No. 37201400019212CUICCT, 2017 WL 7000052, at *1 (Cal. Super. Aug. 09, 2017).

Plaintiffs appealed from the verdict and denial of their motion for judgment not­withstanding the verdict, arguing that the trial court erred when it declined to decide as a matter of law that the insurer had vio­lated the statutes. The insurer requested that the judgment be affirmed on the addi­tional ground that the Statutes do not apply retroactively to policies issued prior to their effective date.

McHugh on Appeal to the Court of Appeal

The California Court of Appeal agreed with the insurer and affirmed the verdict on the additional ground that the Statutes apply only to life insurance policies issued after January 1, 2013, and not retroactively to McHugh’s Policy.

In reaching this decision, the Court of Appeal assumed, perhaps prematurely, that requiring compliance with the Stat­utes for policies issued prior to January 1, 2013, is necessarily a “retroactive” appli­cation of the statutory changes. As the Supreme Court of California would later point out, before applying a presumption against retroactivity of a statute, a court must first answer the threshold question: “Is the statutory change in question ‘retro­active’ or ‘prospective?’” McHugh v. Protec­tive Life Ins. Co., 494 P.3d 24, 33 (Cal. 2021). The Court of Appeal never addressed this question, which was critical to the Supreme Court’s ultimate holding later. See McHugh v. Protective Life Ins., 253 Cal. Rptr. 3d 780, 786 (Cal. App. 5th 2019), rev’d and remanded sub nom. McHugh v. Protective Life Ins. Co., 494 P.3d 24 (Cal. 2021). Thus, the Court of Appeal began its analysis with the legal principal that “a statute may be applied retroactively only if it contains express language of retroactivity or if other sources provide a clear and unavoidable implication that the Legislature intended retroactive application.” Id. (quoting Myers v. Philip Morris Cos., 50 P.3d 751 (Cal. 2002)) (emphasis in Myers). Then, look­ing at the statutory language, the Court of Appeal identified specific language that prevented retroactive application to poli­cies that were issued before 2013.

Specifically, the court found that sec­tion 10113.72 “clearly does not apply to policies issued before the statute’s effec­tive date because” the statute prevents the issuance of any life insurance policy until the applicant has been given an opportu­nity to designate another person to receive notice, and “because an existing policy­holder is not—and by definition cannot be—an applicant.” Id. See also Cal. Ins. Code § 10113.72(a). Then, because sec­tion 10113.71(b)(1) requires advance notice of a pending lapse be sent to a “designee named pursuant to Section 10113.72,” the Court of Appeal concluded that this sec­tion also was intended to apply only to life insurance policies “issued or delivered” after the Statutes’ effective date because the “right to . . . designate” only exists in poli­cies issued after January 1, 2013. McHugh, 253 Cal. Rptr. at 786. Moreover, the court reasoned, the legislature knows how to specify that new insurance code statutes apply “to all policies in force, regardless of their date of issuance” – as it has done, for example, in the long-term care insurance context – but chose not to do so in sec­tion 10113.71. Id. at 787 (quoting Cal. Ins. Code § 10235.95). It is important to note that the California Insurance Code, Divi­sion 2, Chapter 2.6, regulating Long-Term Care Insurance also expressly “applies to all long-term care insurance policies deliv­ered or issued for delivery in [California] on or after January 1, 1990.” Cal. Ins. Code § 10235. Section 10235.95 established the interest rate accrual for accepted claims under long-term care policies, and it is expressly excepted from the prospective-only application of section 10235. Con­versely, the life insurance code provisions at issue in McHugh are not subordinate to any code section expressly limiting its subparts to prospective-only application. Thus, the Court of Appeal’s reliance on this single code section as an example of what the legislature “knows how to do” is less persuasive as the legislature did not have to make sections 10113.71 and 10113.72 expressly retroactive notwith­standing another provision that otherwise would prevent such application.

In addition to the statutory language, the Court of Appeal found persuasive Cali­fornia Department of Insurance employees’ determinations that the Statutes’ notice provisions and grace period applied only to insurance policies issued in 2013 or later. McHugh, 253 Cal. Rptr. at 784. Official instructions on the Department’s applica­tion system for approval of new insurance products and changes to existing products stated: “All life insurance policies issued or delivered in California on or after [January 1, 2013] must contain a grace period of at least 60 days.” Id. (quoting SERFF Instruc­tions for Complying with [Assembly Bill no.] 1747). In other communications both before and after the Statutes became effec­tive, Department employees responded to direct inquiries about the Statutes’ appli­cability and expressly advised that the Statutes applied (or would apply) only to policies issued or delivered after January 1, 2013, not before, and that the Statutes also would not apply to renewals of pre-2013 policies. Id.

Thus, the Court of Appeal concluded, the Statutes were not intended to be retro­active, and life insurance companies did not have to comply with the notice provi­sions or 60-day grace period before termi­nating a policy that was issued before 2013. Id. The Court of Appeal’s decision was ren­dered on October 9, 2019, and, combined with the consistent guidance from Depart­ment of Insurance employees, cemented for the life insurance industry that the Statutes had no effect on the post-2013 lapse and termination of life insurance policies that were issued before January 1, 2013. Until the decision was appealed to the Califor­nia Supreme Court.

McHugh at The California Supreme Court

When Plaintiffs appealed yet again, the California Supreme Court reached a com­pletely different conclusion – and for com­pletely different reasons – to hold that sections 10113.71 and 10113.72, with the exception of section 10113.72(a), “apply to all life insurance policies in force when these two sections went into effect, regard­less of when the policies were originally issued.” McHugh v. Protective Life Ins. Co., 494 P.3d 24, 27 (Cal. 2021).

i. (Non?) Retroactivity of Sections 10113.71 and 10113.72:

While the Supreme Court acknowledged the general presumption against retroactively applying legislative enactments, it reasoned that there was no need to apply the presumption here. Id. at 33. Critically, the Court found the lower court’s analysis to be flawed because it “presupposed that applying sections 10113.71 and 10113.72 to McHugh’s policy was, in fact, retroactive for purposes of applying the presumption against retroactivity.” Id. Before the Court can apply the presumption, it must first determine whether the statutory change in question is in fact retroactive or pro­spective – and to answer this question, the Court says, “The context matters.” Id. at 32-34.

California cases defining “retroactiv­ity” primarily focus on whether a spe­cific statutory change “significantly alters settled expectations: by changing legal consequences of past events, or vitiating substantial rights established by prior law.” Id. at 34 (emphasis in original). Citing Quarry v. Doe I, 272 P.3d 977 (Cal. 2012); Strauss v. Horton, 207 P.3d 48 (Cal. 2009); Elsner v. Uveges, 102 P.3d 915 (Cal. 2004); McClung v. Employment Dev. Dept., 99 P.3d 1015 9Cal. 2004); W. Security Bank v. Supe­rior Court, 933 P.2d 507 (Cal. 1997); Tapia v. Superior Court, 807 P.2d 434 (Cal. 1991) (en banc). Put differently, legislation is ret­roactive if it “increase[s] a party’s liability for past conduct.” Id. For example, appli­cation of a newly amended statute of limi­tations that enlarges the limitation period would be “retroactive” if it allowed claims for which the limitation period had already expired to be revived after the enactment, and the presumption against retroactive application would apply in the absence of an unambiguous legislative intent to the contrary. See, e.g., Gallo v. Superior Court, 246 Cal. Rptr. 587, 591-92 (Cal. App. 1988) (holding that, absent express language of retroactivity, a new enactment enlarging the period in which a plaintiff could sue for damages arising from commission of a felony could not revive a claim that had expired prior to enactment). This would both “significantly alter settled expecta­tions” and “increase a party’s liability for past conduct” because, at the time of the enactment, there could be no liability for an expired claim. Conversely, California Courts have routinely held that similar enlargements apply prospectively to claims that may have arisen before the enactment, but for which the limitations period had not yet run at the time of the enlargement. See, e.g., Soc’y of Cal. Pioneers v. Baker, 50 Cal. Rptr. 2d 865, 874 (Cal. App. 1996) (holding “amended version of the statute of limitations governs this action because the statute had not run in [defendant’s] favor at the time it was amended”). See also Quarry, 272 P.3d at 982 (“As long as the former lim­itations period has not expired, an enlarged limitations period ordinarily applies and is said to apply prospectively to govern cases that are pending when, or instituted after, the enactment took effect. This is true even though the underlying conduct that is the subject of the litigation occurred prior to the new enactment.”); Mojica v. 4311 Wilshire, LLC, 31 Cal. Rptr. 3d 887, 889 (Cal. App. 2005) (Holding that while Plain-tiff’s claims was pending, she was entitled to catch the windfall of any liberalization of the statute of limitations . . . regardless of its non-retroactivity”).

The Court found that the Statutes do not disrupt settled liability expectations in the same way. So, the McHugh Court says, “it’s not clear they operate ‘retroac­tively’ at all.” McHugh, 494 P.3d at 34. The statutes do not, for example, compel any insurer to revive or “reinstate” any pol­icy that lapsed or terminated for nonpay­ment prior to January 1, 2013. At least one plaintiff has unsuccessfully attempted to apply the statutory provisions to a policy that lapsed prior to January 2013, arguing that dismissal of his case was contrary to public policy given the statutes, but con­ceding the statutes were not effective at the time the policy at issue lapsed. Calleja v. U.S. Fin. Life Ins. Co., No. 13-00983 SC, 2014 WL 988900, at *4 (N.D. Cal. Mar. 10, 2014). The Court also found that the stat­utes do not alter the substantive bargain between insurer and insured by, for exam­ple, requiring the insurer to expand the coverage of its policies or altering or elim­inating the insured’s obligation to pay pre­mium for violations of the new enactments. In practice, as noted below, it is arguable that this has not held true where, for exam­ple, an insurer was found to have breached its life insurance policy by failing to pay life insurance benefits on a policy for which premiums indisputably had not been paid. See Thomas v. State Farm Life Ins. Co., No. 20-55231, 2021 WL 4596286, at *1 (9th Cir. Oct. 6, 2021). Id. at 34-35. Instead, the Court found these statutes “merely impose addi­tional rules on insurers as a condition of doing business in California,” altering the procedure for terminating a life insurance policy in the future. Id. at 35. In the par­ticular context of the insurance industry, where the state already significantly regu­lates the contractual relationships between insurers and insureds, the Court suggested that such application “could be regarded as prospective rather than retroactive for pur­poses of the presumption.” Id. This sug­gests that, in the context of a pervasively regulated field such as insurance, the “set­tled expectation” is one of constant change and regulation to which a policy may be required to adapt. And so long as the vested liability of one of the parties is not signif­icantly altered, applying the Statutes to future lapses of policies that were issued prior to 2013 “falls well short of the quint­essential understanding of ‘retroactivity.’”

Despite this holding, the Court declined to expressly determine that the statutes are prospective, and therefore did not foreclose the possibility that a similar policy could be retroactive in effect, thereby invoking the (rebuttable) presumption against retroac­tive application to a particular policy. The Court recognizes instead that “any nomi­nal retroactive effect arguably at issue here plainly fails to present the type of concern underlying the application of the presump­tion as we have ordinarily understood it.” Id. at 37. While this holding is probably most accurately read as finding that the McHugh policy and those similarly situ­ated do not make “retroactive” changes at all, the court punts on this ultimate con­clusion to make the more nuanced holding that, even if the changes are “retroactive” in the broadest sense of that word, then the “indicia of legislative purposes here could rebut it.” Id. The court expressly “decline[d] to give the presumption such weight that it determines the outcome of this case.” Id.

Indicia of Legislative Intent – DOI Defer­ence and Statutory Interpretation

After considering and declining to invoke the presumption against retroac­tivity and determining that the Statutes are not retroactive – or at least, not retroactive in the sense that the presumption can bar their application to pre-2013 life insurance policies – the Court turned to the statu­tory language and other indicia of legisla­tive intent to determine whether they could apply to prevent McHugh’s Policy from lapsing. The Court concluded that they do.

In reaching this holding, the Court gave no deference to the Department of Insurance (DOI) guidance upon which the Court of Appeal heavily relied. The Cali­fornia Supreme Court acknowledged that “some deference to DOI’s interpretations of the Insurance Code” could be warranted “to the extent that those interpretations are embodied in quasi-legislative regulations or constitute long-standing, consistent, and contemporaneous interpretations.” McHugh v. Protective Life Ins. Co., 12 Cal. 5th 213, 227, 494 P.3d 24, 32 (2021). Here, however, its “interpre­tation does not depend on extending def­erence to [Department of Insurance] staff correspondence or electronic instructions, neither of which represent the agency’s offi­cial interpretation” of the Statutes. Id. at 28.

Pre-and post-enactment correspon­dence from DOI employees to insurers stated that the statutes’ notice and grace-period requirements did not apply to pol­icies issued before 2013. While the Court recognized that these statements expressed an interpretive view, it explained that such communications provide little interpretive guidance because they (1) are not necessar­ily the product of careful consideration of the legal issue; (2) do not express or repre­sent “a quasi-legislative rule, promulgated pursuant to delegated lawmaking power”; and (3) they were not disseminated by the DOI to anyone other than the recipient.” McHugh, 494 P.3d at 45. Citing Heckart v. A-1 Self Storage, Inc., 415 P.3d 286 (Cal. 2018) and I, 960 P.2d 1031 (Cal. 1998). More importantly, or at least more persua­sively to the Court on this issue, the Cal­ifornia Insurance Commissioner filed an amicus brief denying that such correspon­dence constitutes official interpretations.

Finding no deference owed to the DOI correspondence, the Court turned to the statutory language for indications of leg­islative intent. The Court grappled first with section 10113.72(a), which provides: “An individual life insurance policy shall not be issued or delivered in this state until the applicant has been given the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium.” Cal. Ins. Code § 10113.72(a) (emphasis added). Like the Court of Appeal, the California Supreme Court rec­ognized that this provision obviously can­not apply to any policy issued or delivered prior to 2013. McHugh, 494 P.3d at 39. The remaining provisions, however, are less obvious and have no similar, prospective-only language indicating a clear legislative intent that pre-2013 policies be included or excluded from the Statutes’ requirements.

For example, section 10113.71 states, “Each life insurance policy issued or deliv­ered in this state shall contain a provision for a grace period of not less than 60 days from the premium due date.” Cal. Ins. Code § 10113.71(a). Nothing in the language of this section, or the subsequent notice sub­parts in 10113.71(b), indicates any intent, one way or another, that the statue apply to pre-2013 life insurance policies. Sub­part (b) of section 10113.72 is similar, stat­ing that an “insurer shall notify the policy owner annually of the right to change the written designation or designate one or more persons.” However, this subpart fol­lows, and references, “the right to desig­nate” created by section 10113.72(a). The Court focused on the fact that subpart (a) refers to “the applicant” for an individ­ual life insurance policy, whereas subpart (b) requires insurers to notify “the policy owner” – a requirement the Court declares “could apply regardless of when the policy was issued.” McHugh, 494 P.3d at 39. The Court appears to have sided with Plain-tiff’s interpretation that subpart (b) con­tains no language to limit the designation right only to “policy owners” who pur­chased insurance after enactment of the statutes, stating (without analysis) that this interpretation “gives full effect to the sev­eral instances where subdivision (b) uses meaningfully distinct language from sub­division (a).” Id. The Court acknowledged, however, that the insurer’s argument that subdivision (b) repeatedly refers back to and builds from subdivision (a) and could be read merely to clarify the scope of that provision. Id.

Indeed, other California Supreme Court precedent supports the insurer’s argument, cautioning against “ignor[ing] the Legislature’s grammatical choices—specifically, its use of definite and indefinite articles.” Pineda v. Bank of Am., N.A., 241 P.3d 870, 875 (Cal. 2010). Section 10113.72(b), refers to “the policy owner,” not “a” or “any” pol­icy owner, which can only be read to refer back to the policy in subpart (a) – which policy “shall not issue or be delivered in” California until the right to designate has occurred. Subpart (b) also refers definitely to “the right” and “the written designa­tion.” Cal. Ins. Code § 10113.72(b). Plain­tiffs’ interpretation does not account for these grammatical choices, whereas the insurer’s interpretation is bolstered by them – the definite selection of “the policy owner,” “the designation,” and “the right” all necessarily refer back to subpart (a). Plaintiffs’ reading requires subpart (b) to be read in isolation from the immediately preceding subpart. Subpart (b) makes lit­tle sense in such isolation, however, as it is impossible to tell the type of policy to which the subpart refers. Indeed, subpart (a) identifies the type of policy – “individ­ual life insurance policy” – covered by the statute. Plaintiffs’ interpretation-in-isola­tion could lead, and has led, to litigation over how far the statute’s requirements can extend. For example, while 10113.72(a) and (c) refer specifically to “individual life insurance policies,” subpart (b) and section 10113.71 are not so limited, despite express references to the designation created by section 10113.72(a).

If a paradigmatic beneficiary of the new legislation was, say, a 70-year-old life insurance policy owner who had paid premiums for 30 years before missing an annual payment, a new-policy-only construction would mean that a person in this situation wouldn’t garner protection from the new laws before 2043. Even for a forward-thinking Legis­lature, this seems like a stretch. (Cf.Bentley, supra, 2016 WL 7443189, at p. *4 [declining to give effect to the  “absurd result[s]” of Protective Life’s interpretation].)Id. at 33.

If a paradigmatic beneficiary of the new legislation was, say, a 70-year-old life insurance policy owner who had paid premiums for 30 years before missing an annual payment, a new-policy-only construction would mean that a person in this situation wouldn’t garner protection from the new laws before 2043. Even for a forward-thinking Legis­lature, this seems like a stretch. (Cf.Bentley, supra, 2016 WL 7443189, at p. *4 [declining to give effect to the  “absurd result[s]” of Protective Life’s interpretation].)Id. at 33.

This hypothetical falls into the exact kind of analysis the U.S. Supreme Court warned of in Landgraf v. USI Film Products, 511 U.S. 244, 283 (1994). “It will frequently be true . . . that retroactive appli­cation of a new statute would vindicate its purpose more fully. That consideration, however, is not sufficient to rebut the pre­sumption against retroactivity.” Id. at 285­86. The McHugh Court neatly sidesteps this problem by circumventing the pre­sumption against retroactivity in its ear­lier analysis.

The Court did not dive deeply into canons of statutory construction, but it acknowledged that the insurer’s interpreta­tion was at least plausible and, thus, iden­tified some ambiguity in the Statutes. The Court therefore looked to the legislative history for Assembly Bill No. 1747, finding an “awareness that consumers tend to hold life insurance policies for long periods” and a concern that policy owners, “especially seniors,” may lose benefits by failing to pay a single annual premium on time – possi­bly because, for example, “they were being hospitalized when the bill came.” McHugh, 494 P.3d at 41-42. The Court did not find any expression of intent about whether the Statutes were to apply to all policies in force, or only to policies issued after Janu­ary 1, 2013; but it concluded, nonetheless, that “the insurer’s interpretation would produce results seemingly incongruous with the legislation’s broader aims of pre­venting forfeiture.” Id. Tellingly, the Court turned to the following hypothetical to support its ultimate holding:

This hypothetical falls into the exact kind of analysis the U.S. Supreme Court warned of in Landgraf v. USI Film Products, 511 U.S. 244, 283 (1994). “It will frequently be true . . . that retroactive appli­cation of a new statute would vindicate its purpose more fully. That consideration, however, is not sufficient to rebut the pre­sumption against retroactivity.” Id. at 285­86. The McHugh Court neatly sidesteps this problem by circumventing the pre­sumption against retroactivity in its ear­lier analysis.

Pointing to the California Legislature’s supposed “awareness” and the hypotheti­cal “absurd result” as indicia of its intent that the Statutes’ requirements apply to pre-2013 life insurance policies, the Court resolved the ambiguity in the statutory language in favor of Plaintiffs. Thus, going forward, the notice provisions and grace periods required by section 10113.71 and 10113.72 apply to all individual life insur­ance policies in force on January 1, 2013.

While McHugh resolves the legal reach of the Statutes to policies issued or deliv­ered before January 1, 2013, practical appli­cation of McHugh’s construction over the last several months has raised more ques­tions and sometimes led to results that seem to contradict the assumptions made by the California Supreme Court.

Thomas v. State Farm Life Insurance Company: Per se Breach of Contract – No Causation or Reciprocal Performance Required

Two potentially contradictory results are demonstrated by the recent Federal Ninth Circuit opinion in Thomas v. State Farm Life Insurance Company, which construed McHugh to eliminate two elements of a breach of Contract claim under California law. No. 20-55231, 2021 WL 4596286, at *1 (9th Cir. Oct. 6, 2021).

Thomas involved two individual life insurance policies issued to James Flynn in 2008. Thomas v. State Farm Ins. Co., 424 F. Supp. 3d 1018, 1020 (S.D. Cal. 2019), aff’d sub nom. Thomas v. State Farm Life Ins. Co., No. 20-55231, 2021 WL 4596286 (9th Cir. Oct. 6, 2021). Flynn failed to pay premiums in 2016, and his policies subse­quently lapsed when he failed to pay pre­mium after a 31 day grace period. Id. Flynn died in 2017 and, when the representative of his estate inquired about the life insur­ance policies, the insurer stated they had been terminated for nonpayment. Id. The parties did not dispute that Mr. Flynn was not given a 60-day grace period, and they stipulated that there was no evidence of the insurer communicating to him a right to designate an additional notice party. Id. at 1022.

The Federal District Court for the South­ern District of California granted sum­mary judgment to Plaintiff, holding that each premium payment after January 2013 renewed the policies and, therefore, under the renewal principal, the policies incorporated the Statutes into the policy’s provisions. Id. at 128. Because the insurer indisputably did not comply with the 60-day grace period, the policies could not terminate. Id.

On appeal, the Ninth Circuit affirmed on narrower grounds. In light of McHugh, the insurer conceded that the Statutes applied regardless of whether each post-2013 pre­mium payment constituted a renewal. Thomas, 2021 WL 4596286, at *1. Instead, the insurer argued that Plaintiff failed to prove causation because she did not estab­lish any evidence “that the policies would not have lapsed even had State Farm com­plied with sections 10113.71 and 10113.72.” Id. The Ninth Circuit was unpersuaded. It found that, in light of McHugh, “[a]n insurer’s failure to comply with these statutory requirements means that the policy can­not lapse.” Id. Thus, it held, the insurer “breached its contractual obligations by failing to pay benefits to Thomas under the policies after Flynn’s death.” Id.

This ruling perhaps proves too much. California law indeed holds that “insur­ance policies are governed by the statu­tory and decisional law in force at the time the policy is issued” and that these statu­tory “provisions are read into each policy issued thereunder, and become a part of the contract with full binding effect upon each party.’” Interinsurance Exch. of Auto. Club of S. Cal. v. Ohio Cas. Ins. Co., 373 P.2d 640, 643 (Cal. 1962). Also according to Califor­nia law, “this rule is followed even through there has been a subsequent amendment or repeal of the statute incorporated into the policy” based on the principal that “a statute should be given the least retroac­tive effect that its language reasonably per­mits.” Id.

While the effect of McHugh and sec­tions 10113.71 and 10113.72 may be to prevent lapse and termination of a life insurance policy issued prior to 2013, the implication that non-termination and fail­ure to pay automatically results in a breach of contract might be a contradiction to the reasoning employed by the McHugh court. Under California law, the elements of a breach of contract action consists of, among other elements, “plaintiff’s per­formance or excuse for nonperformance” of her contractual obligation and that a defendant’s breach of a contract caused the plaintiff harm. See Miles v. Deutsche Bank Nat’l Trust Co., 186 Cal. Rptr. 3d 625, 631 (Cal. App. 2015). See also Troyk v. Farm­ers Grp., Inc., 90 Cal. Rptr. 3d 589, 629 (Cal. App. 2009) (“Regarding the element of causation, CACI No. 303 requires proof the plaintiff ‘was harmed by’ a defendant’s breach of contract.”); Judicial Council of California Civil Jury Instructions CACI No. 303 (2020 edition) (instructing the jury that it must find a breach “was a substan­tial factor in causing” damages). It is con­ceivable that an insurer’s failure to provide the notice and grace period required under the Statutes could excuse a plaintiff’s fail­ure to timely make premium payments, but this should not relieve an insured of the obligation to pay premium at all. Reliev­ing Plaintiff of this obligation would alter the substantive bargain between insurer and insured – i.e., the right to coverage in exchange for premium – which was exactly the kind of substantive effect the McHugh Court opined would be construed as ret­roactive, thus invoking the presumption against retroactive application of the Stat­utes. McHugh, 494 P.3d at 35. Yet, the effect of the Ninth Circuit’s Opinion in Thomas essentially finds that the statute (under McHugh’s construction) does exactly that: the Thomas plaintiff was relieved not only of having to show the necessary element of causation, but also of the obligation to pay premium under the policy before the defendant insurer was found to have breached it.

For incorrectly terminated insurance policies covering insureds who died after 2013 but before the insurer complied with the Statutes, McHugh and Thomas cre­ate another interesting question: can the insurer of such policies ever terminate them for failure to pay premium? Assum­ing the insured is also the policy owner, the holdings would seem to imply that no, these policies can never lapse for nonpay­ment because the insurer can never provide the owner a 60-day grace period or provide him notice of pending lapse “30 days prior to the effective date of termination.” Thus, insurers that have terminated life insur­ance policies since 2013, but not complied with the Statutes, run a risk of exposure to an indisputable breach of contract claim and obligation to pay death benefits under the policy.

This trap became even stronger in 2020, when California’s Unclaimed Life Insur­ance and Annuities Act went into effect. See Cal. Ins. Code § 10509.940, et seq. Among other things, the statute applies to all “in force policies” and requires life insur­ance companies, upon lapse of a policy, to search the Death Master File to determine whether an insured has deceased, and then to locate and pay benefits to the beneficiary or, if no beneficiary can be found, then to remit the funds to the state of California. Cal. Ins. Code § 10509.943 – .944. While the likelihood of having to remit the funds to the state may be very low, there is still no provision for the insurer’s recovery of the benefit of its bargain – i.e., timely pay­ment of premium. And, based on the hold­ings in McHugh and Thomas, there may not be for any insurance policy (now or in the future) that fails to comply with the Stat­utes when terminating a policy for failure to pay premium.

While it is possible the insurer could off­set the past-due premium payments from the benefit paid out under the policy, this possibility should not justify a judgment for breach of contract. Such a judgment necessarily should have included a finding that plaintiff either performed her obliga­tions or was excused from doing so. See e.g., Miles, 186 Cal. Rptr. 3d at 631 (listing “plaintiff’s performance or excuse for non­performance” as an essential element of a breach of contract claim under California law). If plaintiff is excused from paying pre­mium at all before obtaining a judgment, solely because the Statutes excused timely performance, then the result in cases like Thomas might undermine the prospec­tive-versus-retrospective threshold ques­tion relied upon by McHugh.

In any case, what the rulings in McHugh and Thomas make clear is that no life insurance policy in force as of or after 2013 can lapse or terminate for nonpayment unless the insurer first complies with sec­tion 10113.71 and 10113.72. However, the unaddressed consequences of these hold­ings may reveal contradictions or even via­ble attacks on the reasoning in McHugh.

Other Subsequent Cases

Several other cases have been filed in the wake of the Statutes and the McHugh decision. Most are directed to the simple question of whether the Statutes apply to policies issued or delivered prior to 2013. Several were stayed pending the decision in McHugh and are now proceeding or con­cluded based upon that decision See, e.g., Kelley v. Colonial Penn Life Ins. Co., No. 220CV03348FLAEX, 2022 WL 341135, at *2 (C.D. Cal. Jan. 3, 2022).

One case was unsuccessful because the policy in question was issued and delivered in Illinois, and therefore did not fall within the ambit of the California Insurance Code. See Elmore v. Hartford Life & Accident Ins. Co., No. CV 18-08903-CJC(JCX), 2020 WL 1276106, at *4 (C.D. Cal. Jan. 6, 2020) (dis­missing case and recognizing that, “[i]n the insurance context, the terms ‘issued’ and ‘delivered’ refer to the original issuance and delivery of the policy; they are fixed as to time and do not stretch into infin­ity”) (citing Ball v. Cal. State Auto. Ass’n Inter-Ins. Bureau, 201 Cal. App. 2d 85, 87 (1962)) (internal quotation and punctua­tion omitted).

Several class actions have also been attempted in the federal district courts, though as of this article none has managed to survive the 12(b)(6) stage. In Pitt v. Met­ropolitan Tower Life Insurance Company, the Northern District of California dis­missed a class action for lack of personal jurisdiction over the insurer. No. 18-CV-06609-YGR, 2020 WL 1557429, at *9 (N.D. Cal. Apr. 1, 2020). Substantively, courts are striking class claims for failing to offer any model for calculating damages on a class wide basis. In Siino v. Foresters Life Insur­ance and Annuity Company, for example, the class representative was only able to offer a viable damages model for two out of 526 putative class members, represent­ing the only two policies for class members who were deceased. No. 20-CV-02904-JST, 2022 WL 110249, at *5 (N.D. Cal. Jan. 12, 2022). Yet-living policyholders constituted more than 99 percent of claimants and had no cognizable or calculable damages. Id. at *6. Class certification for declaratory relief on whether the Statutes applied to pre-2013 policies was also unviable because McHugh conclusively answered the question. Id. at *1 fn. 1.

One interesting question addressed by a handful of pre-McHugh courts was whether the statutes applied to universal, as opposed to whole life insurance. Most refused to apply the statutory requirements to universal life insurance policies. See, e.g., Bennett v. ReliaStar Life Ins. Co., No. CV 20-6529 PA (KSX), 2020 WL 5835324, at *4 (C.D. Cal. Sept. 23, 2020); Elmore v. Hartford Life & Accident Ins. Co., No. CV 18-8903 CJC (JCx), 2020 WL 1276106, at *3 (C.D. Cal. Jan. 6, 2020); Shaff v. Farm­ers New World Life Ins. Co., No. CV 17-3610 JAK (Ex), 2019 WL 4570014, at *11 (C.D. Cal. Aug. 5, 2019); Avazian v. Genworth Life & Annuity Ins. Co., No. CV 17-6459 RGK (JEMx), 2017 WL 6025330, at *2 n.2 (C.D. Cal. Dec. 4, 2017). These decisions were made under the now-debunked assump­tion that the statutes did not apply to pol­icies issued prior to 2013. Several courts had, nonetheless, applied the statutes’ requirements under the renewal principal, holding like the District Court in Thomas that the payment of premiums after 2013 renewed the policy and incorporated the statutes’ requirements into the terms of the renewed contract. See Siino v. Forest­ers Life Ins. Co., No. CV 20-2904 JST (N.D. Cal. Sept. 1, 2020); Thomas v. State Farm Ins. Co., 424 F. Supp. 3d 1018, 1025 (S.D. Cal. 2019); Bentley v. United of Omaha Life Ins. Co., No. CV 15-7870 DMG (AJWx), 2016 WL 7443189, at *4-*5 (C.D. Cal. June 22, 2016). Because McHugh likely renders the “renewal” argument irrelevant, the Statues will apply to universal life insurance poli­cies going forward.

Less clear is whether and to what extent the statutes apply to group life insurance policies, regardless of when they were issued. This question is currently being appealed to the Ninth Circuit from the Federal District Court for the Eastern Dis­trict of California’s decision in Clark v. Transamerica Life Insurance Company, No. 2:20-CV-00539-JAM-DB, 2020 WL 5110295, at *4 (E.D. Cal. Aug. 31, 2020). Clark involves a similar lapse question as that in McHugh. Plaintiff argued that the defendant insurer failed to comply with the mandatory notice provisions in both sections 10113.71 and 10113.72 by failing to provide the insured with notice of her right to designate another recipient of pol­icy notices. The claim was initially denied, though the case notes that the insurer is “now making full payment of the life insur­ance death benefits and accrued interest to Plaintiff.” Id. at *1. Plaintiff nonetheless continued to pursue her elder abuse, unfair competition, and breach of contract claims due to the insurer’s alleged wrongful lapse of the policy and its alleged concealing of the insured’s right to designate a benefi­ciary under the policy. Id. The court in Clark granted the insurer’s motion to dismiss with prejudice without regard to the applicability of the Statutes to pre-2013 policies. Instead, the court’s decision turned on whether the Statutes applied to group life insurance policies at all. Relying primarily on the language of section 10113.72(a), which states, “An indi­vidual life insurance policy shall not be issued or delivered in this state until the applicant has been given the right to des­ignate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium.” Cal. Ins. Code § 10113.72(a) (emphasis added). Based on this language, the court concluded that section 10113.72 does not apply to group life insurance pol­icies. Clark, 2020 WL 5110295, at *4. As an additional ground, the court held that neither of the Statutes apply to the pol­icy because it was issued and delivered in Illinois – not California. Id. Implicit in the court’s finding is another grounds for dismissal of Plaintiffs’ claims – the in­sured under the policy was not the policy owner and therefore not entitled to desig­nate another notice party under the statute (though likely entitled to the other notices of nonpayment and pending lapse as “a known assignee or other person having an interest in the individual life insurance pol­icy” in section 10113.71(a)).

While it seems apparent both from the statutory language and the Clark court’s analysis that section 10113.72 does not apply to group life insurance policies, the McHugh court’s indication that subsec­tion (b) was “better” read in isolation from subsection (a) may cast doubt on this conclusion. While subsection (a) says that an “individual life insurance policy shall not be issued” without notice of the applicant’s right to designate another party to receive notice of a pending lapse, subsection (b) states only that “[t]he insurer shall notify the policy owner annually of the right to change the written designation or desig­nate one or more persons.” Nonetheless, section 10113.71(b) likely puts this argu­ment to rest, requiring notice go to “a des­ignee named pursuant to Section 10113.72 for an individual life insurance policy.” Cal. Ins. Code § 10113.71(b) (emphasis added). Read in conjunction, it is clear that the designation right, at least, belongs only to applicants and policy owners of individual life insurance policies.

Conclusion

While the results of cases like Thomas may lead to challenges to the McHugh deci­sion, McHugh is the law for the foreseeable future. Life insurance companies should be diligent in reviewing individual life insur­ance policies that lapsed for nonpayment since 2013 to ensure compliance with the Statutes. Without such compliance, there can be no confidence that the policy has truly terminated, and the insurer runs a risk of falling to the liability trap created by Thomas and California’s new Unclaimed Life Insurance and Annuities Act. While the results of these subsequent cases raise possible additional challenges to the con­clusions reached by the Court in McHugh.  

Originally published in “For the Defense,” a publication by the Defense Research Institute, July & August 2022 edition and republished with permission.