Appellate Law Update: August/September 2021

The following published decisions may be of interest to attorneys practicing insurance law:

California Supreme Court

The 60-day grace period for cancelling a life insurance policy applies to all policies in force on or after January 1, 2013, even if the policy issued earlier. McHugh v. Protective Life Insurance (2021) __ Cal.5th __.

William McHugh purchased a term life policy from Protective Life Insurance Company in 2005.  The policy provided for a 31-day grace period before it could be canceled for nonpayment of premium.  McHugh failed to pay the premium due on his policy, which then lapsed 31 days later, on January 9, 2013.  After McHugh passed away in June 2013, his beneficiaries sued Protective Life for breach of contract and bad faith, arguing that under Insurance Code sections 10113.71 and 10113.72, which went into effect on January 1, 2013, the insurer should have given a 60-day grace period before canceling the policy.  Protective Life moved for a directed verdict on the ground that the Insurance Code’s 60-day grace period provisions did not retroactively apply to McHugh’s policy issued in 2005.  The trial court denied the motion.  The case went to trial, and Protective Life prevailed.  The Court of Appeal (Fourth Dist., Div. One) affirmed on the alternative ground urged by Protective Life that it was entitled to judgment as a matter of law because the 60-day grace period was not retroactive.  The appellate court reached this conclusion after giving substantive deference to certain correspondence from the Department of Insurance.  

The California Supreme Court reversed the Court of Appeal.  Insurance Code “sections 10113.71 and 10113.72 apply to all life insurance policies in force when these two sections went into effect, regardless of when the policies were originally issued. This interpretation fits the provisions’ language, legislative  history, and uniform notice  scheme, and  it protects policyowners—including elderly, hospitalized, or incapacitated ones who may  be particularly vulnerable to missing a premium payment—from losing coverage, consistent with  the  provisions’ purpose.”  The Court further explained that the intermediate appellate court should not have given deference to Insurance Department agency correspondence, which did not constitute official interpretive guidance warranting deference.

California Court of Appeal

Whether insurer acted in bad faith by failing to accept a short-fuse policy demand was a jury question, even where the insurer had made a policy limits offer that was rejected earlier in the case. Hedayati v. Interinsurance Exchange of the Automobile Club (2021) 67 Cal.App.5th 833.

The Auto Club’s insured collided with a pedestrian, causing catastrophic injuries.  Before the injured claimant made a settlement demand, the insurer sent a letter to the claimant’s attorney stating “[d]ue to the nature and extent of your client’s injury, Auto Club will tender our insured maximum policy limit of $25k to settle your client’s injury claim.”  The letter directed the claimant’s attorney “to contact me if you have any further questions.”  The attorney did not accept the offer and later made a 7-day time-limited demand, which ran over the Thanksgiving holiday.  The demand attached a number of conditions, including requests for the policy’s declarations page and a declaration from the insured that no other insurance was available.  The insurer did not accept that demand.  The claimant later brought a bad faith suit against the insurer.  The trial court granted summary judgment for the insurer, reasoning that the “mega-short” time limited demand was unreasonable.

The Court of Appeal (Fourth Dist., Div. Three) reversed.  Under all the circumstances here, a jury could find the insurer did not act reasonably because it did not provide the claimant’s attorney with information it knew he would require to evaluate the putative policy-limits offer.  Further, the insurer’s tender of policy limits even before a demand was made did not constitute a “safe harbor” that shielded the insurer from bad faith liability as a matter of law.

Insurer was not responsible for failing to supervise or investigate independent agent. Williams v. National Western Life Insurance Company (2021) 65 Cal.App.5th 436.

Victor Pantaleoni allegedly defrauded the plaintiff into purchasing an annuity from the defendant life insurance company.  While the insurer agreed to cancel the annuity, it charged the plaintiff a penalty.  The plaintiff sued for negligence and elder abuse, and a jury awarded damages against the insurer, including punitive damages.  The insurer moved for judgment notwithstanding the verdict on the ground that Pantaleoni was an independent agent who was therefore the plaintiff’s agent, not the insurer’s, and the insurer therefore could not be held liable for failing to supervise him and prevent his bad acts. The trial court denied the motion.

The Court of Appeal (Third Dist.) reversed with directions that judgment be entered for the insurer.  The undisputed evidence from the Department of Insurance website and Pantaleoni’s contract with the insurer established that he was an independent agent selling insurance for 15 different companies. He did not have authority to bind the insurer, and was authorized only to procure applications and deliver policies.  Under those circumstances, he was an independent agent and thus legally the agent of the insured, not the insurer. Therefore, the insurer could not be liable for failing to supervise him or failing to investigate the plaintiff’s complaints about him.

Trial court properly considered parole evidence in determining identity of insured under workers’ compensation policy. Hollingsworth v. Heavy Transport, Inc. (2021) 66 Cal.App.5th 1157.

Plaintiffs’ decedent was killed in a work accident.  Plaintiffs disputed that decedent’s California employer, HT, was covered by workers’ compensation insurance because the policy the employer relied on was issued to an entity with a different name, Bragg. Plaintiffs argued that Bragg’s workers’ compensation policy did not identify HT in California as a covered d/b/a for Bragg, and referred only to an HT entity with an address in Oregon.  HT responded that the Oregon address was simply an error, and that Bragg, d/b/a HT, and the insurance carrier, and the broker who procured the policy, all intended for decedent’s employer to be covered.  Further, the carrier had paid out benefits on the claim, consistent with the parties’ intent that HT be covered.  The trial court ruled that HT had workers’ compensation insurance and, therefore, the Workers’ Compensation Appeal Board had exclusive jurisdiction over claim.

The Court of Appeal (Second Dist., Div. Four) affirmed.  Insurance policies, like all contracts, are to be interpreted in a manner that achieves the parties’ mutual intent.  Here, the parties to the insurance contract all agreed that HT was a covered entity.  The Oregon address created an ambiguity in the policy that was properly resolved by considering parole evidence about the insured’s, carrier’s, and broker’s intentions when negotiating the policy.

Note: In a prior e-Bulletin (May-June), we reported about the Court of Appeal’s decision in Truck Insurance Exchange v. Federal Insurance Company (2021) 63 Cal.App.5th 211. The California Supreme Court has ordered the opinion depublished. (Case No. S268940)

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.