What's Happening In California After McHugh? – Insurance – United States – Mondaq

On August 30, 2021, the California Supreme Court held in McHugh v. Protective Life Insurance
Company, 12 Cal. 5th 213, 243, 494 P.3d 24, 43 (2021),
that California Insurance Code sections 10113.71 and 10113.72 -
which extended grace periods in life insurance policies to 60 days
and mandated annual notice of the new right for policyholders to
designate a person to receive notice of lapse or termination of the
policy for failure to pay premiums – apply not only to policies
issued or delivered after the effective date of
those statutes, January 1, 2013, but also to policies
already in force on that date. 

Based on McHugh, on October 6, 2021, the Ninth
Circuit decided Thomas v. State Farm Life Insurance
Company, No. 20-55231, 2021 WL 4596286 (9th Cir. Oct. 6,
2021)(unpub.), holding that “[a]n insurer’s failure to
comply with these statutory requirements means that the policy
cannot lapse” and an insurer could be liable for a death
benefit. Shortly thereafter, on October 25, 2021, the California
Department of Insurance issued guidance
acknowledging McHugh, but deferred to “future
court decisions” on how to apply it.

By our count, there are now over 50 cases pending against life
insurers in California state and federal courts based on alleged
violations of Sections 10113.71 and 10113.72. Although many cases
were stayed pending McHugh 
and Thomas, those cases are now active again, and new
cases are being filed regularly. 

Typically in these cases, plaintiffs assert claims for death
benefit proceeds, claims for damages, and claims for reinstatement,
and plaintiffs bring the cases individually or as proposed class
actions. Below, we discuss three recent opinions that provide
insight into how these cases are progressing
post-McHugh.

There has been one significant decision denying class action
certification. In Siino v. Foresters Life Ins. & Annuity
Co., 340 F.R.D. 157 (N.D. Cal. 2022), the named plaintiff
claimed that a $100,000 policy was improperly terminated by the
defendant insurer. The court found “commonality”
satisfied despite the insurer’s claim that “class members
will still need to prove their own performance, the materiality of
the insurer’s breach, and actual harm or damage.” However,
the court agreed with the insurer that the class failed the
“predominance” test because the plaintiff could not
produce a cognizable class-wide damages model for all but two death
benefit claims. The plaintiff has since dropped her damages claims
and intends to file a renewed motion for class certification based
primarily on declaratory relief.

Relatedly, one of the oldest of these class action cases
alleging statutory violations, Bentley v. United Omaha
Life Insurance Co., No. 2:15-cv-07870 (C.D. Cal.), is nearing
a final settlement following the insurer’s unsuccessful appeal.
The settlement will consist of an insurer payment to plaintiffs of
approximately $2.5 million, representing death benefits and
interest on 26 policies. The case had always limited the class to
beneficiaries with death benefit claims.

Siino shows that future class action practice will
focus on substantive defenses and damages theories. These questions
will likely not be as quickly resolved outside the death benefit
context as they were in Bentley. 

In Kelley v. Colonial Penn Life Ins.
Co., No. 220CV03348FLAEX, 2022 WL 341135 (C.D. Cal. Jan.
3, 2022), the court denied a post-McHugh motion to
dismiss. The plaintiff in Kelley  claimed her
policy improperly lapsed and should be reinstated, and alleged
claims for declaratory judgment, breach of contract, and various
California statutory causes of action individually and on behalf of
and a proposed class. The court was not swayed by the insurer’s
arguments that California law did not apply, that the
plaintiff’s policy was not an individual policy under
California law, or that certain causes of action (such as breach of
contract, unfair competition, and financial elder abuse) would fail
as a matter of law. The insurer has now filed an answer, and the
case is proceeding to discovery. It remains to be seen whether and
how far defendant insurers will be able to push individual
defenses, especially at the motion to dismiss stage.

Finally, a case filed in 2017 illustrates some of the issues
that can come up in discovery in long-pending California lapse
cases. In Moriarty v. Am. Gen. Life Ins. Co.,
No. 17-CV-1709-BTM-WVG, 2021 WL 6197289 (S.D. Cal. Dec. 31, 2021),
discovery had closed before the case was stayed
for McHugh. In the discovery dispute before the
court, the plaintiff sought (1) new information and data to update
the insurer’s “stale” production from three years
prior, (2) new discovery to explore the defendant’s compliance
with McHugh, and (3) disclosure of an attorney
memorandum that the defendant relied on in attempting to comply
with Sections 10113.71 and 10113.72. The court found no grounds to
reopen discovery either based on the plaintiff’s showings
or McHugh  and Thomas. The court
also denied disclosure of the attorney memorandum, finding that the
defendant insurer had not divulged enough detail to cause a waiver
of privilege. Defendant insurers emerging from stays can rely
on Moriarty  to challenge plaintiffs’
attempts at new discovery based on whether they adequately
preserved these avenues or whether certain discovery topics were
foreseeable before the stay.

There are dozens of other post-McHugh lapse cases
in California federal and state courts. Most notably, we are
starting to see several new plaintiff law firms filing complaints
alongside major players who continue to file new cases as well.
These developments may change depending on how the California Court
of Appeal, Fourth District, rules on remand
in McHugh on whether plaintiffs must demonstrate
that violations caused harm in each individual case. We are
continuing to monitor and report on these
post-McHugh  cases. 

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