A proposed class-action settlement in California could help tens of thousands of people who failed to pay their life insurance premiums get their coverage back.
U.S. Magistrate Judge Allison Goddard recently granted preliminary approval of a settlement between two insurers — Protective Life Insurance Co. and West Coast Life Insurance Co. — and the owners or beneficiaries of about 115,000 of the companies' life insurance policies.
All of the policies involved in the settlement lapsed or terminated because of nonpayment of premiums from Jan. 1, 2023, through April 22, according to the preliminary approval order.
The plaintiffs in the case, Morneau et al. v. Protective Life and West Coast Life, have accused the life insurers of violating a California law that took effect Jan. 1, 2013.
The proposed settlement would provide $80 million for beneficiaries of policy owners who have died.
Policy owners who were still living, failed to get the required lapse notices and let policies lapse could apply to get their old coverage back. The "discounted reinstatement amount" would be "90% of the premium that would have been due to keep the policy in place during the lapse period, plus an advance payment of 3 months of premiums as the amount effective as of the reinstatement data," according to the order.
The judge has scheduled a final approval hearing for Oct. 24.
Protective Life, a subsidiary of Dai-ichi Life, declined to comment on the proposed settlement.
Michelle Meyers, a partner at Singleton Schreiber, one of the attorneys who represented the plaintiffs, welcomed preliminary approval for the settlement.
"This is an important step forward for the policyholders affected by Protective's failure to follow California's notice and grace period laws before terminating life insurance policies," Meyers said.
California's lapse notice rules: California now requires life insurers that are about to terminate a policy for nonpayment to:
◆ Give insureds an opportunity each year to list other people who should receive important policy notices.
◆ Provide a 60-day grace period before terminating a policy.
◆ Provide a notice of missed premium and of pending termination before terminating a policy.
The California Supreme Court held in 2021, in a ruling on McHugh v. Protective Life, that the notice law applies to policies that were sold before Jan. 1, 2013, but lapse after that date as well as to policies sold after that date.
University of Alabama business researchers estimated that applying that interpretation broadly could lead to the policy termination rules costing life insurers more than $16 billion.
If the researchers' forecast is correct, the impact could be bigger than the impact of the U.S. earthquake with the highest insured losses: the earthquake that hit the Northridge neighborhood in Los Angeles in 1994. Insurers paid about $15 billion in claims after the Northridge earthquake.
The 9th U.S. Circuit Court of Appeals may have narrowed the impact of the lapse notice law, by ruling in 2024 that plaintiffs who want to bring a breach of contract claim against a life insurer based on the law must show that "they did not knowingly or intentionally let the policy lapse," and that they would have reacted to a lapse notice by paying the premiums, according to a passage from the 9th Circuit ruling that Goddard quotes in her opinion.
But the 9th Circuit based its ruling on a prediction about how the California Supreme Court will apply the lapse notice law, Goddard wrote.
The California Supreme Court could go along with the 9th Circuit interpretation, or it could end up contradicting it, Goddard said.
The Morneau case: Cristin Morneau, the lead plaintiff in the case, and her sister, Kelly Strange, are the daughters of Carolyn Morneau.
Carolyn Morneau bought a $250,000 life insurance policy from a Protective Life predecessor company in 1996 and paid $382.50 per year for the policy for 20 years, according to a 2022 order.
After 20 years, the premium was set to rise to $4,355. Carolyn Morneau let the policy lapse.
In January 2022, after Carolyn Morneau died, her daughters learned the policy had been canceled for nonpayment of premiums five years earlier.
The daughters sued Protective Life in state court, arguing that the insurer had failed to comply with the California policy termination notice law.
The case then moved from state to federal court.
The settlement: Goddard noted that Protective Life disagrees with the plaintiffs about the idea that any failure by an insurer to comply with the California policy termination law voids the termination and leaves the coverage in force.
The plaintiffs want to settle because they are worried about the standard of proof set by the 9th Circuit ruling, according to Goddard.
Protective Life wants to settle because it's not certain whether the California Supreme Court will agree with it and the 9th Circuit about the plaintiffs' standard of proof, Goddard said.
Protective's headquarters building. Courtesy photo
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