The purpose of life insurance is to provide financial security to your loved ones after you die. It can help pay for debts, cover lost income, and fund long-term goals. An insured maintains a life insurance policy by paying periodic premiums on the policy, usually once a month. However, despite paying premiums for years, or even decades, a single missed payment may result in a life insurance company lapsing the policy and refusing to pay benefits upon the insured’s passing. Before a policy lapses, however, insurance companies have certain obligations to their insureds.
Under California law, life insurance companies have duties to provide notice to the insured prior to lapsing a life insurance policy. Specifically, life insurance companies have a statutory duty to provide:
(1) a 60-day grace period;
(2) notice of right to designate additional persons to receive notice of lapse; and
(3) 30-days notice prior to any lapse.
If a life insurance company fails to comply with any of these duties, the life insurance policy cannot lapse. (See Insurance Code §10113.72(c) (“No individual 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 pursuant to subdivision (a). . .”).)
This 60-day grace period keeps the insurance policy in effect and allows an insured who misses a premium payment to make a renewal payment before the expiration of the policy period to keep the policy in effect. Insureds also have the right to designate a family member to receive written notice of a missed payment from an insurance company. An insurance company must also notify those persons least 30 days prior to the effective date of termination if termination is for nonpayment of premium.
If the life insurance company fails to provide adequate notice, the insurance policy does not lapse, and the life insurance company has a duty to pay the benefits under the policy.
Insurance companies may try to hide language regarding an insured’s right to designate additional persons to receive notice of lapse, and the notice of lapse itself, by putting the notice on the back of another document or making the print small. This is also improper under the law.
California courts have ruled that insureds “should not be required to muddle through complex language to know that valuable, legal rights are being relinquished.” (Conservatorship of Link, (1984) 158 Cal.App.3d 138, 142.) An insurance policy exclusion or notice is unenforceable if it is “not presented in a conspicuous, clear and plain fashion.” (Miller v. Elite Ins. Co., (1980) 100 Cal.App.3d 739, 752.) The notice must be at least 8- to 10-point type. (See Celli v. Sports Car Club of America, Inc. (1972) 28 Cal.App.3d 511, 521.)
Therefore, insurance companies have a duty to their insured to keep them updated regarding the status of their policy. If the insured misses a payment, the insurance company must notify the insured or designees of the missed payment in writing, and in a conspicuous manner. If an insurance company fails in its obligations and unlawfully lapses an insurance policy, they may have committed insurance bad faith, and may be subject to a lawsuit by its insured to recover the insurance benefits, as well as insurance bad faith damages such as emotional distress to the insured and punitive damages.
