By: Rebecca Coleman-Polifroni, CLTC
       Paralegal Specialist, OSBA Certified Paralegal
       Nationwide Financial Legal
       Individual Products & Solutions Legal Team

In late December 2021, the Ninth Circuit Court of Appeals upheld the Central District of California Court’s decision that a life insurer did not owe 14 years of statutory interest from the insured’s death date, as Cal. Ins. Code § 10172.5 requires. Instead, the Court held that statutory interest began when the beneficiary filed her claim, 14 years after the insured had passed away.

This is an interesting case given the amount of interest paid by insurers when claimants don’t promptly claim, beneficiaries can’t be found, an insurer is unaware of the death, or the DMF match fails to occur for years. In other words, some insurers pay more interest in California due to the “date of death” requirement even when insurers can’t settle some claims for reasons beyond the insurers’ control.

As background to this case, the insured died on June 30, 2002. Fourteen years later, in 2016, the beneficiary (an ex-spouse) finally learned of the insured’s death and filed her claim. The insurer paid $37,000 for the policy benefit and $179.91 in interest for the period from June 1, 2016, through the payment date. The beneficiary complained, saying the insurer owed $9,085.19 in interest from the date of death, pursuant to Cal. Ins. Code 10172.5 (cited below). The insurer acknowledged that the law applies to policies issued in California but that the statute would only make sense if written notice of the claim and proof of loss were timely and only owed interest as of June 1, 2016. The beneficiary filed a lawsuit.

For reference, Cal. Ins. Code § 10172.5 states:
(a) Notwithstanding any other provision of law, each insurer admitted to transact life insurance, credit life insurance, or accidental death insurance in this state that fails or refuses to pay the proceeds of, or payments under, any policy of life insurance issued by it within 30 days after the date of death of the insured shall pay interest, at a rate not less than the then current rate of interest on death proceeds left on deposit with the insurer computed from the date of the insured’s death, on any moneys payable and unpaid after the expiration of the 30–day period. This section shall apply only to deaths of insureds that occur on or after January 1, 1976.

In Workman v. Dearborn Nat’l Life Ins. Co., 434 F. Supp. 3d 799 (C.D. Cal. 2020), the District Court noted that the statute is ambiguous. The District Court believed the real issue was, did the legislature intended the statute to apply “even when insurers were entirely unaware of a claim.” In its review of the legislative history of Cal. Ins. Code § 10172.5, the District Court noted the legislature rejected the fixed 7% interest rate provision. The legislature feared 7% was too high and might encourage beneficiaries to delay filing claims to profit from the above-market interest rates. That rejection of the 7% fixed interest rate and adoption of the lower interest rate suggested that the legislature did not intend to penalize insurers but intended to minimize any incentive for either insurers or beneficiaries to delay submitting or paying claims. The statute required an insurer to “either pay a claim within 30 days of the insured’s death, with limited exceptions, or pay interest at a specified rate.” Thus, the legislature did contemplate instances where an insurer could not pay a claim within 30 days of death. See Assem. Bill Analysis 2384, 2003-2004 Reg. Sess. (Cal. Aug. 19, 2004). Finally, the Court noted that an insurer could not settle a death claim without first receiving notice. It was unlikely the legislature intended the statute to apply when insurers were entirely unaware of a claim, supporting the presumption that notice is a condition precedent to trigger Cal. Ins. Code § 10172.5.

The District Court ruled in the insurer’s favor holding the insurer only owed interest as of June 1, 2016, and that it did not wrongly withhold policy benefits from the beneficiary. The beneficiary appealed to the Ninth Circuit.

The Ninth Circuit affirmed and expanded the District Court’s decision. See Workman v. Dearborn Nat’l Life Ins. Co., Nos. 20-55182, 20-55268, 2021 U.S. App. LEXIS 38488 (9th Cir. Dec. 29, 2021). The Ninth Circuit held that an insurer’s duty to investigate does not arise until the beneficiary files notice and proof of claim. As such, although Cal. Ins. Code § 10172.5 imposes interest from the date of the insured’s death, interest does not accrue unless the claim remains unpaid 30 days after the beneficiary provides the notice and proof of claim to the insurer.

To summarize:
1. The District Court held that notice is required to trigger Cal. Ins. Code § 10172.5.
2. The Ninth Circuit agreed that notice is required to trigger Cal. Ins. Code § 10172.5.
3. The Ninth Circuit also held that a beneficiary filing the proof of claim starts the clock as to the statutory interest requirements of Cal. Ins. Code § 10172.5.

These cases made me wonder what other carriers do in California. Have other insurers already handled claims like the Ninth Circuit? If so, has there been any issue with regulators? If not, are other insurers considering making changes in applying statutory interest to California claims? Do other carriers have concerns regarding regulator inquiries and market conduct criticisms regarding statutory interest application? At my company, we believe this case may provide cost savings and is worth elevating to leadership for a discussion and possible decision tree regarding when to rely on these cases. In turn, we are curious how other companies view this case and if they might implement changes. Perhaps we are conservative outliers on how we handle statutory interest for California claims.

Perhaps this case might be a topic of discussion at the Advanced Claims Roundtable at the ICA Annual Education Conference in September. If not, I’d love to hear from others they handle statutory interest for California claims currently, and if this case might impact future settlements.

See you in San Diego!