William McHugh Missed One $310 Premium. His $1 Million Policy Died Before He Did.

William McHugh paid $310 a year for a $1 million life insurance policy. He missed the payment due on January 9, 2013. Sometime that winter he suffered a fall bad enough to leave him disabled and send him into surgery. He died in June. When his family called Protective Life Insurance Company about a claim, the answer was that the policy had been terminated.

Nine days before that January due date, a California law had taken effect giving every life insurance policy in the state a grace period of not less than 60 days, plus 30 days of mailed warning before any policy could be ended for nonpayment. Protective Life ran the 31-day clock printed in the 2005 contract instead. On February 9 the policy lapsed. On February 18 the company wrote to say he could still buy it back, if the money arrived by March 12, and if he was alive when it did.

Protective Life never had to defend those letters as fair. Its argument was that the new law did not reach a policy sold in 2005. For eight years that argument worked. Two courts bought it. The third one read the statute.

The Premium Schedule Ran Sixty Years.

Chase Life Insurance Company, the predecessor in interest to Protective Life, issued the policy in March 2005. The term ran 60 years. The schedule set the annual premium at $310 for the first decade of the policy, after which it climbed every year. The policy named McHugh’s daughter, Blakely McHugh, as the designated beneficiary, and Trysta Henselmeier, Blakely’s mother and McHugh’s successor in interest, as contingent beneficiary. It carried a 31-day grace period, which is what California regulations provided at the time under title 10, section 2534.3.

McHugh paid every yearly premium through January 2012. That kept the policy in force until February 9, 2013, thirty-one days after the January 9 due date. Protective Life sent a reminder letter on December 20, 2012. It sent a second one on January 29 saying the premium had not arrived and the policy would lapse on February 9. The payment never came.

The Supreme Court’s account of what happened next runs one sentence. “At some point close to when Protective Life sent its last letter, McHugh suffered a serious fall that left him disabled, caused him continuing physical pain, and required surgery.” He died in June 2013. Henselmeier called Protective Life to ask whether a claim could be made and was told the policy had been terminated.

The court spent part of its opinion on why a cancelled life policy is so hard to replace. The new one is priced at an older age, often after a health condition has shown up. It carries commission charges. It restarts the contestability period and the suicide clause. None of that is academic for a man who fell and needed surgery the same month his coverage ran out.

Life Insurance Had No Notice Rule at All.

Before 2013, California law let an insurer cancel a policy when the owner failed to pay, under Insurance Code section 484, and it did not require life insurers to give any notice before doing it. Auto insurers had to give notice under section 662. Life insurers did not. Grace periods and warning letters existed because individual policies granted them and because companies chose to send them as a business practice, which is precisely how the Supreme Court described what Protective Life did.

The Legislature closed that hole with Assembly Bill 1747 in 2012, grafting sections 10113.71 and 10113.72 onto the Insurance Code. Both took effect on January 1, 2013. The first one reads: “Each life insurance policy issued or delivered in this state shall contain a provision for a grace period of not less than 60 days from the premium due date. The 60-day grace period shall not run concurrently with the period of paid coverage.” The same section makes a lapse notice ineffective unless the insurer mails it at least 30 days before the termination date.

The second section is the one nobody talks about. It requires insurers to give every applicant the right to name at least one other person to receive the lapse notice, to hand over a form for making the designation, and to remind the owner of that right once a year. No policy can lapse for an unpaid premium unless the insurer gives 30 days’ notice to the owner and to that designee.

Both provisions became law nine days before McHugh’s premium came due.

The Jury Found Both Things at Once.

Henselmeier and Blakely McHugh sued in San Diego County Superior Court, case 37-2014-00019212-CU-IC-CTL, for breach of contract and breach of the implied covenant of good faith and fair dealing. Protective Life argued the two new sections did not apply to a policy issued before 2013. The trial judge rejected that and sent the case to a jury.

The special verdict is a strange document. The jury found that Protective Life and McHugh had entered into an insurance contract. It found that McHugh failed to do all, or substantially all, of what the contract required of him, but that he was excused from doing so. It found that “Protective Life did something the contract prohibited.” Then it found that “plaintiffs were not harmed by Protective Life’s failure.”

The Court of Appeal affirmed on October 9, 2019, on a ground the jury never reached. The two statutes, it held, did not apply to a policy issued in 2005. To get there the court leaned on two sets of Department of Insurance documents. One was private correspondence between department counsel and insurers. The other was an instruction sheet inside the department’s electronic form-filing system, titled “Instructions for Complying with [Assembly Bill No.] 1747.”

The reading that erased a $1 million policy was living in agency email and a filing manual. Nobody mailed it to William McHugh.

August 30, 2021.

The California Supreme Court took the case as S259215 and reversed. Justice Cuéllar wrote the opinion. Chief Justice Cantil-Sakauye and Justices Liu, Kruger and Groban signed it. Justice Jenkins wrote separately, joined by Justice Corrigan.

“We conclude that 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,” the opinion said. The court refused to defer to the department correspondence and the filing instructions, holding that neither represented the agency’s official interpretation of the sections. It reversed the Court of Appeal and sent the case back down.

Insurance Commissioner Ricardo Lara issued Bulletin 2021-8 on October 25, 2021, addressed to all admitted life insurance companies. “All life insurance policies currently in effect must comply with the McHugh decision and Insurance Code sections 10113.71 and 10113.72,” it said. Policies had to carry the 60-day grace period “by endorsement if necessary.” Every California life policy written before 2013 that had been running a 31-day clock was now running a 60-day one.

Lawanda Small Paid for Twenty-Six Years.

The ruling opened what the Ninth Circuit later called “an onslaught of suits.” One of them belonged to Lawanda Small. Her husband bought a $75,000 universal life policy in 1990 from LifeUSA Insurance Company, a predecessor of Allianz Life Insurance Company of North America. The Smalls paid the premiums for 26 years and missed one in August 2016. The policy terminated. In November 2018 Small asked to have it reinstated and was refused. Her husband died in December 2018. She filed a death claim in January 2019, and Allianz denied it because coverage had lapsed for nonpayment.

It is undisputed, the Ninth Circuit wrote, that Allianz never told the Smalls about the right to name a third person to receive notice of an unpaid premium. Small sued in the Central District of California in 2020. She won certification of a class of roughly 1,800 owners and beneficiaries on May 23, 2023, and then won summary judgment for the class, including a declaration that the policies “were improperly lapsed by Allianz because it failed to strictly comply with the Statutes before it lapsed those policies.”

On December 10, 2024, the Ninth Circuit took that apart. Judge Richard Tallman, writing for the panel, held that the missing letter is not enough by itself. “And for breach of contract, there must be damages caused by the breach,” the opinion said. A policyholder has to show the violation is what cost them the coverage. That is an individual question, and individual questions kill a class, so certification was reversed and the summary judgment orders vacated.

Which drops every one of those families back where the McHugh jury left the McHughs. The breach is provable. The harm is the fight.

The Supreme Court reversed the judgment against Blakely McHugh and remanded her case. No published opinion since has said whether she collected the $1 million. The premium that decided it was $310.