When Someone Dies With A Life Insurance Application Pending In California

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It sometimes occurs that a person applies for life insurance, but dies before a policy is issued or the application is approved by the insurance company.  In those situations, questions arise regarding whether the insurance company is obligated to pay the death benefit.  California has both case law and a statute which provide avenues for recovery when an insured has applied for a life insurance policy, but dies prior to its issuance.

The case law addressing this issue goes back many decades.  In 1954, the California Supreme Court, in Ransom v. Penn Mutual Life Ins. Co. (1954) 43 Cal.2d 420, addressed a case where an insured applied for life insurance, made his first premium payment, but had not yet submitted to a second medical examination requested by the insurance company, when he was killed in a car accident.  (Id. at 422.)  Ransom stated that the “understanding of an ordinary person” upon completion of a life insurance application and advance payment of the premium, is that “he would secure the benefit of immediate coverage.”  (Id. at 425)  Ransom held that, although coverage had not yet been approved by the insurer, “it would be unconscionable” to allow the insurer to avoid coverage when the premium was paid at the time of application.  (Id.Ransom held that “a contract of insurance arose upon defendant’s receipt of the completed application and the first premium payment.”  (Id. at 425.)

Case law has since stated that Ransom established “the basic rule . . . that temporary insurance protection arises when an insurance company receives and accepts an insurance premium with a policy application.”  (Hodgson v. Banner Life Ins. Co. (2004) 124 Cal.App.4th 1358, 1368.)  Temporary insurance can be terminated only by rejection of the application and notice to the applicant before the applicant’s death and refund of any premium.  (Smith v. Westland Life Ins. Co. (1975) 15 Cal.3d 111, 123-124.)

In addition to this case law regarding temporary life insurance, California Insurance Code §10115 also addresses payment of life insurance benefits when an insured dies before issuance of the policy.  It provides that when a first premium payment is made at the time an application is signed, and the insurer provides receipt for or actually receives the payment, and thereafter approves the application, but the insured dies before the policy is actually issued, “the insurer shall pay” as if the policy has been issued.  (California Insurance Code §10115.)  Unlike temporary insurance, section 10115 requires coverage when coverage conditions have been met, “but the formalities of issuance and deliverance have not occurred.”  (Hodgson, supra, 124 Cal.App.4th at 1372-1373.)  Once the conditions for coverage have been met under section 10115, returning the premium check does not avoid liability under the policy.  (Id. at 1373.)

Where an insured has applied for life insurance, made a premium payment, but dies prior to issuance of the policy, California law provides legal avenues and theories for potential recovery.  If an insurance company fails to pay policy benefits on the grounds it was not in effect at the time of death, the beneficiaries of the life insurance policy in question should scrutinize the circumstances surrounding the application and payment of premiums.  There may be a basis to obtain recovery under California law.