Insurance Coverage & Bad Faith Newsletter - Winter 2022

Randle v. Farmers New World Life Ins. Co.

(December 2022) - In Randle v. Farmers New World Life Ins. Co., No. B304970, 2022 Cal. App. LEXIS 918, at *1 (Ct. App. Nov. 7, 2022), the Second District Court of Appeal reversed summary judgment for a life insurer on the grounds that fact issues existed as to, among other things, whether the insurer negligently paid benefits to the insured’s three sons despite assignment of the policy to the insured’s former wife under the terms of the divorce decree.

In 1992, the plaintiff and her then-husband (“McConnell”) obtained life insurance for the latter, naming the plaintiff’s as sole beneficiary. Subsequently, a 2004 divorce decree gave the plaintiff a continuing 1/4 interest in the policy, to be funded by McConnell. In 2006, McConnell applied to Farmers New World Life Insurance Company (“Farmers”) to add the former couple’s three sons as equal 1/4 beneficiaries. Farmers did not act on the application because McConnell did not submit the complete divorce decree. In 2008, the plaintiff began paying all the premiums on the policy and believed she was the sole beneficiary under the policy. In 2014, McConnell died, after which the plaintiff, who did not know about McConnell’s 2006 application to add beneficiaries, made a claim for 100% of the policy.

Farmers alerted the plaintiff to a dispute concerning her beneficial interest. Thereafter one of the former couple’s sons provided Farmers with the full copy of the divorce decree. The plaintiff wrote a letter to Farmers advising that the divorce decree made her a 100% beneficiary in 2008 when she began paying all the premiums. The plaintiff believed she was a 100% beneficiary. The broker who obtained the policy reported no change in the beneficiaries prior to McConnell’s death in response to the plaintiff’s queries. The broker believed that the plaintiff was the owner of the policy per the divorce decree because she was paying all the premiums. In August 2014, Farmers paid the benefits to the plaintiff and her three sons, as designated in McConnell’s 2006 application. 

The plaintiff filed suit against Farmers for breach of contract and bad faith, and the broker for professional negligence. The trial court granted the broker’s motion for summary judgment on the grounds that the agent had no duty to advise, which was affirmed on appeal. Farmers filed a motion for summary adjudication or judgment, arguing that the plaintiff could not sue for breach of contract since she did not own the policy and that McConnell never assigned the policy to the plaintiff under the terms of either the policy or the divorce decree. In opposition, the plaintiff contended that: Farmers was vicariously liable for the conduct of the broker and was charged with notice of whatever information the broker had learned from the plaintiff; the plaintiff was the 100% beneficiary of the policy because the 2006 change form was never effectuated; the plaintiff became the full owner of the policy in 2008, ending any rights McConnell had to control the beneficiary, and; the defendant acted in bad faith by unreasonably denying the plaintiff the full policy benefits.

The trial court granted summary adjudication to Farmers on all claims except promissory estoppel, which the court dismissed in a subsequent bench trial. On summary judgment, the court held that McConnell indisputably remained the owner of the policy at all relevant times and that McConnell’s 2006 beneficiary change application sufficed to add the sons as 1/4 beneficiaries.

The plaintiff appealed.

The Second District Court of Appeal held that fact issues precluded summary judgement. First, the trial court’s judgment in favor of the broker on the theory of professional negligence, did not preclude a finding that Farmers was derivatively liable to the plaintiff for the broker’s knowledge and failure to act. Farmers did not dispute that the broker was its agent, and under California law an agent’s actual knowledge is imputable to the principle. Second, citing Morrison v. Mutual Life Ins. of New York,15 Cal.2d 579, 587 [103 P.2d 963] (1940), the Court of Appeal articulated two pertinent legal principles: (1) the policy’s requirements for changing ownership do not control over the provisions of a contract (here, the divorce decree) of which the insurer has notice, and (2) the question is whether, when it paid out the proceeds, Farmers “had such knowledge or notice of plaintiff’s ownership of the policy as to require a recognition of plaintiff’s rights.” Material factual disputes existed on the notice question because, at the time it tendered benefits, Farmers knew that under the divorce decree’s terms, McConnell’s decision to cease paying premiums forfeited his 3/4 interest and knew that the plaintiff was paying premiums. That McConnell never gave the plaintiff written notice that he was assigning his ownership interest to the plaintiff (as required in the decree) lacked relevance because the decree provision was “clearly for plaintiff’s protection, and her failure to insist on a writing has no bearing on Mr. McConnell’s forfeiture of his ownership as a result of failing to pay the premiums.”

Finally, the trial court’s determination that McConnel had effectively added the sons as beneficiaries in 2006 failed to consider evidence that Farmers and its agent repeatedly assured the plaintiff that she was the beneficiary of the policy up to and even after McConnell’s death. Accordingly, material disputed facts existed bearing on whether Farmers negligently paid the proceeds of the policy to recipients not entitled to those proceeds, thus breaching the contract of insurance.

The Court of Appeal thus reversed the judgment and remanded to the trial court with instructions to vacate its order granting summary adjudication on the plaintiff’s claims for breach of contract, breach of the covenant of good faith and fair dealing, and punitive damages, and to enter a new order denying summary adjudication.

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