SDV Insights

In Kayle Flores v. Life Insurance Company of North America¹ (“Flores II”), the Ninth Circuit agreed with the insured and reversed the Central District of California’s finding that her Long-Term Disability claim was barred by res judicata.

This case has a happy ending for the insured, but really underscores the importance of proceeding against a disability insurer with tact and an advanced understanding of the potential pitfalls of not complying with policy provisions, particularly proof of loss provisions.    

Facts and Procedural History

In this case, the Plaintiff was an insured suffering from Cushing’s disease, which prevented her from working as a registered nurse. In July 2018, she applied for Short-Term Disability (“STD”) benefits from Life Insurance Company of North America (“LINA”), but LINA denied her claim. In May 2020, she filed suit against LINA seeking STD benefits alleging breach of the policy and the implied covenant of good faith and fair dealing (“Flores I”).²   In addition, although she had not yet filed a claim with LINA for long-term disability (“LTD”) benefits, she also sought to recover LTD benefits as well, arguing that filing an LTD claim with LINA would be futile. She further amended her complaint to include a claim under the Employee Retirement Income Security Act (“ERISA”).

The court in Flores I found that the insured Plaintiff was entitled to STD benefits but because she failed to comply with a proof of loss provision in the LTD policy, which the court found to be a condition precedent to payment of benefits, she was not entitled to LTD benefits. She did not appeal the decision. After the case concluded, Plaintiff thereafter attempted to file an LTD claim with LINA, which was denied in April of 2022, and she accordingly filed suit in Central District of California later that month, alleging violations of California contract law and ERISA (“Flores II”).³

In Flores II, the Central District issued an order dismissing Plaintiff’s complaint for failure to state a claim because her suit was barred by res judicata (or claim preclusion), which bars litigation in a subsequent action of any claims that were raised or could have been raised in the prior action. Most critically, the court found that there was an “identity of claims” between the two lawsuits, looking to the following 4-part test and finding that LINA had established all four prongs: (1) the rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) substantially the same evidence was presented in the two actions; (3) the two suits involved infringement of the same right; and (4) the two suits arose out of the same transactional nucleus of facts.

Majority Opinion and the Dissent

The Ninth Circuit reversed, focusing on prong four from the above test (whether the two suits arose out of the same transactional nucleus of facts) and finding error with the Central District’s conclusion. The Court explained that “Flores’s two suits d[id] not arise out of the same nucleus of facts because Flores’s cause of action for her second suit – Flores II – did not accrue until after she filed the operative complaint in her first suit – Flores I.”⁴  The court observed that after the determination in Flores I that she had failed to comply with the LINA proof of loss provision, “Flores filed a claim for LTD benefits with LINA, waited for LINA to deny her benefits, and then filed Flores II having complied with the proof of loss requirement.”⁵  As such, the Court found that the prior district court’s determination that she was not entitled to LTD benefits before she had complied with the terms of the LTD policy did not bar her subsequent suit for LTD benefits.⁶   Since Flores II accrued after she filed the operative complaint in Flores I and the claims could not have been brought together, claim preclusion did not apply.

Judge Collins, who authored the dissent, disagreed. He argued that Flores I had already resolved Flores’s LTD benefits claim on the merits. Focusing on California’s “notice-prejudice” rule,⁷  Judge Collins pointed out that Flores’s failure to timely present her LTD benefits claim in Flores I created actual prejudice to LINA so as to excuse the carrier from its contractual obligations. He also disagreed that the two suits did not arise from the same common nucleus of fact since “the LTD claim asserted in Flores II . . . [sought] the same LTD benefits under the same policy based on the same asserted disability asserted in Flores I.”⁸   He further noted that while the decision in Flores I may have been wrong, Flores did not appeal that decision and she was precluded from relitigating that decision.⁹

Takeaway

In the end, the Plaintiff was able to successfully pursue her claim for LTD benefits. However, if the dissent’s view had prevailed, the insured would have completely lost any recourse to obtain LTD benefits. This case therefore underscores the importance of an insured’s compliance with policy conditions and following claims protocols. Even with a strong claim, failure to comply with policy conditions may result in a claim denial. An insured who takes active steps to ensure compliance with policy conditions, creates a well-documented record of their condition and treatments, and otherwise stays on top of the process will benefit from a greater chance of ultimate recovery. Proceeding strategically and methodically is therefore key to success in recovering disability benefits.

For more information, please contact Mike Stockalper at MStockalper@sdvlaw.com.     

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¹No. 22-55779, 2024 WL 222265 (9th Cir. Jan. 22, 2024) (unpublished)
²No. SA CV 20-00897-DOC-ADS (“Flores I”)
³Flores v. Life Ins. Co. of North America, No. SA CV 22-00897-DOC-JDE, 2022 WL 3575199 (C.D. Cal. Aug. 1, 2022) (“Flores II”)
⁴2024 WL 222265 at *1
⁵Id. at *2
⁶Id.
⁷See e.g. Pitzer College v. Indian Harbor Ins. Co., 447 P.3d 669 (Cal. 2019)
⁸Id. at *4
⁹Id. at *5