Are You Really Sure That Your Insurance Policy Was Cancelled?
I.
INTRODUCTION
Cancellation is an ugly word to an insured. All too often cancellation rears its problematic head when there is a pending claim or lawsuit involving thousand of dollars. To the insured, cancellation means tremendous exposure and expense from both a need to defend and obligation to satisfy a judgment. To the insurer, it may well mean avoidance of millions in defense costs and indemnity obligations. The stakes are high for both sides.
Cancellation of insurance policies takes on many forms involving deleting coverage, adding coverage, and of course outright and total cancellation. There are very few simple resolutions dealing with cancellation and almost each case is marked with different twists and turns, with the outcome depending on the unique facts each situation presents. The result in one case with similar facts to another may be the complete opposite.
An examination of rules and authorities regarding cancellation of insurance policies will provide guidance to the practitioner who finds himself/herself navigating these issues.
II.
BASIC CANCELLATION ACCORDING TO THE INSURANCE CODE
While there are several statutes that address cancellation, there are two basic statutes that are regularly cited: Tex. Ins. Code Ann. § 551.051 et seq. (dealing with cancellation and nonrenewal of certain liability insurance policies formally Tex. Ins. Code Ann. § 21.49-2A) and Tex. Ins. Code Ann. §551.101 (dealing with declination, cancellation, and nonrenewal of certain property and casualty policies formally Tex. Ins. Code Ann. § 21.49-2B). Section 551.051 addresses general liability, professional liability other than medical malpractice coverage, commercial automobile, commercial multiperil and other lines designated by the Texas Department of Insurance. In contrast, Section 551.101 deals with personal automobile, homeowners, standard fire, one family dwelling or duplex, a contract for a one family dwelling, duplex, or apartment, as well as coverage to certain governmental entities. The two statutes are different.
For liability coverage under §551.051 et seq., the relevant portions are as follows:
§551.052. Cancellation Prohibited; Exceptions
(a) An insurer may not cancel a liability insurance
policy that is a renewal or continuation policy.
(b) An insurer may not cancel a liability insurance
policy during the initial policy term after he 60th day
following the date on which the policy was issued.
(c) Notwithstanding Subsections (a) and (b), an insurer
may cancel a liability insurance policy at any term
during the term of the policy for:
1. fraud in obtaining coverage;
2. failure to pay premiums when due;
3. an increase in hazard within the control of the insured that would produce a rate increase; or
4. loss of the insurer’s reinsurance covering all
or part of the risk covered by the policy.
(d) Notwithstanding Subsections (a) and (b), an insurer
may cancel a liability insurance policy at any time during the term of the policy if the insurer is placed in supervision, conservatorship, or receivership and the cancellation or nonrenewal is approved or directed by the supervisor, conservator or receiver.
§551.053 Written Notice of Cancellation Required
Not later than the 10th day before the date on which the cancellation of a liability insurance policy takes effect, an insurer must deliver or mail written notice of the cancellation to the first-named insured under the policy at the address shown on the policy.
§551.054. Written Notice of Nonrenewal Required
(a) An insurer may refuse to renew a liability insurance policy if the insurer delivers or mails written notice of the nonrenewal to the first-named insured under the policy at the address shown on the policy.
(b) The notice must be delivered or mailed not later than the 60th day before the date on which the policy expires. If the notice is delivered or mailed later than the 60th day before the date on which the policy expires, the coverage remains in effect until the 61st day after the date on which the notice is delivered or mailed.
(c ) Earned premium for any period of coverage that extends beyond the expiration date of the policy shall be computed pro rata based on the previous year’s rate.
§551.055. Reason for Cancellation or Nonrenewal Required
In a notice to an insured relating to cancellation or refusal to renew, an insurer must state the reason for the cancellation or nonrenewal. The statement must comply with:
(1) Sections 551.002 (b) and (c); and
(2) Rules adopted under Section 551.002(d).
Tex. Ins. Code Ann. §551.052-551.055 (Vernon Supp. 2006)
Significant to these statutes is the notice of cancellation and/or intent not to renew requirements. These notice regulations are strictly construed and the failure to provide proper notice including the basis for cancellation and/or nonrenewal is fatal. Trinity Universal Ins. Co. v. Fidelity & Casualty Co., 837 S.W.2d 202 (Tex. App. – Dallas 1992); see also Tex. Ins. Code Ann. §551.002 (Vernon Supp. 2006) (requirements for statement on basis for nonrenewal and/or cancellation).
One basis for cancellation, the increase in hazard exception, has been interpreted by the courts. In Kino Express Ins. v. Consumers County Mut. Ins. Co., Consumers issued a commercial automobile liability policy for Kino’s, a package delivery service. 990 S.W.2d 784, 785 (Tex. App – Austin 1999). The policy was based on a “fixed rating plan” which meant the premium would not be changed for reasons arising after the effective date of May 4, 1994. Id. Consumers cancelled Kino’s policy effective October 3, 1994 on the basis of an increase in hazard because the insured refused to cooperate with inspectors regarding Kino’s operation. Id. The policy permitted Consumers to: 1. inspect and audit Kino’s books; 2. make inspections and surveys anytime; 3. cancel the policy for any reason within sixty (60) days of the policy effective date; and 4. cancel the policy after sixty (60) days for an increase in hazard within the insured’s control which would produce an increase in rate. Id. The last provision (4) was apparently taken almost verbatum from art. 21.49-2A(a)(3) now §551.052 (c)(3). Claiming the cancellation was illegal, Kino sued Consumers for declaratory relief that it had not failed to cooperate and there was no increase in hazard. Id. Consumers counterclaimed asserting that the cancellation was proper. Id. Consumers sought and was granted summary judgment from which Kino appealed, Id. at 786.
The Austin Court of Appeals reversed Consumers’ summary judgment and remanded, finding that Consumers accepted the risk before it knew the extent of the hazard and cancelled the policy without assessing the degree of the hazard. Id. at 788. The best that could be said was that Kino had failed to cooperate but that did not show that any hazard was “enlarged”. Id. See also Republic Western Ins. Co. v. Rockmore, 2005 WL 57284 (N.D. Tex. 2005).
Additionally, the Court held that cancellation under Art. 21.49-2A§ (a)(3) would apply regardless of whether the policy premium was fixed or variable. Id. at 789. “We believe the correct construction is that the legislature intended to allow cancellation whenever the rate changed under either kind of policy when it becomes substantially disproportionate to the risk originally assumed by the insurer due to an increase in hazard within the control of the insured.” Id.
Section §551.053 dealing with written notice of cancellation to the first named insured is equally significant. Written notice must be delivered or mailed at least ten (10) days before cancellation to the first-named insured. Cases addressing §551.104 infra provide guidance on how this specific statute will be applied. However, this statute requires that notice need only be given to one insured – the first named insured. Notice is not required to all insureds. For other insureds, they are at the mercy of the first named insured.
Personal lines statutes addressing cancellation are more restrictive and specific than those following under §551.051 et seq.:
§551.103. Cancellation
For the purposes of this subchapter, an insurer has cancelled an insurance policy if the insurer, without the consent of the insured:
(1) terminates coverage provided under the policy;
(2) refuses to provide additional coverage to which the insured is entitled under the policy; or
(3) reduces or restricts coverage under the policy by endorsement or other means.
§551.104. Authorized Cancellation of Policies
(a) An insurer may cancel an insurance policy only as provided by this section.
(b) An insurer may cancel any policy if:
(1) the named insured does not pay any portion of the premium when due;
(2) the insured submits a fraudulent claim; or
(3) the department determines that continuation of the policy would result in a violation of this code or any other law governing the business of insurance in this state;
(c) An insurer may cancel a policy, other than a personal automobile insurance policy, if there is an increase in the hazard covered by the policy that is within the control of the insured and that would produce an increase in the premium rate of the policy.
(d) An insurer may cancel a personal automobile insurance policy if the driver’s license or motor vehicle registration of the named insured or any other motor vehicle operator who resides in the same household as the named insured or who customarily operates an automobile covered by the policy is suspended or revoked. An insurer may not cancel a policy under this subsection if the named insured consents to an endorsement terminating coverage under the policy for the person whose license is suspended or revoked.
(e) Cancellation of a policy under Subsection (b), (c), or (d) does not take effect until the 10th day after the date the insurer mails notice of the cancellation to the insured.
(f) An insurer may cancel a personal automobile insurance policy effective on any 12-month anniversary of the original effective date of the policy if the insurer mails to the named insured written notice of the cancellation not later than the 30th day before the effective date of the cancellation.
(g) An insurer may cancel any insurance policy other than a personal automobile or homeowners insurance policy if the policy has been in effect less than 90 days. An insurer may cancel a personal automobile insurance policy if the policy has been in effect less than 60 days. An insurer may cancel a homeowners insurance policy if the policy has been in effect less than 60 days and:
(1) the insurer identifies and condition that:
(A) creates an increased risk of hazard;
(B) was not disclosed in the application for insurance coverage; and
(C) is not the subject of a prior claim; or
(2) before the effective date of the policy, the insurer does not accept a copy of a required inspection report that:
(A) was completed by an inspector who is licensed by the Texas Real Estate Commission or who is otherwise authorized to perform inspections; and
(B) is dated not earlier than the 90th day before the effective date of the policy.
(h) For purposes of Subsection (g), an inspection report is considered accepted if an insurer does not reject the inspection report given to the insurer under Subsection (g)(2) before the 11th day after the date the inspection report is received by the insurer.
§551.105. Nonrenewal of Policies; Notice Required
Unless the insurer has mailed written notice of nonrenewal to the insured not later than the 30th day before the date on which the insurance policy expires, an insurer must renew an insurance policy, at the request of the insured, on the expiration of the policy.
Consistent with other cancellation statutes, notices of cancellation and/or renewal are strictly enforced but do not automatically result in a default of coverage. In Texas Specialty Underwriters, Inc. v. Tanner, 997 S.W.2d 645, 646 (Tex. App. – Dallas 1999, pet. denied), the insured sued the insurer to recover on a fire loss. Texas Special Underwriters (hereafter “TSU”) issued an insurance policy to Tanner for a one story home that he leased out; the policy period was October 25, 1994 until October 25, 1995 at 12:01 am. Id. On August 10, 1995 TSU mailed a letter to the producing agent offering a renewal for a $498.51 premium. Id. The agent in turn wrote to Tanner offering the renewal and soliciting a down payment for the policy. Id. at 647. Tanner did not respond to the agent’s letter although he admitted to receiving the agent’s letter about sixty (60) days before the policy’s expiration. Tanner did not contact the agent until after the home burned down on November 3, 1995, Id. After the fire, Tanner went to the agent’s office with the down payment. Id. The agent refused to renew the policy. Id. TSU denied Tanner’s loss and Tanner sued TSU. Id.
Tanner moved for summary judgment claiming that TSU did not mail him a notice of nonrenewal and that Tanner did not reject the renewal. Id. The trial court granted summary judgment in Tanner’s favor and TSU appealed. Id.
At issue was Article 21.49-2B § 5. Tanner contended and the trial court by implication agreed that the policy was automatically renewed unless a notice of nonrenewal was sent or the insured declined renewal. Id. The Dallas Court of Appeals disagreed holding that this statute only applies if the insurer is refusing to renew. Id. at 648. The Court held that the section did not equate to automatic renewal, as the statute provided renewal is required if no notice is given at the request of the insured, citing art. 21.49-2B § 11, now Tex. Ins. Code Ann., § 551.105. Because the statute deals with nonrenewal, the insured cannot be forced to renew. Id. Therefore, the Court concluded that unless the offer is accepted by payment of the premium or some other act of acceptance, the policy expires by its own terms. Id. at 648-649.
However, when an insurer fails to comply with the notice requirements, cancellation attempts are void. In Jones v. Ray Ins. Agency, the insured purchased a new vehicle insuring it with a State and County Mutual Fire Insurance Company. 59 S.W.2d 739,744 (Tex. App. – Corpus Christi 2001, pet. denied, 92 S.W.3d 530 (Tex. 2002)). When obtaining insurance, the insured, Jones, advised that her sister lived with her and was told there would be no problem as long as she paid the premiums on time. Id. at 745. Significantly, the policy excluded coverage for anyone residing with insured that was 14 or over unless listed on the policy. Id. The policy was a six (6) month policy running from November 7, 1997 through May 7. 1998. Id.
On December 28, 1997, the insured’s vehicle was severely damaged when it was struck by uninsured drunk driver. Id. Initially the insured was told she was covered but thirty (30) minutes later she was told there was no coverage. Id. The policy was allegedly cancelled because she failed to list her sister on the application and/or because she did not provide a copy of her driver’s license. Id. The insurer claimed notice of cancellation was sent on November 25, 1997 to the insured’s address but the insured denied receipt of any such notice. Id. The policy was to be cancelled on December 4, 1997. Id. Subsequently, the repair shop foreclosed on the insured’s vehicle and the insured’s lienholder repossessed the vehicle even though her payments were current. Id. The insurer did not return the insured’s December premium payment. Id.
The insurer and agent’s motions for Summary Judgment were granted and the insured appealed. The Corpus of Christi Court of Appeals reversed holding that proof of mailing of cancellation is not sufficient when the insured contends that she never received such notice. Id. at 746 citing Beacon National Ins. Co. v. Young, 448 S.W.2d 812,814 (Tex. Civ. App. – Dallas 1969, writ ref’d n.r.e.). The Court reasoned that when the insurer is required to give a certain number of days notice prior to cancellation, it cannot be determined whether the insurer mailed the required notice unless the insured received the cancellation notice. Id. Thus when a conflict in evidence exists on whether notice was actually sent, summary judgment is not appropriate and the issue must be decided by the trier of fact.
The court also held that cancellation could occur for only the reasons listed in §551.104 if the policy had been in effect less than sixty (60) days. The Court held cancellation could not occur after sixty (60) days. In this case, the insurer attempted to cancel the policy because the insured’s driver’s license was not provided. Id. at 747. This reason, the Court held, was not listed in the statute, making the cancellation “illegal and void.” Id.
Lastly, the Court pointed out that while the date of the notice of cancellation was dated on November 25, 1997, it was not actually mailed out until December 1, 1997, less than ten (10) days if cancellation was to occur on December 4, 1997. Id. at 748. As a result, the cancellation was ineffective. Id.
The Texas Supreme Court, in denying review, disapproved of the Court of Appeals’ holding that the policy could not be cancelled after sixty (60) days. 92 S.W.3d at 520. The Supreme Court did agree a fact issue existed on whether notice was actually sent. Id.
Clearly the Jones case provides some excellent guidance in evaluating whether cancellation has legally occurred. First, the issue of notice is a fact question when the insured contends it never received notice of cancellation. Second, if the grounds for cancellation are not provided in the statute then attempted cancellation maybe void and illegal. Third, it is not the date of the notice of cancellation that is controlling but rather the date the notice was actually mailed; there must be a ten (10) day window between the actual mailing and the cancellation date. Failure to adhere to these principles makes cancellation ineffective.
III.
CANCELLATION UNDER PREMIUM FINANCE AGREEMENTS
Many times an insured will finance a premium under a premium finance agreement. Special rules apply to this arrangement regarding cancellation.
§651.161. Cancellation of Insurance Contract
(a) An insurance premium finance company may not cancel an insurance contract listed in a premium finance agreement except as provided by this section for an insured’s failure to make a payment at the time and in the amount provided in the agreement.
(b) The insurance premium finance company must mail to the insured a written notice that the company will cancel the insurance contract because of the insured’s default in payment unless the default is cured at or before the time stated in the notice. The stated time may not be earlier than the 10th day after the date the notice is mailed.
(c) The insurance premium finance company must also mail a coy of the notice to the insurance agent or broker identified in the premium finance agreement.
(d) After the time stated in the notice required by Subsection (b), the insurance premium finance company may cancel each applicable insurance contract by mailing a notice of cancellation to the insurer. Each insurance contract shall be canceled as if the insured had canceled the contract, except that the return of a canceled contract is not required.
(e) The insurance premium finance company must also mail a notice of cancellation to:
(1) the insured at the insured’s last known address; and
(2) the insurance agent or broker identified in the premium finance agreement.
(f) A statutory, regulatory, or contractual restriction that provides that an insurance contract, may not be canceled unless notice is given to a governmental agency, mortgage, or other third party applies to a cancellation under this section. The insurer shall:
(1) give the prescribed notice on behalf of the insurer or the insured to each governmental agency, mortgage, or other third party on or before the second business day after the date the insurer receives the notice of cancellation from the insurance premium finance company; and
(2) determine the effective date of cancellation, taking into consideration the number of days’ notice required to complete the cancellation.
Tex. Ins. Code. Ann. § 651.161 (Vernon Supp. 2006).
This statute requires a premium finance company to issue a written notice of intent to cancel for a payment default to the insured prior to mailing a notice of cancellation to the insurer. Ins. Co. of N. America v. Aberdeen Ins. Services, Inc., 253 F. 3d 878, 884 (5th Cir. 2001). The notice of cancellation by the premium finance company must be sent to the insurer, the insured, and agent and/or broker listed on the premium finance agreement. See INAC Corp. v. Underwriters at Lloyd’s, 56 S.W.3d 242, 248 (Tex. App. – Houston [14th Dist.] 2001) (holding that notice to the agent of the insurer is sufficient for statute requirements).
Obviously, one must initially determine whether a premium finance agreement is involved and/or whether other cancellation statutes are implicated.
IV.
THE SECRET WEAPON – THE TEXAS ADMINISTRATIVE CODE
The Texas Administrative Code likewise deals with cancellations but has other specific provisions helpful to the policyholder. See 28 Tex. Adm. Code § 5.7001 et (West. Supp. 2005). For example section 5.7003 specifies the method of calculation of notice to be given for cancellations for personal automobile policies. 28 Tex. Adm. Code §5.7003. But the mother lode prevision may be found in §5.7004;
Any company that declines to recognize or put into effect additional coverage to which an insured is entitled under the provisions of an existing policy, or that attempts to reduce or restrict coverage under the provisions of an existing policy by endorsements or by any other means, is in violation of these sections if such acts are performed without the consent of the insured, and shall be subject to the same penalties as a policy that is cancelled in violation of these sections.
28 Tex. Adm. Code § 5.7004. Emphasis added.
This regulation has been codified in §551.103. Simply stated, an insurer cannot reduce coverage or limit additional coverage which an insured has under an existing policy without the consent of the insured. Note the prevision does not say that consent can be obtained by any named insured but rather consent must be obtained from the insured. Thus if the policy has more than one insured, consent must be obtained from all the insureds. See Old American County Mut. Fire Ins. Co. v. Sanchez, 149 S.W.3d 111, 116-117 (Tex. 2004). This regulation is the opposite of § 551.053 (notice to the first named insured).
For renewals of policies, this provision is especially important. Renewals must be on the same terms and conditions as a prior policy. Continental Casualty Co. v. Allen, 710 F. Supp. 1088, 1094 (N.D. Tex. 1989). A renewal not in compliance is null and void. Id.. This regulation applies to virtually all types of conventional policies. See Tex. Adm. Code §5.7001.
If an agreement is reached permitting different terms of renewal, the new policy is not automatically null and void. Liverpool & London & Globe Ins. Co. v. Swann, 382 S.W. 2d 521, 522-523 (Tex. Civ. App. – Beaumont 1964, no writ). Predictably, there must be a meeting of the minds for changes to be permitted. Allen, 710 F. Supp. at 1094.
So what happens if there is no discussion of a change? The answer is not simple. One court has held that changes in policy terms must be called the insured’s attention. Harbor Ins. Co. v. Urban Construction Co., 990 F.2d 195,201 (5th Cir. 1993). The Harbor held that if the insured had actual knowledge of the change, he is bound by the change. Id. Another court ruled that if the insured receives notice of the change from a prior policy, the insured is bound. Indiana & O. Live Stock Ins. Co. v. Keinigham, 161 S.W. 2d 689, 690 (Tex. App.- Dallas 1984, writ ref’d n.r.e.). These authorities seem to contradict the statutes and regulations.
One key aspect to Section 5.7008 is what acts constitute cancellation. See 28 Tex. Adm. Code §5.7004. See also Tex. Ins. Code Ann. §551.103. Acts that constitute cancellation are defined more broadly than traditional cancellation. For instance, failure to provide additional terms to which the insured is entitled is defined as cancellation; conduct which reduces and restricts coverage under the policy by endorsement or other means is termed cancellation. From a common sense perspective, any action which reduces coverage without the insured’s consent is a cancellation. This would include adding or deleting insureds, vehicles, deductibles, etc. Thus, when an insurer claims a vehicle was deleted from coverage and certain insureds were eliminated, the insurer must be able to demonstrate consent from all the insureds.
The usefulness of the Texas Administrative Code relating to cancellations cannot be underestimated. The burden is an the insurer and basically any conduct restricting and limiting coverage from an existing and renewal policy qualifies for protection.
V.
MCS-90 FORM AND CANCELLATION
The typical MCS-90 endorsement reads in pertinent part as follows:
In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance, or use of motor vehicles subject to the financial responsibility requirements of Section 18 of the Bus Regulatory Reform Act of 1982 regardless of whether or not each motor vehicle is specifically described in the policy. It is understood and agreed that no condition, provision, stipulation, or limitation contained in the policy, this endorsement, or any other endorsement thereon, or violation thereof, shall relieve the company from liability or from the payment of any final judgment, within the limits of liability herein described, irrespective of the financial condition, insolvency, or bankruptcy of the insured.
Rockmore, 2005 WC 57284 at 9. See also Appendix 1.
The basis for this endorsement is that insurer remains liable to third parties on the liability policy resulting from the negligent use of any motor vehicle even if it is not covered under the insurance policy. T.L.E. Ins. Co. v. Larsen Intermodal Services, Ins. 24L F.3d 667,672 (5th Cir. 2001). In fact, this endorsement has been equated with surety. Canal Ins. Co. v. Carolina Casualty Ins. Co., 59 F.3d 281, 283 (1st Cir. 1995). Simply stated, when an insurance policy attached an MCS – 90 endorsement, coverage remains in effect until it is cancelled in a manner prescribed by federal law. Rockmore, 2005 W.L. 57284 at 9. An MCS-90 endorsement may also be cancelled if the insured purchases replacement insurance. 49 C.F.R. §387.7(c).
The MCS-90 endorsement played a large role in a case involving a recent bus accident where numerous youth from a church traveling to East Texas were killed and/or severely injured. Rockmore, 2005 WL 57284 at 1-2. The insurer in Rockmore had issued a five (5) million dollar liability policy with an MCS-90 endorsement to the bus company. Id. When the insurer claimed that the named insured did not provide necessary information regarding the policy, it cancelled the policy giving thirty-two days notice. Id.
The insurer in Rockmore argued that thirty-two (32) days notice was close enough to the 35 days required by the endorsement. Id. at 10. The court though decided it was not close enough and it would require the Court to “rewrite” the federal regulations. Id. Therefore, coverage was not cancelled and remained in effect. Id.
In addition to the MCS-90 form, other statutes provide similar protection. Liability insurers for motor carriers in Texas must give proper notice of cancellation. See Tex. Transp. Code Ann. § 643.105 (Vernon 1999). For example, private investigators are required to carry insurance and an insurer cannot be released from coverage without proper cancellation including giving notice to the State. See Tex. Occ. Code Ann. § 1702.124(e) (Vernon 2005). These statutes and/or regulations are enormously helpful for coverage purposes.
VI.
CONCLUSION
Cancellation statutes differ based on the type of policy involved, the nature of the insured’s occupation or business, and any endorsement attached to the policy. Careful consideration considering the specific facts involved dictate whether cancellation is proper. Cancellation statutes primarily are consumer oriented and are construed in favor of the insured. Each unique fact situation must be carefully examined and similarities in situations do not always result in the same outcome.
