Dig a Little Deeper

By Dawn Jackson, AU, AINS

CHANGES IN TERMS AT RENEWAL—INSURED LEFT SCRATCHING HEAD

Insurer failed to provide notification to insured for changes in renewal coverage terms.

The Court Decisions column is one of the more popular features of Rough Notes magazine. One reason is that the courtroom is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mere mental exercises. In this column, the editors of PF&M Analysis, a publication of The Rough Notes Company, are going to dig a little deeper into one of those court decisions to identify a coverage problem and then to provide possible solutions.

This case involves an insured’s stolen vehicle and the insurer’s denial of coverage.

The insured, JN Auto Collection Corporation, is a used car dealer. Some of the autos it purchases have state-issued certificates of destruction. In this case, the insured suffered a loss with a vehicle that was issued such a certificate.

On January 16, 2007, the insured verbally accepted its renewal policy with the insurer, U.S. Security Insurance Company, and was issued a temporary binder. The acceptance of the renewal policy by the insured appears to have been based on the premium and without regard to coverage changes, because the insured was unaware of a new exclusion. On January 17, one of the insured’s vehicles was stolen from its lot, and the theft was reported to the carrier.

After the carrier investigated the claim, it denied it based on a newly added endorsement that excluded coverage for autos with state-issued certificates of destruction. The insured disagreed with the denial and filed suit for declaration of coverage and breach of contract because it was unaware of the added endorsement.

It is not a problem for an insurer to exclude coverage for exposures it does not want to accept; however, it must adequately notify the insured of the change, especially if ­it is limiting coverage for an active part of the insured’s operations.

Advance written notice of changes to coverage is mandatory in the majority of states. The notification must be mailed directly to the named insured within a specified number of days prior to the renewal effective date. The notification period varies by state and can be anywhere from 10 days to 120 days plus mailing time. If the insurer is unable to provide notification within the state-mandated time, the current terms of the policy must remain in effect until the next renewal term and then can be changed only if appropriate advance written notification is mailed before the next renewal. Providing early notification allows the insured time to determine if it wants to continue coverage with the current carrier under the new terms or pursue other options.

In this case, the insurer failed to advise the insured of the coverage change. Significantly, the change directly affected coverage for the insured’s operations. At the hearing, neither the insured nor the insurer provided documentation showing that advance written notice was mailed to the insured

In addition to the insurer’s failure to provide notification, the renewal policy was not issued until April. This means that the insured would not have been aware of any changes to its coverage for four months after the policy effective date; and if the information was not explicitly identified in the details of the renewal policy, the insured would not have known to look for the changes. The insured had been with the same carrier for three years prior to the coverage change in which the autos that are now excluded were then included.

The change in terms of the renewal policy left the insured without appropriate coverage for its exposure. The insured indicated that if it had known of the newly added exclusion, it would not have proceeded with the renewal policy. It is not a problem for an insurer to exclude coverage for exposures it does not want to accept; however, it must adequately notify the insured of the change, especially if it is restricting or eliminating coverage for a key aspect of the insured’s operations.

After reviewing the information presented, the higher court reversed the trial court’s decision based on the following facts:

• The insured’s prior policies included coverage for autos with state-issued certificates of destruction
• The insured was not notified of the change in terms
• The insured would not have renewed the policy had it known of the new exclusion because it directly affected the nature of the business
• The insured stated that not having this coverage was detrimental to the business

While it is the insurer’s responsibility to advise the insured of any coverage changes at renewal, it may be good business practice to verify changes in policy terms before agreeing to a verbal binder.

The author

Dawn Jackson, AU, AINS, is senior editor for Technical and Education Products at The Rough Notes Company, Inc. She has more than 20 years of experience in the property and casualty insurance industry with a primary focus on commercial lines. She worked for fifteen years as a commercial underwriter with both national and regional carriers. Dawn is also an experienced business analyst with a primary emphasis on commercial underwriting systems. She has experience as a P-C claims trainer as well. Dawn is a licensed Indiana resident P-C producer, and she obtained her bachelor’s degree from the University of Indianapolis.