Case Studies-Cancellations and Nonrenewals

Cancellations and Nonrenewals Case Study #1

The Scenario

The agent sent out notice to the insured that his or her Homeowners policy was canceled flat due to failure to pay the renewal premium. The policy had been issued on an agency bill basis. At a later date, the agency accepted the insured’s payment, but did not forward it to the insurer. Since no coverage was in force, the insurer was not obligated to pay a subsequent fire loss, but did so in order to avoid a bad faith action. The carrier, in turn, sued the agent to recover the amounts paid for the fire loss.

The Issues

  • Acceptance of late payment when policy is in a state of cancellation.
  • Failure to advise insured of lapse in coverage.
  • Failure to timely remit premium to insurer or advise that payment had been made to agency.
  • Lack of written procedures to determine process of dealing with nonpayment cancellations.

The Outcome

Since the insurer had the opportunity to deny the fire claim, the E&O insurer participated in the settlement to the policyholder. The amount in excess of the agency’s retention was:
$40,000 paid to policyholder
$30,734.02 in defense costs

Prevention Tips

Since the insured accepted and retained a premium payment on a canceled policy, the E&O carrier settled the claim on a 50/50 basis with the insurance carrier. (The insurance company could have denied the loss due to no coverage, but decided to pay the claim, resulting in the partial settlement).

  • Do not accept late payments without confirming policy status with the insurance company
  • Do not imply that a carrier will rescind a notice of cancellation or reinstate coverage unless you have confirmed this fact with the company

 

 

Cancellations and Nonrenewals Case Study #2

The Scenario

The client’s policy was cancelled due to nonpayment of premium. The client called the agent to see what could be done and the agent advised him to send the premium and he would have the carrier reinstate coverage. A loss occurred, and the carrier denied coverage stating they had not agreed to reinstate the policy. The agent denied that he had made any representations to the client regarding policy reinstatement.

The Issues

  • Failure to advise client process for reinstating canceled policies.
  • Failure to promptly forward premiums to insurer to prevent cancellation.
  • Lack of written policy for handling cancellation of agency bill policies.

The Outcome

Since the agency had good documentation, they were able to demonstrate that they had not informed the client that coverage would be reinstated.
Motion for summary judgment granted in favor of agency.
$71,329.54 in defense costs.

Prevention Tips

Since the agency’s file was well documented indicating that no promises or commitments had been made to the insured, the E&O carrier was able to obtain a summary judgment in favor of the agent.

  • Document all late payments
  • Confirm in writing to the insured that coverage may not be reinstated or rewritten

 

 

Cancellations and Nonrenewals Case Study #3

The Scenario

The client was a chronic late-payer with a history of past due premium payments. The agency had established a practice of notifying the client when premiums were overdue. The individual agent who had made a practice of notifying clients when premiums were overdue had left the agency and no one made a call to the client the month after the agent left to notify them their business auto policy in the amount of $1,000,000 was subject to cancellation for nonpayment of premium. The client’s policy canceled due to nonpayment. The day following cancellation, the insured’s employee struck three children in a crosswalk.

The Issues

  • Past course of conduct indicated that a call would be made when a premium was overdue. The client felt justified in waiting to hear from the agent before making premium payments, not realizing the agent had left the agency.
  • An individual agent, attempting to provide value-added service for the customer, increased the agency’s legal responsibility.

The Outcome

Since the agency had undertaken a policy of following up with a customer when a premium payment was late, they exposed themselves to loss in the event the contact did not take place and the client relied on the call or notification to his or her detriment.
The amount paid in excess of the agency’s retention was:
$598.882.40 paid to the claimants of the auto accident
$105,330.40 in defense costs

Prevention Tips

When an agency has a policy of following up on direct bill premium payment reminders, the insured can later claim they had a legal justifiable reliance on such practices. Although the agent probably saw this practice as a value-added service, such practices spell liability for an agency when there is no follow up and a policy subsequently cancels.

  • Do not make a practice of calling or otherwise notifying customers whose policies are subject to cancellation for nonpayment
  • If such a policy exists, notify clients in writing that the practice will be discontinued
  • Do not allow individuals in the agency to make “special” arrangements with some of their customers

 

 

Cancellations and Nonrenewals Case Study #4

The Scenario

Client had a workers compensation policy that was expiring and said the agent told him he no longer needed the coverage. Client found out he did need coverage and told the agent to renew. Agent agreed. No coverage was in force, however, when an employee of the insured was injured at work.

The Issues

  • Documentation of client file with regard to coverages ordered.
  • Notice of cancellation received by customer.
  • The agent’s documentation included a letter to the client indicating that the policy would not be renewed and the reason.
  • The insurer notified the policyholder of cancellation for nonpayment.

The Outcome

The documents in the agent’s files were in complete contrast to the insured’s allegations. The carrier had sent notice of cancellation for nonpayment of premium. Despite having two attorneys recommend that the case not go forward, the plaintiff continued to pursue the matter and the case went to trial.
Defense verdict.
$18,407.28 defense costs

Prevention Tips

Since the agency’s file was well documented, it provided the E&O carrier with an excellent defense. While this allowed the agency to obtain a defense verdict, there was no way to eliminate the possibility of having a claim filed by the insured.

  • Document all conversations or correspondence with an insured when they have been notified by the insurer that a policy will not be renewed
  • Do not promise that coverage will be rewritten with another carrier unless you have obtained a commitment from another carrier to do so

 

 

Cancellations and Nonrenewals Case Study #5

The Scenario

The agency received a nonrenewal notice on a customer and the CSR contacted the insured to obtain additional information needed to replace the coverage. When the agency's efforts to replace the coverage with its only standard market failed, the CSR called and spoke to the insured's son. She asked him to tell the insured that the agency was unable to place coverage and to call the agency if she had any questions. Two months after the policy expired, the home burned to the ground resulting in a $550,000 uninsured loss. The unhappy former customer sued the insurance company and the agency.

The Issues

  • Failure to advise client that the agency was unable to obtain coverage requested by the client
  • Lack of written procedures to provide written notice

The Outcome

The agency's E&O carrier and the company settled the claim for $275,000 each, and the agency paid its $5,000 deductible.

Prevention Tips

Why was the E&O carrier so quick to settle and to consider itself lucky that the homeowners carrier shared the loss? Because the agency failed to take that one last step to protect the customer. If the CSR had written a letter to the insured and then followed up with direct telephone contact to be sure the insured was making an effort to replace the coverage, this claim would not have happened. To avoid a similar claim in your agency, you need written procedures for handling cancellations and nonrenewals, including a requirement for written notification to the insured (and other interested parties such as a mortgagee) if you are unable or unwilling to replace the coverage.

  • Develop written procedures for cancellation and nonrenewal
  • Confirm in writing to the insured when you are unable or unwilling to renew after the company sends a nonrenewal notice