Financial responsibility laws are nothing new. Most states have enacted laws that require drivers to maintain certain levels and types of insurance. Other states require insurers to specifically offer their insureds certain types of coverage. For example, almost all states require an individual purchasing a personal auto policy to expressly reject underinsured or uninsured motorist coverage or maintain a certain minimum amount of UM/UIM coverage. The same goes for personal injury protection or no-fault coverage. Carriers are well aware of these types of laws because they are statutorily enacted. Insureds are aware as well, because typically a vehicle cannot be registered without proof of valid insurance.
Less familiar to practitioners and insurers are regulatory requirements that govern the issuance of certain types of business licenses. For example, a state’s Alcoholic Beverage Control Board may require a licensee to obtain and maintain certain minimum limits of liquor liability insurance. Other regulations require carriers to notify a regulatory entity if its insured’s policy is cancelled or non-renewed so that it can revoke the license of that entity.
These types of regulations are generally not a problem if the licensing entity is reviewing an applicant’s policy before a license is issued to make sure the insurance procured is in conformity with the financial responsibility regulation. However, many of the regulatory or quasi-governmental entities issue licenses based only on a certificate of insurance that may or may not accurately reflect the coverage provided by a policy, depending on who issued the certificate.
Why is this a problem? Consider this scenario: An intoxicated patron leaves a bar in his vehicle, plows through an intersection and collides with another vehicle. Insurer A insured the bar, but the bar failed to make its last premium payment. The insurer cancelled the policy for non-payment according to the terms of the policy after the insured fails to bring his premium current following notice of intent to cancel. Two years after the accident, suit is filed and notice of loss is sent to the insurer by the producing agent. The insurer disclaims coverage, citing the cancellation, which took place before the accident. The bar is uninsured, and cuts a deal with the plaintiff’s attorney to take a consent judgment. A condition of the settlement is that the plaintiff will not seek to satisfy her judgment against the bar. It will only seek to recover to the extent there is insurance available. No problem, right? Wrong. This particular state’s ABC Board regulations require an insurer to notify the Board of cancellation of the licensee’s policy. The insurer did not notify the board, and now (in some jurisdictions) faces a direct claim by the claimant and a breach of contract and bad faith suit by its insured.
Unfortunately, this scenario is becoming more common. Plaintiffs’ attorneys are using these types of regulations as a basis to argue coverage was either non-compliant or cancellation ineffective to set up contractual and extra-contractual claims against carriers. The lack of authority of what effect, if any, these regulations have on a non-compliant policy leads to inconsistent and unpredictable results. The policies at issue may be approved by a state’s insurance department, but no bulletins may have been issued on these regulations or changes, and counsel or insurers may otherwise be unaware of such regulations until suit is filed.
The problem is compounded when a premium is financed. Finance companies are often granted a limited power of attorney, signed by the insured, to act on its behalf. If the insured fails to make a payment on the premium loan, the finance company cancels as if the insured cancelled, not the insurer. The insured fails to notify the ABC Board of cancellation, and later argues the cancellation was ineffective after he is sued for a loss occurring after the cancellation date.
Cancellation is not the only area of concern. For example, suppose a licensing entity changes its required minimum, per occurrence liability insurance limit from $100,000 to $100,000, exclusive of attorneys’ fees. What happened? The eroding limits policy just became non-compliant. The entity issued the license relying only on a certificate of insurance issued by a producer, who may or may not have had authority to issue evidence of insurance on the insurer’s behalf. It simply referenced a $100,000 per occurrence limit. Suppose further the insured is sued and seeks a defense and indemnity for a loss for which liability is clear. The carrier picks up the defense, and at some point in the litigation, a $100,000 time-limited demand is made. The carrier responds that the policy has been reduced by fees incurred in the defense of the claim, but offers remaining limits. The plaintiff rejects the offer, and the insured sues his carrier for failure to settle when presented with an offer at or within limits. The basis for such a claim is that the carrier had the opportunity to settle for $100,000. It refused or failed to obtain a settlement, “unreasonably and in bad faith,” citing a non-compliant policy term — limits reduced by fees.
How are these traps avoided? Unfortunately, this question is not easily answered. Those writing specialized lines and hard-to-place risks are most vulnerable. Carriers may rely on their managing general agents or underwriters in a specific jurisdiction, who may be more familiar with a particular state’s laws and regulations. Inevitably, the situation will unexpectedly arise in litigation. As a practical matter, treating the policy as compliant the first time around and learning a lesson the hard way (go ahead and settle for $100,000 this time) may be the best way to avoid extra-contractual or insurer-insured litigation in the future, but it is not always a sure-fire bet. Check with a lawyer experienced in the line of risk for advice if the situation arises and be prepared to react quickly if and when the issue arises.