Policy Cancellation – a Mission Made More Impossible
In the world of insurance, it is inevitable that policies will be cancelled. As you can imagine, there is nothing worse than receiving a claim on a policy well after the effective date of cancellation. What should be a simple, clear cut denial of liability can quickly spiral into an expensive defense effort resulting in payment on the cancelled claim. If this has never happened to you you’re probably wondering how something like this is even possible. The answer is simple failure to comply with statutory requirements for effective cancellation.
There are several statutes addressing the cancellation of insurance policies, and the controlling statute is determined by the type of policy being cancelled. For example, cancellation of a workers’ compensation insurance policy is governed by N.C.G.S. § 58-36-105, but cancellation of a homeowners’ insurance policy is governed by N.C.G.S. § 58-41-15. Regardless of the type of policy being cancelled, the North Carolina Supreme Court has long established the principle that failure to comply with the statutory requirements for cancelling an insurance policy renders the cancellation ineffective. Pearson v. Nationwide Mut. Ins. Co., 325 N.C. 246, 382 S.E.2d 745 (1989). Compliance with statutory requirements may seem straightforward but there are a few common pitfalls that prevent effective cancellation and create liability where there should be none. Some of these include failure to provide proof of mailing such as a green card from certified mail, actual notice and/or receipt of notice by the insured.
Recently, the North Carolina Court of Appeals addressed the requirement of actual notice and/or receipt of notice by the insured for effective cancellation of insurance coverage. In Ha v. Nationwide Gen. Ins. Co., Nationwide issued Plaintiffs a homeowner’s insurance policy prior to an inspection of the home. During the inspection of the home, several hazards were discovered which led to Nationwide’s decision to cancel the policy. In keeping with company procedures, a letter was sent to the Plaintiffs outlining the hazards noted during the inspection and the steps necessary for the Plaintiffs to remedy these issues and reinstate their homeowner’s insurance policy. Plaintiffs took no steps to remedy the hazards and the policy was not reinstated. Nationwide refunded Plaintiffs’ pro-rata share of the premium paid and ceased deducting premium payment from the Plaintiffs’ bank account. Approximately six weeks after the cancellation, Plaintiffs’ home was destroyed by a fire. Plaintiffs filed a claim, which was denied by Nationwide who argued Plaintiffs’ home was not insured as the policy had been cancelled. The trial court agreed with Nationwide and dismissed Plaintiffs’ claims.
Ultimately, the Court of Appeals reversed the trial court decision, finding that N.C.G.S. § 58-41-15 required actual delivery to and/or receipt of the notice of cancellation by the insured. The Court reasoned that as Nationwide only provided “proof of mailing” which the Plaintiffs alleged they did not receive, Nationwide failed to provide Plaintiffs sufficient notice of cancellation in compliance with the statute. According to the Court, N.C.G.S. § 58-41-15(c) required Nationwide to furnish notice of cancellation which meant something more than proof of mailing.
Risk Handling Tips: This case creates in the insurer an obligation to not only send notice of cancellation to the insured, but also to prove the insured actually received that notice if the insurer intends to deny coverage on the grounds of cancellation of the policy. Here are some tips on how to ensure that your company is effectively cancelling policies. First, know the statute that governs cancellation of the type of policy you are seeking to cancel. Second, review your mailing procedures to determine how your cancellation notices are mailed. If you are using certified mail, be sure there is a system in place to receive and maintain the return receipts. If you are sending notices electronically, develop a system to maintain those communications as well. Although these additional precautions won’t guarantee success in litigation over denied coverage, you will be in a far better position having this information. Feel free to reach out to our insurance coverage team with any questions.