Cancellations
Case Analysis
May
28, 2007
The
decision leaves unanswered what the result would be in the following common scenario:
The
insured fails to make a payment, and the insurer sends a notice that the policy
will be cancelled if payment is not made in 10 days, but fails to send a notice
to the lienholder. After the policy is cancelled, the insured totals the vehicle.
The insured then stops making payments to the lienholder on the vehicle and defaults
on the loan (or lease).
The
court did not decide whether the cancellation would be effective as to the lienholder,
limiting its decision to the insured and parties injured by the insured or his
permissive users.
The
court wrote, “Whatever the situation might be with any claim that Mitsubishi
Motors Credit might have against Acuity in connection with Mitsubishi Motors Credit’s
designation as a ‘Lienholder’ under the ‘Car Damage Coverage’
part of the policy, or that Mitsubishi Motors Credit might have against Major
League Sports, Monfre, or Erickson as a result of its lease agreement with Major
League Sports, Acuity’s failure to give Mitsubishi Motors Credit notice of
the pending policy cancellation does not negate Acuity’s proper cancellation
of Monfre’s liability coverage in connection with the Galant.”
Numerous
states require that, before an insurance policy is cancelled, the insurer must
provide notice to both the named insured and any lienholders. Wisconsin, however,
does not.
Nevertheless,
cases from other jurisdictions suggest that policy language would be enough, and
that the policy at issue in this case would require that the lienholder be paid
by the insurer, even in the absence of a statute requiring notice.
The
hypothetical above presented itself in Pocatello Railroad Federal Credit Union
v. Dairyland Ins. Co., 926 P.2d 628 (Idaho 1996).
Like
Wisconsin, Idaho only requires that notice of cancellation be sent to the insured,
not the lienholder. As in the case at bar, however, the policy required notice
be sent to the lienholder.
The
court held that the insurer was liable to the lienholder, concluding that the
plain language of the policy entitled it to notice of cancellation.
Similarly,
in Mackey v. Bristol West Ins. Service of Cal., Inc., 105 Cal. App. 4th 1247,
1266-67 (Cal. 2003), the court held that a lienholder’s coverage continues,
even though the insured’s does not, when only the insured receives notice.
The court relied both on a statute requiring notice to the lienholder, and policy
language as well.
Case
law from other jurisdictions can also be beneficial to the insured in these situations,
as Metropolitan Property & Casualty Ins. Co. v. Zeller, 541 S.E.2d 433 (Ga.Ct.App.
2001), shows.
Interestingly,
the lienholder in Zeller did not sue the insurance company, but sued its lessee
directly, to recover the balance due under the lease. The lessee then filed a
third-party complaint against its insurer, alleging that the loss was covered
under the policy.
The
court of appeals agreed with the lessee. Unlike Wisconsin, Georgia’s equivalent
statute requires that notice be given the lienholder, and the insurer failed to
do so.
However,
the court relied not just on the statute, but on the policy itself to find that
notice to the lienholder was required, and thus, coverage was present.
Thus,
it is possible for the insured to benefit from the insurer’s failure to notify
the lienholder, even though the insured’s failure to pay premiums is the
root cause of the problem.
The particular
facts of the case at bar suggest another problematic hypothetical. In this case,
the lease required that the lessee’s insurance policy give it 30 days notice
prior to cancellation. Standard practice, however, is that automobile insurance
policies provide only the 10 days notice required by statute.
Suppose
the insurer does give notice to both its insured and the lienholder, but only
states that the policy will be cancelled if no premium is received within ten
days; the hypothetical accident then occurs after the cancellation, but less than
30 days from the date of the notice.
In
such a case, the lessee would properly bear the brunt of his failure to pay the
policy, because of his failure to obtain a policy that gives the lienholder 30
days notice. If sued, like Zeller was, for defaulting on his loan, he would likely
not be able to invoke coverage.
The
result would be particularly harsh, though. A reasonable person assumes that,
when he obtains coverage for collision, and lists the lienholder as a “loss
payee” in the policy, he has satisfied his contractual obligations. A reasonable
insured is unlikely to notice a 10/30 day discrepancy.
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here for Main Story.
David
Ziemer can be reached by email.
