Once Coverage is Bound Cancellation Requires Compliance with Statutory Requirements
Insurance agents and brokers like to write insurance business. They will often bend over backwards to collect a premium and place a policy. When an insured is offered coverage, accepts the coverage, even without payment, a binder (evidence of insurance to be issued in the future) is evidence that a contract of insurance has been formed. The agent might try to say there is no coverage until the premium is paid but to do so it must make sure the binder issued says it is not effective until the premium is collected.
In James Allen Insurance Brokers and Certain Underwriters at Lloyd’s, London, Subscribing to Certificate No. FRO-100944 v. First Financial Bank, NO. 2018-IA-00307-SCT, Supreme Court of Mississippi (April 18, 2019) James Allen Insurance Brokers (JAIB) and Certain Underwriters at Lloyd’s, London, Subscribing to Certificate No. FRO-100944 (Lloyd’s) petitioned the Supreme Court of Mississippi for review of the trial court order granting partial summary judgment in favor of First Financial Bank (FFB). The trial court held that FFB is entitled to insurance proceeds from a fire loss that occurred at Luther and Freda Feazell’s poultry farm, because JAIB and Lloyd’s failed to comply with Mississippi law requiring notice of cancellation of property insurance.
The Feazells borrowed money from FFB secured by, among other things, four poultry houses on the Feazells’ farm, valued at $231,750, $231,750, $150,000, and $150,000 that became the subject of insurance with Lloyd’s.
The Underwriters advised the Feazells that they required before they would issue the policy they must provide the premium, among other things, within 10 days. Feazells were advised that if all items are not received they will cancel the policy flat with no coverage afforded at anytime and all premium, less the policy fee will be returned. In so saying the Underwriters did not believe the statutory requirements of 30 days notice for cancellation of an insurance policy.
On January 5, 2014, three days after the final premium payment deadline, the Feazells’ poultry farm caught fire. All four of the chicken houses used to secure FFB’s loan to the Feazells were either destroyed or rendered inoperable. According to FFB, due to the extensive fire damage, the Feazells’ poultry operation came to a halt, effectively resulting in complete casualty loss.
The actual binder that was issued with effective dates of coverage from December 13, 2013 through December 13, 2014 contained no deadline for the payment of the premium and did not contain any terms regarding automatic cancellation or withdrawal of coverage.
JAIB and Lloyd’s claimed that the trial court misinterpreted those facts and the applicable law when it granted partial summary judgment in favor of FFB. They contend that the sole issue is a legal one—whether FFB was owed a statutory notice of cancellation when the policy never was cancelled because the binding terms never were satisfied. They maintain no coverage was in place at the time of the fire loss; without effective coverage, the notice requirements of the Mississippi Code were not triggered.
Mississippi statutes require all fire policies include a standard mortgage clause that provides that “This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for thirty (30) days after notice to the mortgagee (or trustee) of such cancellation and shall then cease, and this company shall have the right on like notice to cancel this agreement.”
The evidence in the record showed that an insurance binder was issued by JAIB and Lloyd’s with an effective date of coverage for the Feazells’ chicken farm beginning on December 13, 2013, through December 13, 2014. The binder listed FFB as a mortgagee/loss payee and included FFB’s mailing address. Although temporary, a binder is nonetheless a contract of insurance and it is sufficient to trigger statutory notification requirements.
First, the claim asserted by JAIB and Lloyd’s that coverage never went into effect because JAIB did not receive the premium timely has no merit. It is not essential that the premiums on the policies be paid, or that the policies be actually delivered to the insured, before the contract becomes effective. This includes insurance binders.
Here, while JAIB and Lloyd’s certainly could have contracted to require that the premium be paid before the binder went into effect, they did not do so. Instead, they agreed to issue a binder with an effective date of coverage from December 13, 2013, through December 13, 2014, with the full premium due within ten days of the binding effective date.
Coverage having gone into effect on December 13, 2013, under the terms of the binder, and FFB having been listed in the binder as a mortgagee/loss payee triggered the statute’s notification requirements for purposes of FFB. JAIB and Lloyd’s failed to comply with those notification requirements; therefore, they are liable to FFB for its loss.
Accordingly, the trial court correctly granted partial summary judgment in favor of FFB.
Insurers like the Underwriters at Lloyd’s and brokers who place insurance with them should know what a contract is and that a binder is an insurance contract with all the terms and conditions to be provided later. If they wanted to limit what they did to come into effect only after the premium is actually received all the Underwriters needed to do was to make a conditional offer and not issue a binder including effective dates without stating the conditions it intended. Hopefully the Underwriters and the broker have learned a hard lesson when it pays the bank its losses.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Insurance and the Law of Unintended Consequences Paperback
Insurance is, and always will be, a business of the utmost good faith. All parties to the insurance contract agree, in good faith and fair dealing, to do nothing to deprive the other the benefits of the contract. Insurance is, and always be, nothing more than a contract.
The insurer makes a promise to the insured that if a contingent or unknown loss occurs caused by a peril or risk insured against and not excluded, to pay the insured indemnity as promised by the contract up to the limits provided.
The insured promises to truthfully disclose the risks of loss faced by the insured, property owned by the insured, the business of the insured and/or the insured’s liability exposures. The insured also promises to honestly present a claim, prove the claim, and cooperate with the insurer in its investigation. If the parties to the insurance contract deal with each other fairly and in good faith the policy remains viable, claims are paid promptly and to the satisfaction of the insurer and the insured.
Only if a true tort occurs can the insured waive the contract action and sue in tort. Breach of contract, by centuries old tradition, is not a tort and cannot and should not be considered a tort. The Tort of Bad Faith has served its purpose and is now causing more problems than it solves. It is time the courts and state legislatures rescind the tort and return to common law contract damages.