Insurers are required to comply with insurance statutes and regulations in every jurisdiction where they do business, governing everything from solvency to consumer protection. Oft-times, insurers incorporate the language of applicable state statutes and regulations into their policy forms, turning compliance requirements into enforceable contractual rights. The use of statutory and regulatory language in a policy of insurance may create additional, unanticipated obligations to insureds which may be enforced by the courts. A recent decision issued by the United States Court of Appeals for the Third Circuit illustrates this point.

On October 15, 2015, the Third Circuit, interpreting a contractual endorsement governing nonrenewal, held that a renewal offer must contain nearly the same terms as the original agreement. In Indian Harbor Ins. Co. v. F&M Equipment, Ltd., Civil Action No. 14-1897 (3d Cir. Oct. 15, 2015), a precedential case decided under Pennsylvania law, the circuit court vacated the district court’s finding that the insurer’s offer constituted a renewal because the insurer had provided advance notification to the policyholder that the policy terms would change. The court reversed, finding that the insurer had reneged on its promise under the policy to offer a renewal by changing the length, amount and scope of the coverage offered. In so holding, the court stated that while a “reasonable change” in price will not render a new contract a nonrenewal, the remaining terms must be “recognizable extensions” of the initial policy.

The dispute arose from a December 2001 policy issued to F&M Equipment, Ltd., f/k/a Furnival Machinery Company (Furnival), providing $10 million in pollution and remediation legal liability protection for a 10-year period covering 12 specific Furnival locations. (The $10 million of coverage was increased to $14 million in 2006 for an additional premium.) When the 2001 policy was issued, the insurer knew that Furnival had an agreement with the federal government requiring it to clean up a landfill site included among the 12 covered locations.

Pursuant to an endorsement issued with policy, Furnival agreed that the insurer could cancel or refuse to renew the policy for five reasons, which are typically permissible reasons for cancellation or nonrenewal under state insurance statutes and regulations: a material misrepresentation by the insured; a material breach by the insured; a material failure by the insured to comply with policy terms; a material change in the insured’s operations; or a loss of or substantial decrease in reinsurance by the insurer. In the policy at issue, the insurer agreed further in the endorsement that it would not cancel or nonrenew the policy except for the stated reasons.

In January 2012, at Furnival’s request, the insurer forwarded a renewal proposal offering $5 million in coverage over a one-year span and specifically excluding coverage for the landfill site which was the subject of the existing remediation agreement. Furnival rejected the offer and requested a new proposal pursuant to the terms of the policy. The insurer refused and filed a declaratory judgment action, seeking an order finding that it had fulfilled its obligation to provide a renewal offer. Furnival counterclaimed for breach of contract and thereafter moved for summary judgment.

The district court denied Furnival’s motion for summary judgment, holding that Furnival had “inadvertently acknowledged” that there was an “unless otherwise expressed” exception to the general requirement that a renewal contain the same terms of the original policy. Because the insurer had provided notice to the insured that it intended to change the policy in accordance with state law, the district court held that the insurer had satisfied the terms of the policy contract under the “unless otherwise expressed exception.”

Furnival appealed, arguing that a contractual renewal provision is illusory, if all it requires is the offer of a new contract with appropriate notice, and that such an interpretation would permit an insurer to offer a useless policy. The Third Circuit agreed, stating that the insurer’s contention that it can drastically change the policy as long as it provides notice to the insured cannot be what the parties intended when they included a renewal provision, rejecting the insurer’s argument that the duty of good faith and fair dealing prevents it from offering a commercially unreasonable policy. The circuit court observed that the relevant provision of the contract is the promise to offer a renewal, not the promise to provide a reasonable insurance contract, and it was “unmoved” by the insurer’s implied argument that the “contract it drafted was not careful enough.” Slip op. at 13. The court opined that future contracts need not incorporate such broad renewal provisions and rejected the question of being held to a perpetual renewal based on such broad language as not before it. Id.

In reaching its decision, the court did not address the definition of “nonrenewal” as contained in applicable insurance statutes and regulations, e.g., Pa. Code 113.81, or the circumstances under which a regulator may permit nonrenewal.

A copy of the decision may be accessed here