California Insurance Code §678 provides as to personal lines policies (such as homeowners, auto or personal liability): “(a) At least 45 days prior to policy expiration, an insurer shall deliver to the named insured…(1) an offer of renewal of the policy contingent upon payment of premium…stating…(A) Any reduction of limits or elimination of coverage…”

Insurance Code §675.5 makes the same law applicable to commercial policies issued for delivery to California insureds. Insurance Code §676.2(c)(1) provides as to policies of commercial insurance that upon renewal no reductions or changes in the conditions of coverage shall be effective unless a written notice is mailed at least 30 days before the effective date of the change, and such changes can only be made where there are specific reasons for the change (such as willful or grossly negligent acts by the insured or failure to institute loss control measures, or change in use materially adding to the risk). These Insurance Code provisions protect insureds from surprise exclusions which materially reduce the coverage being renewed.

It is very common to find California Changes Endorsements on policies issued in California to reflect these legal requirements. They are usually entitled: “California Changes—Cancellation and Nonrenewal” followed by a promise to adhere to these time limits of Notice and other provisions of the Insurance Code regarding renewal or cancellation of the policy.

What if at renewal time, the insurer simply sends a general “Notice of Policy Conditional Renewal” which is a boiler plate Notice reserving the right to make any kind of change in terms, premium or deductibles? Is that sufficient Notice to allow major reductions in coverage to be enforceable? We think not.

The case law makes these contractual obligations to notify explicit. The California Supreme Court has held that “no change may be made in the terms of the renewal policy without notice to the insured.” (Industrial Indemnity Co. v. Industrial Accident Commission of California (1949) 34 Cal. 2d 500, 506.) California law requires that when an insurance company changes, reduces, or limits the coverage or benefits of a policy upon renewal, the notice of such change must “be provided in a ‘plain, clear and conspicuous writing.’” (Everett v. State Farm General Ins. Co. (2008) 162 Cal. App. 4th 649, 663.) To be conspicuous, the notice must be “displayed or presented” in a way that it would be “noticed” by a reasonable person. (Broberg v. Guardian Life Ins. Co. of Am. (2009) 171 Cal. App. 4th 912, 922-23.) Examples of conspicuous notice “includes . . . a heading in capitals . . . larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size . . ..” (Id. at 923.) Moreover, the notice of reduction in coverage must be “specific.” (Davis v. United Services Auto Ass’n (1990) 223 Cal. App. 3d 1322, 1332.) Thus, “a general admonition to read the policy for changes is insufficient.” (Id.) The failure to provide “adequate notice” renders the attempted reduction or limitation in coverage “ineffective.” (Id. at 1333.)

A major reduction in coverage in the Renewal terms should be disclosed to the insured so that the insured has an opportunity to make an informed decision to renew with the same insurer or seek coverage elsewhere. Certainly an insured must have a reasonable notice of the renewal terms, if the insurer plans a major reduction in coverage. The failure of the insurer and/or the broker to disclose major reductions in coverage in the renewal terms, has serious consequences including making that surprise and deadly exclusion unenforceable. So buyer beware and be forewarned! If you find your renewal policy has surprise holes in the coverage, you might consult coverage counsel as the insurance law may afford some remedies.