When a homeowner’s insurer reinstates coverage that was cancelled for nonpayment of premium, can it avoid coverage for a fire loss that happened while the policy was cancelled? Yes, said the Connecticut Appellate Court in the recent decision Brown v. State Farm Insurance Co., 150 Conn. App. 405, May 27, 2014. The Brown court upheld a trial court verdict for the defendant insurer, finding that the acceptance of a premium after coverage lapsed effected a reinstatement prospectively.
Underlying Facts and Lower Court Decision
In Brown, notice was sent on March 22, 2006, stating that cancellation would happen on April 6 if payment were not made by then. Payment was not made. On April 21, 2006, after coverage had lapsed, a fire destroyed the insured’s three-family dwelling and personal property, a direct loss of about $390,000, plus rental income.
The plaintiff purchased a homeowner’s insurance policy from the defendant on September 16, 2004, to be billed on a quarterly basis. The plaintiff subsequently purchased a business policy from the defendant on September 26, 2005. At the plaintiff’s request, the defendant agreed to bill the plaintiff quarterly on the same date for both policies, rather than on each policy’s anniversary date. On November 17, 2005, Brown was billed the Q2 2005 payment on both policies, payable by December 16, 2005. On that date, Brown paid one third of the invoice at a branch office, and asked that his payment plan be changed to monthly.
The following events ensued:
- A cancellation notice was issued on 12/21/05, requiring Brown to pay the Q2 balance on or before 1/10/06 to avoid cancellation of the homeowner’s policy.
- On 1/17/06, Brown visited the branch office expecting to make a monthly payment, but was told that the customer service representative had no authority to honor the request for monthly billing, and that he had to pay the open quarterly balance, which he did.
- Because Brown had not timely paid the $508.32, his homeowner's policy was not in force between 1/10/06 and 1/17/06, when it was "reinstated."
- On 2/16/06, Brown was billed $729.85 for Q3 beginning in March 2006 and payable on/before 4/6/06. Brown admitted that he mailed the required payment ($729.85) to State Farm after the fire and after discovering the cancellation notice dated 3/21/06 in a stack of wet mail he found in his house.
- The trial court found it “incredible” that Brown could not produce some corroborating evidence of payment before the fire, and declined to accept his claim that payment was timely made.
- Plaintiff's policy was "reinstated" on 3/22/06, the day after the fire loss. On 4/24/06 Brown made an additional payment of $2,040.41, without explanation.
Brown’s pre-trial motion for summary judgment was denied and he took an appeal.
Ruling on an issue of first impression, the Brown court turned to the language of the policy, a statutory form, which provided in relevant part that cancellation for nonpayment may be made on ten days' written notice, and the notice in this instance conformed. Because there was no guiding precedent in this jurisdiction on the question of prospective versus retrospective reinstatement, the court looked to decisions in other states for guidance. It found that the majority of states addressing the issue held that reinstatement after a lapse for nonpayment restores coverage prospectively only. The court reasoned that this rule effects an important principle of insurance law: the concept of fortuity, and that “losses that are certain to occur, or which have already occurred are not fortuitous.”
Turning to the insured’s argument that by accepting the premium State Farm waived its right to deny coverage, the court found that State Farm adequately reserved its right to reinstate prospectively both in terms of the policy and in the cancellation notice, which expressly stated, “There is no coverage between the date and time of cancellation and the date and time of reinstatement.”
Brown confirms that Connecticut is within the mainstream of jurisdictions holding that coverage reinstated following a lapse for nonpayment of premium applies only prospectively to losses happening after coverage is restored. Brown lost earlier bids for coverage on the same loss in Connecticut state and federal courts; accordingly, while he may be inclined to appeal, a different outcome is unlikely. Moreover, Brown failed to provide any evidence to support his claim that the defendant had misapplied his premium payments for his homeowner's policy and his business policy.
Although the appellate court was clear in its articulation of a rule for prospective coverage, insurers may want to take steps to ensure that policy language and cancellation notice clauses clearly state the intent to reinstate coverage onlyprospectively.