Recently, in a case involving the interpretation of a Pollution and Remediation Legal Liability Policy (the “Policy”), the U.S. Court of Appeals for the Third Circuit held that “for a contract to be considered a renewal, it must contain the same, or nearly the same, terms as the original contract.” The court’s precedential ruling in Indian Harbor Insurance Co. v. F&M Equipment, Ltd., No.14-1897 (Oct.15, 2015), means that when an insurance company promises to offer its insured a “renewal,” it cannot simply offer a subsequent insurance policy with new terms, even if the insurer provides the policyholder notice of the changes. That is not a “renewal.”
The Policy that Indian Harbor Insurance Company (“Indian Harbor”) issued to the appellant, F&M Equipment, Ltd., in 2001 “included a promise by Indian Harbor to offer a renewal.” Per an endorsement to the Policy, Indian Harbor agreed that it would not cancel or non-renew the Policy except for specified reasons that did not apply. However, when it came time to “renew” the Policy, Indian Harbor offered the appellant a policy with a different limit of liability and a different length of coverage period, plus it eliminated coverage for one critical insured site. “Unsatisfied with the terms of [Indian Harbor’s version of a renewal offer], [the appellant] rejected it, and two days later, requested that Indian Harbor send an offer to renew under the same terms and conditions as the Policy. On January 31, 2012, Indian Harbor informed [the appellant] that it would not provide a revised offer.” Litigation commenced soon thereafter. The U.S. District Court for the Eastern District of Pennsylvania found “Indian Harbor’s offer constituted a renewal because an insurance company need only notify the insured that a policy will change for the later offer of a contract to constitute a renewal.”
The policyholder appealed to the Third Circuit, which vacated the judgment of the district court. Applying Pennsylvania rules of insurance-policy interpretation, the Third Circuit had to “determine what the parties meant when they agreed that Indian Harbor would not ‘refuse to offer a renewal extension of coverage’” (footnote omitted).
At the outset, the court rejected the insurer’s argument: “Indian Harbor argues that a renewal need only be any offer of a new contract, so long as advance notice is provided for any changed terms and the terms are commercially reasonable. … Indian Harbor seeks a rule that any new contract with notice of new terms qualifies as a renewal. … There is no difference between what Indian Harbor proposes and what it had every right to do without a prior promise to renew. If any new offer counts as a renewal, the promise of a renewal is illusory[.]” The court added that “the relevant provision of the contract is a promise to offer a renewal, not a reasonable insurance contract.”
Although, the Third Circuit held that “[a] renewal contract need not contain identical terms to the original” (footnote omitted), it ultimately agreed with a prior decision by the U.S. Court of Appeals for the Eighth Circuit “that a renewal requires ‘continuation of coverage on the same, or nearly the same, terms as the policy being renewed’” (footnote omitted).
The Third Circuit clarified that “a reasonable change in price should not alone render a new contract a nonrenewal. But the remaining terms must be recognizable extensions of the initial [p]olicy.” In this case, the court concluded, they were not: “The length of coverage is different, the amount of coverage is different, and the scope of coverage is different. The general subject matter is the same and the parties are the same; but this is not enough. Because Indian Harbor did not offer a contract that is either the same or nearly the same as the Policy, it breached its promise to offer a renewal extension of coverage.”
Finally, the Third Circuit discounted the insurer’s argument that the court’s ruling would result in a “perpetual contract”: “Indian Harbor complains that holding it to its promise would require renewing the renewal provision itself, and that would obligate Indian Harbor to recursively renew the contract in perpetuity. To the extent Indian Harbor argues that a contract it drafted was not careful enough, we are unmoved. Moreover, in future policies, Indian Harbor need not incorporate the broad renewal provisions that are included here.”
In ruling that an insurer be held to its promise, and that the term “renewal” be understood in a common-sense manner, the Third Circuit reached a sensible result that provides greater certainty to policyholders as to the value of guaranteed renewal provisions in their policies. Further, the Third Circuit’s guidance as to what changes constitute a non-renewal will have an impact in instances where the policyholder has the right, either automatically or by purchase, to an extended reporting period when its policy is not “renewed."