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IS AN INSURER'S RIGHT TO CANCEL AN INSURANCE POLICY FOR NON-PAYMENT OF PREMIUM ABSOLUTE?

There is an old adage in the legal profession that bad facts can make bad law.  A recent Connecticut Superior Court decision serves as an example that an insurer’s right to cancel an insurance policy for nonpayment of premium is not absolute.  In 21st Century North America Insurance Company v. Glenda Perez, Docket No. HHD CV 14-6051072-S (March 11, 2016), the court refused to allow  the insurance company to avoid coverage under an automobile liability policy in a wrongful death action when the insured’s late installment premium payment was twenty-four cents less than the premium due.  While the Perez case is a trial court decision which is not binding on other courts and it may not be considered bad law, the facts of the case can leave one scratching their head over the position taken by the insurance company. 

The policyholder in Perez purchased an automobile liability policy with a monthly installment premium plan, which required payment of $62.24 per month.  After the insured failed to pay the second installment due on the renewal of the policy, the insurer sent a  notice of cancellation for nonpayment of premium, indicating that the policy would be cancelled as of a specified dated unless the “premium due is paid prior to the effective date of the cancellation.”  The cancellation notice indicated that the amount due was $124.48, twice the amount of premium installment.  The insureds made a payment of $62.00 after receiving the notice and before the cancellation date.  One month later, the insured was involved an automobile accident that caused the death of the operator of the other vehicle.

After receiving notice of the accident, the insurer filed a declaratory judgment action seeking to escape any duty to provide coverage under the policy because of the insured’s failure to pay the $124.48 reflected as due in the notice of cancellation. The insurer contended that because it complied with the Connecticut statutes governing cancellation of an insurance policy for nonpayment of premium, its right to cancel the policy was absolute.  The trial court disagreed, finding that the cancellation notice was ambiguous and misleading.  Acknowledging that insurance policies are contracts of adhesion, the court stated that just as ambiguous provisions in a policy are to be construed against the insurer, “incorrect and misleading notices should not be construed to provide an insurer with an absolute power that obliterates any rights of the insureds to the coverage for which they had contracted and paid.”  According to the court, “the ability to mislead an insured and then revoke coverage for a premium payment that is twenty four cents less than the amount due does not comport with the fairness our law attempts to extend to all parties” in insurance transactions.   You may read the court’s decision here.

The insurance company’s potential liability under the policy for the wrongful death claim in Perez is $20,000.  The insurance company is intent on seeking to escape liability for that amount based on a dispute of twenty-four cents and no more than $62.48 because it has appealed the court’s decision to the Connecticut Appellate Court.  The Connecticut Appellate Court will now have an opportunity to decide whether an insured’s substantial compliance with the terms of an insurance policy concerning the payment of premium due is sufficient to defeat a claim of non-coverage under an insurance policy, or whether an insurer has an absolute right to cancel an insurance policy for nonpayment of the exact amount due. 

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