What is Termination by Insurance Policy
Insurance policies can be terminated for various reasons, both justified and potentially unjustifiable. They can also be terminated on differing levels of authority within an insurance company. Each insurance contract is different, but they will typically contain language that provides insurers with a right to terminate coverage. There could be a clause at the beginning of the contract that states that the insurer may cancel or terminate the contract at any time if the insured does not meet conditions stipulated in the contract. Or the term may be stated later in the contract.
One common clause in an insurance policy that provides the insurer with a right of termination or rescission is when the insured misstates underwriting information. This is typically known as a warranty statement which is a basic fact about the insured or the insured property that the insured states in the policy application before the policy is published. In a typical application , there is a question which asks the applicant for information about his driving record. For example, it may ask how many tickets or accidents the insured has had over the last three years. That response is then stated in the policy application and it becomes a warranty statement. If the insured did not truthfully respond to that question and the insurance company is then informed that the insured was not truthful, the insurer can then challenge the warranty statement and cancel the policy.
A critical reason for an injured party to understand these provisions is that it can determine whether an injured party falls within the time limits provided by the terms of the insurance policy to either appeal or negotiate around a cancellation. Where an insurance company cancels your policy, it can result in no coverage being available to defend you or to indemnify you for damages caused by the accident that you are involved in. Understanding the terms of the cancellation can be critical to your case.
Basis of Action Against Your Insurance Company
A policyholder may find themselves asking "Can I sue my insurance company for dropping me?" after receiving a cancellation letter from their insurance company. Affected policyholders should understand the circumstances in which they can make legal claims against their insurance company for canceling their policy. The policyholder may have a claim based on an insurer’s improper cancellation of its policy. A court may potentially award money for damages based on the cancellation, and/or compel the insurer to provide coverage under the policy.
At least two legal grounds may be available to a policyholder to support a lawsuit for an improper cancellation of its policy. The first potential cause of action against an insurer for dropping a policyholder is breach of contract. If the insurance company was contractually obligated to provide coverage under the policy, then the policyholder may be able to sue the insurer for breach of contract. Breach of contract occurs when a party fails to fulfill a contractual obligation.
A second potential cause of action against an insurer is a claim for having acted in bad faith. Some states require a "bad faith" insurance carrier to pay damages to their insureds for withholding benefits under an insurance policy. Specifically, some courts have held that insurers have a duty to deal fairly and in good faith with its insured. Generally, a claim for bad faith requires that the insurance company unreasonably delays or denies payment of a claim for coverage. Although the concept of "bad faith" is sometimes referenced for insurance contracts, there is no universal definition of what constitutes "bad faith". How courts have described "bad faith", however, has been as "a breach of a duty of good faith and fair dealing implicit in all insurance policies" and "any covenant … imposed upon the parties to a contract which deals with claims for losses under that contract." An insurer is considered in bad faith if it acts unreasonably in claiming there is no coverage or failing to provide coverage when it is owed.
Steps to Follow Before Filing a Lawsuit Against Your Insurance Carrier
Filing a lawsuit against an insurance company is not your first course of action upon discovering that the insurer has canceled or decided not to renew your policy. A policyholder should take several steps beforehand to preserve the possibility of a suit and to potentially resolve any disputes without having to go to court.
First, review your insurance contract in order to determine whether the terms of the policy allow the insurer to do what it is doing.
Next, contact the insurance company and, if possible, get a written explanation for the reasons under which the company is terminating or refusing to renew your policy. You should also attempt to schedule a personal meeting with a claims adjuster or supervisor. It can be extremely beneficial to speak to a live representative who can offer you a candid assessment of the situation and who might agree to help you resolve the problem.
If you get nowhere with the insurer, you may want to contact the Department of Insurance in your state for guidance on how the state handles complaints. The department may mediate a dispute between a policyholder and the insurer, but it may not guarantee that you can successfully retain your policy.
Finally, consult with an experienced insurance coverage attorney about any disputes with your insurer over your coverage. The attorney may be able to negotiate a satisfactory outcome with the company without ever having to file a lawsuit, although if need be, an attorney can certainly file suit in the event an amicable resolution simply cannot be reached.
Consequences of Suing an Insurance Carrier
One of the first questions that a policyholder may ask once it has decided to sue an insurance company is: what happens next? While it can be difficult to predict the future in any context, a good starting point is to consider the most common outcomes if the case does not first settle.
Unsuccessful Lawsuit
It is always a very real possibility that a lawsuit will be unsuccessful. Perhaps the cases against the insurance company were just not strong enough. At worst, it is possible that the reasoning behind the insurance company’s decision was entirely valid.
Even in this scenario, it is still possible for the policyholder to be slightly better off than before the lawsuit if an insurer has acted in bad faith. Some of the costs associated with bad faith include extra-contractual damages and punitive damages which are not available under most contracts but are made available to an award in bad faith cases.
Maximizing Settlement Amounts or Awards
More often than not, filing a lawsuit leads to a higher settlement amount or award (if the case ever goes to trial). Insurance companies know that policyholders are less likely to settle for a small amount out of court when there is a possibility of getting a bigger award in court. The added risk on the part of the insurer is why settlements are much more likely after litigation is filed.
At the same time , the possibility of a settlement amount decreasing is higher the longer a dispute proceeds through litigation. Eventually, the insurance company will try to get a settlement done while the policyholder will be unwilling to accept anything less than the awarded amount. Eventually, almost everyone reaches their breaking point in negotiations and whether or not the dispute goes to trial will be determined.
Difficulty Getting Additional Insurance
There are two reasons that a policyholder may have difficulty obtaining insurance after a lawsuit. The first reason is that an insurer may cancel a policy due to a claim that was brought. For example, an insurer may cancel some or all of a group health insurance policy if a lawsuit is brought against it. It would then be much harder for the individual or group to obtain a similar policy elsewhere.
A second reason is that an insurer may require much higher premiums when the insured tries to obtain a new policy. This can happen either when the policyholder is trying to obtain a similar type of policy from the same insurer or a different one.
Alternatives to a Suit
Rather than a lawsuit, a person could pursue a number of alternatives, including mediation, arbitration, or insurance department involvement, as discussed below. These alternatives may be pursued separately and/or in conjunction with a lawsuit.
Mediation: Mediation is a form of alternative dispute resolution that a policyholder and his/her insurance company can use to resolve their differences. Mediation is generally non-binding – in other words, the parties do not have to agree to anything. Mediation may help identify the key issues and/or help the parties reach a settlement if there is a potential compromise. Mediation is often overseen by a trained and neutral third-party mediator, who encourages and guides the parties to work toward a resolution. Mediation sessions can be scheduled to last about two to four hours. Policyholders and adjusters need to prepare for mediation, including gathering and organizing any information and documentation they believe is relevant to the dispute.
Arbitration: Arbitration is another form of alternative dispute resolution. Arbitration is much like a trial; but the process is more informal. In arbitration, both the insurer and policyholder (or his/her lawyer) present info and documents to the arbitrator. The arbitrator then renders a decision, which is usually binding, i.e., both parties must abide by the arbitrator’s decision. Arbitration is often limited to disputes over damages and does not resolve issues regarding liability. A policyholder may have to waive his/her right to bring a lawsuit to use arbitration, so he/she should get legal advice before pursuing arbitration.
Insurance Departments: Policyholders who are denied insurance coverage may also be able to pursue administrative actions with their state’s insurance department. This process varies greatly from state to state.
Cases and Legal History
There are a number of legal precedents that have set the stage for whether a purchaser can sue an insurance company for dropping them as a policyholder. Some states have specific regulations in place, while for others, general consumer protection laws would apply.
One of the most famous Massachusetts cases concerning policy termination goes back to 1947. In Lussier v. American Guarantee and Liability Insurance Company, a woman was injured in an automobile accident. Her husband had taken out an automobile liability insurance policy with the defendant, American Guarantee and Liability Insurance Company. When it was determined that he was responsible for the accident, she filed a claim against her husband’s policy. But the insurance company determined that she was not an "insured" person under the policy and therefore could not be covered.
The policy at issue in the case contained a clause that stated that the insurance company could cancel the insurance contract at any time by delivering or mailing to the policyholder written notice of cancellation. The policy also specified that the cancellation would be effective 5 days after delivery of written notice of cancellation, or 5 days after sending of notice by certified or registered mail, unless the notice provided that the cancellation was contingent upon the return of the policy.
The company did not provide the required notice of cancellation to the policyholder , and instead began a process of showing that she was not an insured person under the contract. The policyholder argued that she was entitled to recover under the policy because the defendant had not canceled the contract according to the terms stated in the policy. It was the prevailing case in Massachusetts at the time that an insurance company could be liable for an accident that occurred after the policy expired and before proper cancellation notice had been given to the policyholder.
The court examined the relevant case law in Massachusetts and other jurisdictions and concluded that, by "the great weight of authority the insurer is liable after cancellation of the policy by lawful notice and before expiration of the period of grace" (Lussier v. American Guarantee & Liability Insurance Co., 1947). In accordance with previous decisions, the court ruled that if an insurer provides no notice of cancellation to the insured policyholder, it cannot avail itself of the privileges and defenses provided by the cancellation statute when sued by a third party for automobile liability.
There are a number of more recent cases involving policy termination in various states. These decisions include:
In these cases, it is important to examine the wording of the insurance policy to determine the obligations of the company and determine whether or not specific cancellation protocols were followed. A qualified litigation attorney can help determine the best course of action for a client who has been dropped by their health or private insurance company.