Policy Renewal Pitfalls

Written by Gary Reinhardt, Esq.

The Bureau of Insurance strongly encourages insurers and other licensees to be flexible and take into consideration the hardships and constraints many individuals and businesses are experiencing during this unprecedented public health emergency. For this reason, the Bureau encourages those it regulates to consider taking the following actions, consistent with prudent insurance practices:

  • Insurers should consider relaxing due dates for premium payments, extending grace periods, waiving late fees and penalties, and allowing payment plans for premium payments to otherwise avoid a lapse in coverage.
  • Insurers should also consider cancellation or non-renewal of policies only after exhausting all other reasonable efforts to work with policyholders to continue coverage.

(Bureau of Insurance bulletin, March 27, 2020)

The Bureau of Insurance (BOI) is not mandating that insurers provide flexibility with this statement, merely that insurers “should consider” not canceling policies if insureds have COVID-19 related issues that hamper premium payments.  However, some insureds are taking advantage of the extensions of insurers and using this to shop rates or just take a break from premium payments.

If insureds do not renew a policy, an insurer does not have to jump through all of the cancellation hoops contained in title 38.2 of the Code of Virginia.  If an insured does not respond to an offer to renew, the policy lapses and the insured has no coverage as of the timeframe contained in the policy.

Almost if not every insurer initially conditions renewal on receipt of premium when the insurer makes its first offer of renewal.  This condition on receipt overrides any claims that simply mailing the premium prior to the due date suffices to renew the policy.  By using language like “If the bill is not paid by July 1, 2020, your coverage expires at 12:01 a.m., July 2, 2020…”, the insured is responsible for making sure the premium arrives on time and for preventing a coverage lapse.   The language in the renewal offer requires that the premium “actually to be received as a condition to formation of the contract.  Thus, the contract [would not be] formed until [the premium] was received.”  Nan Ya Plastics Corp. v. DeSantis, 237 Va. 255, 261 (1989).  If the premium arrives to the insurer after the due date, the policy lapses and the insured has no coverage for losses occurring after the due date.

However, insurers must carefully review their form letters regarding renewals.  Often, insurers (again, most if not all) send a “courtesy” letter to the insured if the insured has not made the renewal premium payment prior to the due date.  The standard insurer language in these “courtesy” letters says something like this:

“If you already sent us your premium payment, you may disregard this notice.”

The “courtesy” letter no longer requires receipt of the premium.  The “courtesy” letter shifts the focus to if the insured sent the premium payment.  “Sent” obviously equates to mailed, bringing the “mailbox rule” back into effect.  Under the mailbox rule, the insured completed the contract of renewal when she “sent” the premium to the insurer.  “Where parties are at distance from one another, and an offer is sent by mail, it is universally held in this country that the reply accepting the offer may be sent through the same medium, and, if it is so sent, the contract will be complete when the acceptance is mailed.”  Okosa v. Hall, 315 N.J. Super. 437, 440 (1998).  Actual receipt becomes irrelevant in completing the renewal process.  This allows an insured to combat a lapse simply by claiming that she “sent” the payment prior to the due date.  This shifts the burden to the insurer to prove that the insured failed to send the premium prior to the lapse.  Absent an eyewitness, the insurer will have no evidence to refute the insured’s blaming slow mail service for the lapse.  If the insured asserts mailing the premium prior to the due date and has an accident after the lapse date but prior to the receipt of the premium, the insured most likely still has coverage.

Please review all forms associated with renewing coverage.  If the company requires renewal only when premium is received, courtesy letters and even the letter sent out affirming the policy lapse need updating to remove language conditioning renewal on the insured sending payment.  Instead, each letter after the initial offer should reiterate that the policy will lapse on a certain date unless premium is received by the insurer.  This letter should also advise the insured to contact either her agent or the company’s customer service if the insured sent payment previous to receiving the courtesy letters or even the lapse letter to discuss the possibility of policy reinstatement.




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