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New Exclusions in Renewal Policy are Ineffective without Notice to Insured

People frequently renew their homeowner’s, auto, health insurance, or other insurance policies and pay no attention to changes that have occurred in their policy.

As a result of multiple traffic tickets, Crackhead Craig lost his driver’s license for three years. In order to get around town and to and from work, Crackhead purchased a golf cart that he used to drive to Pacific Beach to go surfing and over to Jimmy “The Bud” Weedman’s medical marijuana warehouse to work and pick up extra money.

Crackhead’s homeowner’s policy through Allsnake Insurance Company had an exclusion that eliminated liability coverage arising from the use of any motor vehicle. Shortly after purchasing the golf cart, Allsnake renewed Crackhead’s renter’s policy. The renewal policy expanded the motor vehicle exclusion for the liability coverage. The new motor vehicle exclusion also included an exclusion for liability arising out of the use of a mechanical device, which it described as a golf cart, minibike, dirt bike, and other similar devices used principally for offroad use. The renewal policy was sent with a notice that informed Crackhead that there had been some modifications to his policy and that several new exclusions had been added. The notice contained different sections describing changes in the policy. Once section was entitled, “Clarification of Coverage.” In another section, it was entitled, “New Exclusions.” Allsnake described the expanded motor vehicle exclusion for the use of a mechanical device in the Clarification of Coverage section and did not mention the new exclusion in the new Exclusion Section of the notice.

Crackhead picked up his girlfriend, Ima Forit, in his golf cart to go surfing at Mission Beach. While descending a hill leading into Mission Beach, Crackhead lost control of the golf cart causing it to roll over, and causing serious injury to Ima.

Ima hired attorney Seickem Bulldog to assist her in pursuing her claims against Crackhead Craig. Attorney Bulldog sent notice of the claim to Allsnake Insurance Company and inquired about the policy limits under the renter’s policy. Allsnake obtained Crackhead’s permission to reveal the policy limits of $100,000. However, Allsnake informed Attorney Bulldog that there was no coverage for the loss because the Allsnake policy in effect at the time of the incident had an express exclusion that excluded liability coverage for damages arising out of the use of a golf cart. Attorney Bulldog contacted Crackhead Craig and obtained the documents relating to Allsnake’s notice of the changes to the policy when the renewal policy was issued.

Attorney Bulldog sent a policy limits demand to Allsnake. The demand documented that Ima’s medical expenses were $85,000 to date and additional surgeries were contemplated. Attorney Bulldog contended that Allsnake’s exclusion of coverage was ineffective and unenforceable because it did not provide adequate notice to Crackhead Craig of the expansion of the motor vehicle exclusion of coverage to include in the exclusion the use of a golf cart. Attorney Bulldog contended the failure to provide the notice violated both California common law and Insurance Code Section 678(a) (1)(A), which requires insurance carriers to provide “at least 45 days prior to policy expiration, an insurer shall deliver to the named insured or mailed to the named insured at the address in the policy, . . . (1) an offer of renewal of the policy. . . stating (A) any reduction of limits or a limit or elimination of coverage.” Attorney Bulldog explained that Insurance Code Section 678(a)(1)(A) requires an insurer to provide notice of the changes in a plain, clear, and conspicuous manner, and that the notice Allsnake provided did not meet that requirement. Allsnake rejected the policy limits demand. Attorney Bulldog filed suit and judgment was entered in favor Ima Forit for the sum of $2.7 million. Attorney Bulldog obtained an assignment of rights from Crackhead Craig against Allsnake Insurance Company and thereafter sought your representation on the insurance bad faith case against Allsnake. Should you accept the case?

Insurance Carriers Are Required to Provide Notice of Reductions in Coverage in Renewal Policies

It has long been a matter of public policy that insurance companies are required to provide clear, conspicuous, and unambiguous notice in an expected place of any reduction in coverage on a renewal of an existing policy and, absent such notice, the insured’s failure to read the renewal policy and note the reduction in coverage is excused and the reduction in coverage is held to be ineffective. (Davis v. United Services Auto Ass’n (1990) 223 Cal.App.3d 1322, *1332.) This is not a recent position taken by the courts. “It is a long-standing general principle applicable to insurance policies that an insurance company is bound by a greater coverage in an earlier policy when a renewal policy is issued but the insured is not notified of the specific reduction in coverage.” (Fields v. Blue Shield of Calif. (1985) 163 Cal.App.3d 570, *578.) In general, an insurance company’s general admonition to “read the policy for changes” has been held to be insufficient notice of the new exclusions or limitations of coverage. (Davis v. United Services Auto Ass’n, supra, 223 Cal.App.3d at *1332.) The courts recognize that policyholders are even less likely to read renewal policies than original policies. Therefore, it is not enough that the new exclusion is “plain and clear” and appears in a “conspicuous” place in the renewal policy. Some form of specific notice that is separate from the policy is required to be given by the insurance carrier to direct the insured’s attention to the change in the policy. (Sorensen v. Farmers Insurance Exch. (1976) 56 Cal. App.3d 328, *334.)

The Legislature has codified this requirement for both commercial general liability polices (CGL) and homeowner-type policies. Insurance Code Section 678.1, applicable to CGL policies, requires carriers to provide at least 60 days’ notice, but not more than 120 days’ notice in advance of the expiration of the policy period, that the policy would be renewed upon the condition that there is a reduction in limits, elimination of coverages, changes in deductibles, or an increase of more than 25% on the rate upon which the premium is based. (Ins. Code §678.1(c).) A CGL carrier that fails to provide such notice is bound by the terms of the original policy until 60 days after the carrier fulfills the notice requirements and provides the notice of those changes. (Ins. Code §678.1(d).)

When dealing with homeowner policies, Insurance Code Section 678(a)(1)(A) has similar language that requires the carrier to describe any reduction in limits or elimination of coverage at least 45 days prior to the policy expiration. Where a homeowner’s carrier fails to provide such notice, the terms and conditions of the original policy shall remain in effect for 45 days after the date that the carrier actually sends such a notice to the insured. (Ins. Code §678(b).)

Allsnake’s notice was ineffective because it did not provide clear and conspicuous notification of the change of the terms of the exclusion to exclude liability coverage for the use of a golf cart because it placed the description of the new exclusion in the Clarifications of Coverage section instead of the Exclusions of Coverage section. Pursuant to the case of Davis v. United Services Auto Ass’n, such conduct was held to be ineffective in providing sufficient notification of the new exclusion to the insured and the exclusion was held to be unenforceable.

Under California law, you would be correct if you concluded that Allsnake’s notice of the new exclusion of liability coverage for use of a golf cart would be unenforceable. Pursuant to the holding of Johannsen v. California State Auto. Assoc. Inter- Insurance Bureau (1975) 15 Cal.3d 9, *16), an insurance carrier believing there is no coverage and turns down a reasonable policy limits demand cannot avoid liability for bad faith and the judgment entered against its insured because it erroneously concluded that coverage was excluded. Consequently, you should agree to accept the case.

Conclusion

The facts of this Crackhead Craig chronicle are not unusual. People frequently renew their homeowner’s, auto, health insurance, or other insurance policies and pay no attention to changes that have occurred in their policy. When a carrier is asserting an exclusion of coverage that results in a complete denial of your client’s claim, you should attempt to obtain the cooperation of the policyholder to find out if this policy was renewed and then obtain all of the documents relating to notifications of the renewed insurance policies and any changes in coverage over the years. Carriers will often overlook those changes when renewing its policies because the notices are frequently written by the marketing or sales department and not by the legal or claims departments. Even when the notices attempt to provide notification of the changes, the notices can be challenged as being ineffective because the language in the notice was unclear or the description of the policy changes was placed in a location in the notice that did not bring the policyholder’s attention to the fact that there are new exclusions in the policy and/or describes new exclusions in an unclear or ambiguous manner. It will be the carrier’s burden to establish that such notification of the new exclusions was given when the policy was renewed. If it cannot meet that burden, the carrier is bound by the terms of the original policy, which may not have such an exclusion.


This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2017). New exclusions in renewal policy are ineffective without notice to insured. Trial Bar News, 40(8), 25-28.

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