Midterm Cancellations: When is a Reissue Not a Renewal?

August 21, 2017

Like virtually every other state, Wisconsin has adopted a statute dealing with midterm cancellation of insurance policies by carriers. Section 631.36 (2) Wis Stats provides that “…no insurance policy may be canceled by the insurer prior to expiration of the agreed-upon term….” except for certain grounds specified in the statute. Failure to pay a premium when due, material misrepresentations, substantial change in the risk etc., are examples of some of the permitted grounds for a midterm cancellation. However, there is an exception to the general rule of prohibition against midterm cancellations. The prohibition does not apply “…to any insurance policy that has not been previously renewed if the policy has been in effect less than 60 days at the time the notice of cancellation is mailed or delivered.” In my experience, most agents are aware of the foregoing legal principles applicable to midterm cancellations.

Recently, the Wisconsin Court of Appeals issued a decision in a case involving a midterm cancellation. The plaintiff had procured insurance coverage for a residential property from an insurance agent. The policy was issued on June 23, 2010 through June 23, 2011; and was titled as a “New Policy”.  Thirty days before the expiration of the initial term, the carrier sent a notice indicating that there would be a renewal premium due and that the renewal would run from June 23, 2011 through June 23, 2012. The notice also specified the due date of the premium. Plaintiff failed to make payment and the carrier issued a cancellation notice. Subsequently, the plaintiff and the carrier engaged in a long series of policy cancellations and reinstatement that occurred through December 2013. On six occasions during this timeframe, the carrier canceled the policy for nonpayment; and after each cancellation, the carrier reissued the policy. The reissued policies contained the same policy number. On October 23, 2013, the declaration sheet that was issued to the plaintiff stated “Policy Reissued”. On December 18, 2013, the carrier sent a notice indicating that coverage would be terminated as of December 31, 2013 due to the history of nonpayment. A refund of premium was issued to the plaintiff. This was not a cancellation for failure to pay a premium; but simply a cancellation due to the carrier’s decision that it’s had enough with respect to the plaintiff’s history of payment. In April 2014, a fire occurred at the residential property. The carrier in question denied the loss because the policy had been previously canceled. Rather than contesting the cancellation with the carrier, the plaintiff sued the agent who sold the policy in the first instance.

The theory of a lawsuit against the agent was that the agent had failed to secure the requisite coverage on the property following cancellation of the policy in 2013. Rather than simply relying on the failure of the plaintiff to procure coverage as an affirmative defense, the agent raised a rather novel defense. The agent asserted that when the carrier canceled the policy in October 2013, such cancellation was an unlawful midterm cancellation; and that the policy was therefore in effect at the time of the loss. This brought the carrier into the lawsuit. Specifically, the agent alleged that the statute was applicable because the policy that had allegedly been canceled, was the same policy that had been in effect for over three years, had the same policy number, had the same coverage terms etc. The prohibition against midterm cancellations applies to “renewal” policies; and the exemption from this prohibition is applicable only to “new policies” which have not been in effect for a period of more than 60 days. The carrier argued that its policy was not a “renewal” so as to fall within the prohibition contained in the statute. Rather, it argued that it was a “reissued” policy, which was a “new policy” for purposes of the statute. Specifically, the carrier argued that a “renewal” policy is a continuation of a policy already in existence, while a “reissued” policy is the formation of a new contract after a break in coverage. The trial court disagreed with the carrier;  found that the policy was a renewal; found that the carrier had unlawfully canceled the policy on a midterm basis; and that the carrier was responsible for providing coverage for the loss. The carrier appealed.

The issue before the appellate court was whether or not the policy in question was a renewal or a new policy. The court noted that the statute does not define the word “renewal” , but given the facts of the case, the court could not buy into the argument of the carrier. The facts were very clear. The only document entitled “new policy” was the policy that was issued on June 23, 2010. All documents subsequent to that date made references to “reissued policies” which used the same policy number as the June 23, 2010 policy. The plaintiff had never been required to submit a new application for new coverage when the policy was reinstated or reissued; and  the carrier never did perform any new underwriting for purposes of assessing the risk. The appellate court noted that if the carrier wanted to create a “new” contract, it could have made that clear on each new document, required a new application prior to reissuance, required new underwriting prior to reissuance, assigned a new policy number etc. The carrier failed to do so. It now had to bear the consequences of its unlawful midterm cancellation.

Needless to say, the agent was exonerated. However, what is troublesome to me with respect to this decision, is the lack of any discussion concerning the role of the agent in the context of the numerous cancellations and reinstatements of the policies. I know that cancellations for failure to pay and reinstatements of policies occur within virtually every agency at some time or another. I’ve always viewed these situations as potential “mine fields” for agents. I can think of any number of scenarios where an agent could incur liability that would not otherwise exist. My general advice is that the agent should stay clear of the cancellation and restatement process, and let the insured and carrier resolve the matter. The agent should document what’s transpiring; and make clear what the role of the agent is in the process. Risk management is always prudent.

For more information about "Midterm Cancellations: When is a Reissue Not a Renewal?," contact Timothy D. Fenner at tfenner@axley.com or 608.283.6733.