Courts in Ohio and Louisiana recently faced the question of how a minimum statutory time period should be applied to cancellation notices for nonpayment of premium and whether the insurer must wait until the insured actually defaults on the payment before it can issue the cancellation notice.
State law generally prescribes the reasons an insurer is allowed to cancel a policy and the steps it must take to do so. When cancelling a policy because the policyholder failed to pay the premium, many statutes require the insurer to send written notice of cancellation allowing a certain time period before cancelling the policy. Both the Ohio Revised Code and the Louisiana Revised Statutes allow insurers to cancel an auto policy for nonpayment of premium but only if the insurer first provides at least ten days written notice of the cancellation to the insured. Applying their similar statutes, the Ohio and Louisiana courts came to opposite conclusions regarding the time period but the decisions shed light on the rules for policy cancellations and offer guidance to insurers for issuing effective cancellation notices.
In Vietzen v. Victoria Auto. Ins. Co., 2014-Ohio-749 (Ohio Ct. App.), an Ohio court determined that under state law, a notice of cancellation for nonpayment of premium is effective only if it is sent after the policyholder actually defaults on the payment. The case arose when a driver’s insurer refused to pay a judgment because it said it cancelled the policy before the accident. Prior to the accident, on August 24, 2009, the insurer mailed an invoice to the insured with payment due on September 5, 2009, and included a cancellation notice that said the policy would be cancelled if payment was not received by September 5. The insured never paid, and the accident occurred on September 6.
The insurer argued that it had complied with the statute by providing the cancellation notice ten days before it cancelled the policy. But the injured party argued that the notice and subsequent policy cancellation were invalid because the insurer could not have issued a cancellation notice until after the insured failed to pay the premium. Acknowledging the ambiguous nature of the statute, the court analyzed the law in light of the legislative intent and public policy interest.
The court determined that the legislature intended to create a grace period to “protect the public from the burden of compensating for injuries sustained as a result of uninsured drivers” and saw the statute not as simply a notice period, but rather a grace period triggered only after a payment default. The court noted that the ten-day requirement is preceded by a list of valid reasons for insurers to cancel an automobile insurance policy, including for “nonpayment of premium” which is defined as failing to “discharge when due” the insured’s obligations in connection with the payment of premiums. The court highlighted that the statute requires an actual default and does not permit an insurer to anticipate a default and “cancel a policy on the belief that the insured will not pay her premium… [Rather] an insurance company must wait until the insured has actually failed to pay her premium when due before mailing notice of cancellation of the policy which will take effect no fewer than ten days after the date of mailing the notice.” Within the court’s reasoning, the insurer cannot issue a notice of cancellation until it has grounds to cancel the policy, and no grounds exist until the payment due date expires and the policyholder actually defaults. The court held that the notice of cancellation was not compliant with the statute and therefore ineffective to cancel the policy.
Applying a nearly identical statute to essentially the same fact pattern, a Louisiana court came to the opposite conclusion in Lewis v. Coleman, 118 So. 3d 492 (La. Ct. App. 2013), finding that the statute required ten days notice but did not specify when the notice-period applied. Whereas the Ohio court thought the statute prescribed a ten-day grace period applicable only after a default, the Louisiana court found only a ten-day notice provision.
In the case, an insurer refused to pay a claim on the grounds that it had cancelled the policy. The insurer had issued an invoice to the insured on December 13, 2010 with payment due on January 2, 2011. On December 21, 2010, before the payment due date, the insurer issued a notice of cancellation, notifying the insured that the policy would be canceled on January 2, 2011 if payment was not made by then. No payment was made and on March 12, 2011 the accident occurred.
The parties set forth the same arguments as those in Vietzen, but whereas the Ohio case was one of first impression in the state, Louisiana courts had split on the issue. Acknowledging the split, the appellate court followed the precedent from its circuit and held that the notice was valid under the Louisiana statute.
The court stressed the importance of the insurer’s conduct and distinguished between a notice of intent to cancel and a notice of cancellation. The trial court had observed that the cancellation notice was “a little bit unusual because it was sent before the premium was due” but found the notice unambiguous and in compliance with state law. The appellate court agreed the cancellation notice was “clear, unequivocal, and unambiguous” and was sent at least ten days prior to cancellation as required by the statute. Dismissing arguments the contrary, the majority briefly analyzed the statutory language and noted that the law includes only a minimum notice requirement and “there is no requirement in the statute that the premium be in default when the notice is sent.”
A dissenting judge was not persuaded by the majority’s nuanced distinction between a mere notice of intent to cancel and an actual notice of cancellation in anticipation of default. Consistent with the decision from the Ohio court and the first and fifth appellate circuits in Louisiana, the dissent stated, “There was no outstanding premium balance at the time of the notice cancellation. This notice was not a positive notice of cancellation that is required by [the statute]. No matter how you dress it up, it was simply a ‘notice of intent’ to cancel if premium was not paid timely.”
The conflicting opinions from Ohio and Louisiana fail to secure a general rule for insurers, but the cases provide important guidance for insurers and shed light on a significant statutory provision. Insurers should understand how various jurisdictions approach this statutory requirement for cancellation notices and should ensure that their policy provisions and internal procedures align with state law and any mandatory grace period. At the very least, as the Louisiana court highlighted, a notice of cancellation should be clear and unequivocal, providing the insured with notice above and beyond a mere demand for payment.