What’s in a Name? Insurance Coverage?

Are insureds required to notify the insurance company of a change in business form and structure after the inception of the initial policy? This issue recently came before the United States Court of Appeals for the Tenth Circuit in Christy v. Travelers Indemnity Co. of America, 810 F.3d 1220 (10th Cir. 2016). In this case, the insured, Corey Christy, purchased a CGL policy from Travelers in the name of his sole proprietorship, K&D Oilfield Supply (K&D). Thereafter, Christy registered his business as a corporation in New Mexico under the name K&D Oilfield Supply, Inc. (K&D, Inc.) Christy renewed his CGL policy annually for three separate years in a row but did not notify Travelers that he incorporated his business. After Christy had incorporated his business, he had an accident where a motor vehicle struck him while he was riding a bicycle. When he presented a UIM claim under the Travelers policy, Travelers argued that Christy was not a named insured and, therefore, would have UIM coverage only when occupying a covered auto. The bicycle he was riding was not a covered auto.

In the District Court, Travelers argued that Christy had a duty to notify Travelers that he had changed the form of his business from a sole proprietorship to a corporation. Additionally, Travelers argued that the change in business structure and Christy’s failure to update Travelers regarding the change constituted a material misrepresentation that had induced Travelers to renew the CGL policy. The trial court agreed and granted summary judgment in favor of Travelers. On appeal, the Tenth Circuit Court of Appeals reversed finding that there were material issues of fact as to whether Christy had committed a material misrepresentation.

First, the Tenth Circuit Court of Appeals held that Christy had no duty to notify Travelers of the change in his business form and structure absent express language within the Travelers policy requiring notification. There was no express requirement in the Travelers policy. Alternatively, Travelers argued that the Court should impose a duty to inform as a matter of public policy. Specifically, Travelers argued that in the absence of a duty to notify of the change in business structure, Christy would be rewarded for making a material misrepresentation which, in turn, would incentivize others like Christy to withhold information from insurers to derive greater benefits which honest disclosure would not have permitted. Regarding the latter argument, the Court noted that it was based on the assumption that Christy had in fact made a material misrepresentation.

The record in the trial court established that in the annual discussions Christy had with his insurance agent, the focus was on the number of employees and types of vehicles used by his business. Christy had never been informed that changing his business form and structure could affect Travelers’ decision to renew his insurance coverage. The insurance agent testified that while he asked Christy whether there had been any changes in the business’s operations, the agent never expressly and specifically asked whether the business form and structure had changed. Against this evidence, Travelers introduced the cover letter that it sent with the annual renewal notice which stated in relevant part: “Please review your policy for accuracy and advise … if any changes or additional coverage are needed.” Travelers argued that the cover letter was sufficient to notify Christy that he should have informed Travelers of any changed circumstances that might warrant a corresponding revision in the policy. The Court found, however, that that type of generic inquiry was insufficient to place the burden on the insured to determine which specific changes might be material to the insurer. That would place the burden on the insured, a layperson, to divine what new circumstances might necessitate changes or additional coverages under the existing CGL policy.

Reviewing all of the facts and taking all reasonable inferences in the light most favorable to Christy, the Tenth Circuit held that there were material facts in dispute as to whether Christy knew or should have known Travelers would consider the change in his business form material to its decision to renew the CGL policy. The Court noted that while the undisputed facts showed Travelers never specifically asked Christy about changes to his business form and structure, a trier of fact could reasonably conclude that the annual cover letter, together with Christy’s annual discussions with his insurance agent, were sufficient to place him on notice that such information would be material to Travelers. The Court could not conclude as a matter of law that Christy knew of the material nature of the change in his business structure, however.

So, what’s in a name? In the insurance context it is definitely advisable that the insured should ask his insurance agent and/or the insurance company whether the change in a business form and structure will make a difference regarding the coverages available therein.