This might just be a Coverage Opinions first – discussion of a case about an insurer cancelling a policy.  Such cases are usually not good candidates for CO.  They are often-times dull and involve issues, especially statutory, that are unique to their state.

But Yang v. Everest National Ins. Co., No. 344987 (Mich. Ct. App. Aug. 27, 2019) made the cut.

Everest sent Wesley Yang a bill for his no-fault insurance policy and informed him that the policy would be cancelled if payment was not received by the due date.  Yang did not make the payment. He and his wife were subsequently injured in a pedestrian-automobile accident.  They sought coverage and Everest said no as the policy had been cancelled.

Litigation ensued and the trial court found for the insureds.  Everest appealed.

The appeals court summed it up:  “At issue in this case is whether an insurer may cancel a policy by sending the statutorily required ‘notice of cancellation’ to the insured before the grounds for cancellation have occurred.  We hold that such notice does not satisfy the Insurance Code, MCL 500.100 et seq., and is therefore ineffective to cancel the policy. Accordingly, we affirm the trial court.”

In essence, the court held that “a notice of cancellation which states that a policy will be cancelled on a specified date unless premiums due are sooner paid, is not a notice of cancellation, but merely a demand for payment.”

Therefore, an insurer needs to send a cancellation notice immediately after payment is not received by the due date.  Then, the policy will cancel however many days later that notice of cancellation was required, based on any statute or policy provision.  So, if a loss occurs during that notice period, it is covered, even if the insured does not ultimately pay the premium.

Yes, the case involves a Michigan statute.  However, I believe that it offers lessons that go beyond the Great Lakes State.  Indeed, the court looked at how several states nationally have addressed the issue, and concluded that it was adopting the majority rule.  Insurers would be well-served to examine how they handle cancellation notices.

The issue arises from the following scenario:

“On October 9, 2017, Everest mailed Yang a bill for the second premium installment payment that contained a notice of cancellation for nonpayment of the premium. The document informed Yang that he must pay the premium by October 26, 2017. It stated that the failure to pay that amount by the due date ‘will result in the cancellation of your policy with the indicated Cancellation Effective Date,’ October 27, 2017.  Thus, the document provided that if the premium payment was not received by October 26 the policy would be cancelled effective the next day. It also stated that the cancellation notice did not apply if the bill was paid by the due date.

On October 30, 2017, Everest, having not received the premium payment, sent Yang an offer to reinstate the policy. It informed Yang that his insurance was cancelled as of October 27, 2017, because it did not receive the premium payment by the due date. The letter informed Yang that he could reinstate the ‘policy with a lapse in coverage’ if it received payment by November 26, 2017.

Yang sent a payment for the premium on November 17, 2017, and Everest reinstated the policy effective on that date. The notice of reinstatement informed Yang that there was a lapse in coverage from October 27, 2017 to November 17, 2017.

The accident in which plaintiffs were injured occurred on November 15, 2017, two days before Yang made the premium payment.”

This sounds confusing.  To summarize, Yang’s policy was cancelled as of October 27, 2017 for non-payment of premium.  And, as Everest saw it, notice of cancellation had been provided when Everest sent the October 9, 2017 bill to Yang that contained the notice that policy would be cancelled if the premium had not been paid. 

But here’s the problem for Everest.  The notice of cancellation was sent before the premium was due.  The court rejected this as being in compliance with the statutory notice of cancellation obligation: “For a cancellation to take place, the event triggering the right to cancel must have taken place first. In this case, the event that allowed for cancellation occurred on the date of nonpayment. Therefore, it is only after the nonpayment that the insurer may properly notify the insured of cancellation. In other words, it is not sufficient that the insurer warn the insured that a future failure to pay the premium will result in cancellation; rather, it must advise the insured that, because of an already-occurred failure to pay, the policy will be cancelled in ten days. This reasoning is consistent with the Michigan Supreme Court’s understanding of MCL 500.3020.”

The court observed that this decision was consistent with the majority of courts nationally that have addressed the issue.

As I noted above, an insurer needs to send a cancellation notice immediately after payment is not received by the due date.  Then the policy will cancel however many days later that notice of cancellation was required, based on any statute or policy provision.  So, if a loss occurs during that notice period, it is covered, even if the insured does not ultimately, pay the premium.