Late Notice: Not the One-Way Street You Might Expect

In the April 2006 issue of the Litigation & Counseling Alert, we explained some of the ways in which policyholders may lose coverage for otherwise covered claims by failing to satisfy the various notice requirements in their insurance policies, and how to avoid those situations.

What should a policyholder do, however, when an insurance company denies a claim, asserting, for example, that an exclusion in the policy precludes coverage for the loss? Upon review of the policy, if it appears that the exclusion clearly applies to the claim at issue, is the insured completely out of luck? Not necessarily, because insurance companies have notice requirements, too.

Insurance Company Obligations

Insurance is regulated at the state level. Therefore, every state has its own set of statutes, typically referred to as the “Insurance Code.” These laws set forth what insurance companies must do in order to sell their products to consumers in the state. By complying with these requirements, insurance companies strengthen their ability to enforce the terms and conditions of their policies.

In the insurance business, policies, endorsements, declaration pages and notices to policyholders are collectively referred to as “forms.” In most states, insurance companies must obtain approval of their forms, typically by filing them with the state’s insurance department or commissioner. Some states also require that if the insurance company intends to replace a previously approved form, the new one must be submitted for approval. An insurance company that sells a form to the public without complying with these requirements is in violation of the particular state’s law, and therefore might not be allowed to deny coverage on the basis of that form.

Most states also require that insurance companies notify insureds of an intention not to renew a policy on the same terms as the expiring policy. For example, many states, including Illinois, require insurers to notify policyholders of their intent to:

• Increase the premium by more than a certain percentage set in the statute
• Increase the deductible by a substantial amount
• Reduce coverage by introducing a new exclusion or expanding the scope of an existing one

In most cases, the insurer must provide this notice one or two months before the effective date of the change. If the insurance company fails to comply with a state’s “notice not to renew” requirement, state law may compel the insurer to extend the expiring policy for an additional period (which could be as long as a year) on the same terms and at the same price.

Although insurance companies do not often make these kinds of mistakes, they do happen. Thus, if your claim has been denied, even for a reason that appears to have a basis in the policy, you should consult with your broker or coverage attorney. These knowledgeable individuals can determine whether the insurance company failed to notify you, the state or both, which may result in coverage for your claim.