Your Insurer Can Issue You a Policy While Planning to Underwrite it Later

Agents and carriers don’t tell their customers that they’ll inspect to see if they ever wanted to insure them in the first place after issuing a policy. In California, the law gives this right to residential and commercial carriers. In residential claims, we often see carriers lure insureds away from a competitor with cheaper premium pricing, fail to fully investigate the adequacy of the risk during the application process, proceed to issue a policy, and then cancel after issuance and an underwriting inspection. By this time, the insured has typically already cancelled their policy with their prior insurer.

Insurance companies have a 60-day window after issuance to cancel without punishment. Insurance Code section 676 provides the rules for cancellation of residential and commercial insurance policies. It provides somewhat limited bases for cancelling a policy, but the critical language is that these restrictions on cancellation only come into place 60 days after the new policy has been in effect. Thus, carriers will order underwriting inspections after issuance to ensure that they want to stay on the risk.

Some carriers do not outright cancel if the inspection is less than pleasing. Often, the risks observed can be mitigated, so the carrier will send a list of something confusingly titled “mandatory recommendations” or the like, which outlines steps the carrier requires the insured to take to reduce risk to the property and maintain insurance. The notice may say that failure to comply could result in cancellation, but this is not a cancellation notice itself. Cancellation will still have to be perfected following the strict statutory rules, which require notice mailed by a specific date and specific information about the reason for cancellation.

According to Cal. Ins. Code § 676, on a policy that has been in place for 60 days or more, a carrier can cancel for the following reasons:

(a) Nonpayment of premium, including nonpayment of any additional premiums, calculated in accordance with the current rating manual of the insurer, justified by a physical change in the insured property or a change in its occupancy or use.

(b) Conviction of the named insured of a crime having as one of its necessary elements an act increasing any hazard insured against.

(1) The insured or his or her representative in obtaining the insurance.

(2) The named insured or his or her representative in pursuing a claim under the policy.

(d) Discovery of grossly negligent acts or omissions by the insured or his or her representative substantially increasing any of the hazards insured against.

(e) Physical changes in the insured property which result in the property becoming uninsurable.

Section 676.2 lists additional rules for cancelling only commercial policies, some of which are just variations on the wording in Section 676, but they also include:

(2) A judgment by a court or an administrative tribunal that the named insured has violated any law of this state or of the United States having as one of its necessary elements an act that materially increases any of the risks insured against.

(5) Failure by the named insured or his or her representative to implement reasonable loss control requirements that were agreed to by the insured as a condition of policy issuance or that were conditions precedent to the use by the insurer of a particular rate or rating plan, if the failure materially increases any of the risks insured against.

(6) A determination by the commissioner that the loss of, or changes in, an insurer’s reinsurance covering all or part of the risk would threaten the financial integrity or solvency of the insurer. A certification made under penalty of perjury to the commissioner by an officer of the insurer of the loss of, or change in, reinsurance and that the loss or change will threaten the financial integrity or solvency of the insurer if the cancellation of the policy is not permitted shall constitute this determination unless disapproved by the commissioner within 30 days of the filing. There shall be no extensions to this 30-day period.

(7) A determination by the commissioner that a continuation of the policy coverage would place the insurer in violation of the laws of this state or the state of its domicile or that the continuation of coverage would threaten the solvency of the insurer.

(8) A change by the named insured or his or her representative in the activities or property of the commercial or industrial enterprise that results in a material added risk, a materially increased risk, or a materially changed risk, unless the added, increased, or changed risk is included in the policy.

Not only can insurers cancel commercial policies within 60 days of issuance, but after 60 days, the insurer can keep the policy in force and demand a change in premium, reduce the limits, or change a condition of coverage for any of the following reasons:

(A) Discovery of willful or grossly negligent acts or omissions, or of any violations of state laws or regulations establishing safety standards by the named insured that materially increase any of the risks or hazards insured against.

(B) Failure by the named insured to implement reasonable loss control requirements that were agreed to by the insured as a condition of policy issuance or that were conditions precedent to the use by the insurer of a particular rate or rating plan, if the failure materially increases any of the risks insured against.

(C) A determination by the commissioner that loss of or changes in an insurer’s reinsurance covering all or part of the risk covered by the policy would threaten the financial integrity or solvency of the insurer unless the change in the terms or conditions or rate upon which the premium is based is permitted.

(D) A change by the named insured in the activities or property of the commercial or industrial enterprise that results in a materially added risk, a materially increased risk, or a materially changed risk, unless the added, increased, or changed risk is included in the policy.

So, don’t be surprised if you or your client comes to you with a cancellation notice shortly after issuance of a new policy. It is critical to do all you can to maintain that policy in force or replace it in order to maintain continuity of coverage. It is also important to remember these rules when obtaining a new policy.