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Premium Payment for Cancelled Insurance Policy Does Not Create Reinstatement for Time Period Prior to Receipt of the Payment

Paying bills used to be so complicated, and so filled with the unknown. An insurance premium was past due and the insurer had sent a notice of cancellation. The insured wrote a check, stuck a stamp on an envelope, took it to the post office, and hoped that it arrived at the insurer’s office within a few days so that the policy could be reinstated. The insured then waited until the monthly statement was mailed by the bank to see if the payment was received.
 
Now fast-forward to 2009. An automobile insurance premium is past due and the cancellation date has arrived. A few days after the cancellation date, the insured is involved in an accident. While waiting on the police to arrive, the insured whips out his iPhone or Blackberry Storm, accesses the insurer’s payment website, and pays the past due premium. Pursuant to the policy language and state law, the policy is reinstated. A police officer arrives, prepares an accident report, issues a citation to the insured for running a red light, and the insured and the other driver exchange insurance information. A week later, the insurer is informed of the accident and ultimately refuses to pay the claim because the policy was not in effect until a few minutes after the accident. The insured cries foul, claiming that the insurer is barred by estoppel and waiver from refusing the claim because the insurer automatically reinstated the policy upon payment of the past due premium.
 
Absent some unusual course of dealing by the insurer with regard to late payments, the fact that, through the wizardry of modern communications and computers, the late payment was received and the policy was reinstated very shortly after the accident will generally not require the insurer to cover the claim. As Appleman on Insurance explains:
 
“Generally, where there is no course of dealing concerning late payments, the insurer's acceptance of a payment on a lapsed policy with the knowledge that an accident has occurred during the period of lapse will permit it to choose to return the premium for the lapsed period, to apply the premium from the date received forward, or to retain the entire premium and cover the loss….It should be noted that the insured relying on waiver or estoppel must also establish that he reasonably relied on the insurer's conduct and was misled into believing that coverage was in force.” (5-28 Appleman on Insurance § 28.2).
 
Although there are no reported cases of payments made using iPhones or Blackberry Storms, recent decisions involving payments made by old-fashioned snail mail through the Post Office Department, a branch of the Federal Government, as Fred Gailey would say, give us guidance. (You don’t remember famous lawyer Fred Gailey? Check him out on Wikipedia.)
 
Earlier this year in Hartland v. Progressive County Mut. Ins. Co., 2009 Tex. App. LEXIS 2755 (Tex. App. Houston 14th Dist. Apr. 23, 2009), the Court of Appeals of Texas affirmed a jury’s finding that an insurer properly denied a claim where the insured failed to prove to the jury’s satisfaction that the payment was made prior to an accident. The policy period ended at May 9 at 12:01 a.m., and the insured’s wife was involved in an accident at 8:00 a.m. on May 9. The insured claimed that he mailed the renewal payment on May 8, but the insurer produced evidence that the payment was postmarked on May 11. The insurer received the payment on May 16, and on May 18 the insurer renewed the policy effective back to May 12.
 
The jury answered ‘No’ to the question as to whether the insured mailed his renewal payment prior to May 9 at 12:01 a.m., and the insured then claimed that “the parties formed a contract under the original terms of the renewal policy when appellee retained payment on the forfeited policy.” The court of appeals rejected the insured’s argument, which the insurer claimed was an untimely waiver argument. “When the initial policy expired, the relationship between appellant and appellee had ended according to the terms of the initial policy…. In this case, there was no policy in existence. When appellant paid the renewal premium, appellee issued a new policy effective on the date of payment….appellant did not forfeit the right to an existing policy by not paying the premium and then resurrect it when appellee accepted the premium; the policy expired and a new policy did not begin until appellant paid the premium.”
 
In Zilka v. State Farm Mut. Auto. Ins. Co., 291 Ga. App. 665 (Ga. Ct. App. 2008), the insurer mailed a notice to the insureds, a husband and wife, that their automobile policy would be cancelled on November 1 because they had failed to pay the premium that was due on October 9. The husband mailed the premium on November 6, and the wife was involved in an accident on November 7. The insurer reinstated the policy on November 8 when it received the premium, which was also the date that the insureds notified their insurance agent of the accident. The appellate court affirmed the trial court’s finding that there was no coverage on the date of the accident, holding that “State Farm reinstated the policy upon its receipt of the premium payment on November 8, 2000, but nothing in the policy required that the reinstatement be retroactive to the date of cancellation, and the notice of cancellation specifically provided that there would be no coverage between the date of cancellation and the date of any reinstatement. Accordingly, State Farm and Rhinehart have demonstrated that there remains no issue of material fact as to whether the policy issued to Dina Zilka had been effectively cancelled when the loss occurred on November 7, 2000.”
 
The insureds also argued that the insurer could not deny coverage because it had accepted at least three prior past-due payments from the insureds. The court pointed out that the insureds did not demonstrate “that State Farm ever reinstated the policy after it had sent a notice of cancellation, as is this case here, or that any reinstatement following cancellation was without interruption of coverage. Thus, there is no evidence that the parties departed from the terms of the contract insofar as cancellation and reinstatement such that State Farm was required to give prior notice of its intent to adhere to the policy terms…. Furthermore, even if the parties had mutually departed from the terms of the policy, State Farm provided Dina Zilka advance written notice of its intent to expressly rely on the policy terms based upon her failure to timely pay the insurance premiums in this instance; specifically, that the policy would be cancelled effective November 1, 2000, and that any reinstatement would not provide coverage between the date of cancellation and the date of reinstatement.”
 
In a similar case, State Farm Mut. Auto. Ins. Co. v. Ingle, 180 Ohio App. 3d 201 (Ohio Ct. App., Miami County 2008), the insurer mailed a cancellation notice effective December 7. The insured, who had previously had his policy temporarily cancelled for non-payment, was able to pay the payment in person to his local insurance agent or could mail it to the insurer at a payment center in Kansas. The insured claimed that he wrote the premium check and mailed it on December 2. The insured was then involved in an accident on December 14. On December 15 the insurer mailed a notice that the policy had been cancelled effective December 7. The premium check was not received by the insurer until December 20, and the policy was reinstated effective that date. The trial court denied coverage, finding that the mailbox rule did not apply and that the insurer had not waived timely payment of the premium by accepting the premium payment after the accident.
 
On appeal, the insured asserted that “"It has been the law of Ohio forever that acceptance of a premium by an insurance company after knowledge of a loss occurring while premium was in default waives forfeiture, and does not merely revive the policy as to the future." The appellate court explained under what circumstances that waiver or estoppel might apply:
 
“As for Ingle's argument, Ingle overstates the Ohio case law in his favor…. In determining whether an insurer's acceptance of late premiums results in continued coverage without interruption, the issue is whether the insurer's acts are consistent with a theory of waiver or estoppel.
 
“In cases where a loss has occurred prior to acceptance of the late payment, the insurer must have knowledge of the prior loss in order to apply the doctrine of waiver….However, acceptance of a late payment after loss does not, by itself, result in waiver….Rather, the conduct of the insurer must indicate that it intended to waive the lateness of the payment. Such conduct might include retention of the portion of the premium for the period of time that the policy had been cancelled.
 
“The insurer also may forego its right to cancel the contract when it misleads the insured into believing that he will have coverage for an accident by belatedly paying his premium.... Insurers may also be precluded from cancelling a policy due to untimely payment of premiums when the parties had established a course of conduct that late payments would be accepted without causing a lapse in coverage.”
 
The appellate court thus rejected the insured’s argument. “With these standards in mind, we find no error in the trial court's conclusion that Farmers did not waive its right to cancel the policy due to Ingle's failure to timely pay his premium. Farmers' notices to Ingle indicated that the company would cancel his policy if the premium were not made by the cancellation date of December 7, 2004. The December 15, 2004 notice informed Ingle that his policy had been cancelled, and it indicated that the policy could be "reinstated" at a date and time to be determined by Farmers. When Ingle's policy had been cancelled in the past due to nonpayment of premiums, the policy was reinstated as of the date of the late payment. The premium payment was not applied retroactively to avoid a gap in coverage. Instead, the reinstatement date began a new six-month policy term…. Upon review of the record, the record amply supports the trial court's conclusion that Farmers did not waive its right to cancel Ingle's policy due to nonpayment of premiums, even though it accepted Ingle's late premium payment with knowledge of a loss.”
 
As long as an insurer has clear language in the policy stating that past due premiums do not cause reinstatement prior to receipt of the past due payment, and as long as the insurer does not engage in a course of conduct that leads the insured to believe that past due payments cause the policy to be reinstated back to the date of cancellation, insurers can deny coverage as did the three insurers in the above cases.