Every insurance contract is based on the concept of fortuity. Insurance must, by definition, only indemnify the insured against a contingent or unknown risk of loss. No one should be able to purchase insurance after a home burns to the ground by purchasing insurance after the fire. Preexisting conditions are anathema to insurance.
In Brown v. State Farm Fire & Cas. Co., Superior Court of Connecticut, Judicial District of Fairfield, 2014 Conn. App. LEXIS 237, AC 35347 (December 24, 2012), [enhanced version available to lexis.com subscribers], a Connecticut appellate court was called upon to decide a breach of insurance contract action where the plaintiff, Ralston Brown, claims that the defendant, State Farm Fire and Casualty Company, wrongfully failed to cover the fire loss sustained to his dwelling in Bridgeport on April 21, 2006. The trial court rendered judgment for the defendant after a trial to the court on the merits. On appeal, the plaintiff claims that Judge Melville, the trial judge, erred in concluding that the plaintiff’s post-loss premium payment reinstated his insurance coverage prospectively only; and that Judge Melville erred in rendering judgment for the defendant after a trial on the merits, concluding that the homeowner’s insurance policy was not in effect on April 21, 2006, the date of the fire.
The plaintiff purchased a homeowner’s insurance policy from the defendant on September 16, 2004, to be billed on a quarterly basis. The plaintiff purchased a business policy from the defendant on September 26, 2005. At the plaintiff’s request, the defendant agreed to bill the plaintiff quarterly on the same date for both policies, rather than on each policy’s anniversary date. He did not pay the full amount owed for that quarter.
On February 16, 2006, the plaintiff was billed $729.85 for the quarter beginning in March, 2006, payable on or before April 6, 2006. On March 22, 2006, the plaintiff was sent a cancellation notice indicating that his policies would be cancelled on April 6, 2006, if he failed to pay that amount by that date. The plaintiff did not tender payment prior to April 6, 2006. The plaintiff admitted to finding the cancellation notice in the debris left after the fire.
On April 21, 2006, the plaintiff’s dwelling was lost due to fire. After the fire, and upon discovering a cancellation notice sent from the defendant, dated March 22, 2006, the plaintiff mailed the defendant the missing payment. The defendant credited the plaintiff’s account $729.85 on April 22, 2006-the day after the fire. The court found that this payment reinstated the plaintiff’s policy, effective that day.
The plaintiff filed an insurance claim with the defendant for the fire loss to his dwelling, which it denied. The plaintiff thereafter filed a one count complaint alleging breach of contract against the defendant. After a bench trial, the court rendered judgment in favor of the defendant.
The plaintiff next argues that the defendant waived its right to deny coverage for the loss when it accepted payment after the April 21, 2006 fire and then declined to provide coverage retroactive to the date of loss. He contends that the court erred in concluding that the plaintiff’s post-loss premium payment operated to reinstate his coverage prospectively only.
This claim, one of first impression in Connecticut, presents a question of law. Among the declarations in the insurance policy issued by the defendant to the plaintiff was the proviso: “You agree, by acceptance of this policy, that . . . you will pay premiums when due and comply with the provisions of the policy.” The policy further states: “We may cancel this policy only for the reasons stated in this condition. . . . (1) When you have not paid the premium, we may cancel at any time by notifying you at least 10 days before the date cancellation takes effect.” The cancellation notice sent to the plaintiff on March 22, 2006, with a cancellation date of April 6, 2006, states: “Should you wish to reinstate these policies, please forward your payment immediately. . . . If paid after [the] date and time [of cancellation] you will be informed whether your policies have been reinstated and if so, the exact date and time of reinstatement. There is no coverage between the date and time of cancellation and the date and time of reinstatement.”
Ignoring the policy language and the statements in the notice the plaintiff maintains that the defendant’s post-loss acceptance of his late premium payment obligated it to cover the loss sustained to his dwelling on April 21, 2006. The trial court disagreed. The trial court determined that the approach taken in a majority of jurisdictions represented the better view, and held that when a late payment is made on a lapsed insurance policy, the payment restores the policy only going forward fully. The reinstatement was prospective with regard to coverage and did not cover the fire loss which occurred on April 21, 2006.
This rule effectuates an important principle of insurance law: the concept of fortuity. It is a fundamental requirement in insurance law that the insurer will not pay for a loss unless the loss is “fortuitous,” meaning that the loss must be accidental in some sense. Losses that are certain to occur, or which have already occurred are not fortuitous. This principle explains why a person cannot suffer a loss and then subsequently purchase insurance to cover that loss. One procures insurance because he might suffer a future loss. A loss that has already occurred is not fortuitous-and is thus not insurable. Without such a rule, one could allow his coverage to lapse by not paying his premiums timely and then, upon suffering a loss, force his insurer to “buy a claim” by quickly making the missed premium payments to reinstate his lapsed coverage retroactively. Such a rule would allow the insured to consciously shift the burden of his known loss from himself onto his insurer, and, ultimately, onto those policy holders who have dutifully paid their premiums on time and maintained continuous insurance coverage.
Accordingly, when an insurance policy has been cancelled due to nonpayment of premiums, and the insured seeks to reinstate that policy, the insurer is within its rights to reinstate coverage effective only for losses going forward.
At trial, the plaintiff admitted that he failed to pay any part of this bill on or before the March 16, 2006 due date or the April 6, 2006 cancellation date. The court found that, due to nonpayment by the plaintiff, the homeowner’s policy was not in effect on April 21, 2006. The plaintiff introduced no evidence that his payment was made prior to the effective date of cancellation on April 6, 2006, or that any payment had been made before the fire occurred on April 21, 2006. Thus, the trial court properly rejected the plaintiff’s claim that this payment was made timely.
Mr. Brown, understandably thought that the late payment of premium was enough to avoid the requirement for fortuity because of the publicity surrounding the Affordable Care Act (“Obamacare”) that requires health insurers to insure people with preexisting conditions. Clearly, not buying health insurance until the person is sick, is similar to not buying fire insurance until the house burns. In both situations, as the court pointed out, such a rule would allow the insured shift the burden of his known loss from himself onto his insurer, and, ultimately, onto those policy holders who have dutifully paid their premiums on time and maintained continuous insurance coverage.
Mr. Brown’s argument would have changed fire insurance from a contract of indemnity to an entitlement. A government can do so, and has, but a state court cannot, and should not, change the meaning of a contract of insurance and turn insurers from a profit making business into an eleemosynary organization.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2014, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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