Cancellation For Nonpayment And Notice

Insurance attorneys in Dallas will see situations where a policy is cancelled due to nonpayment of premiums. The Texas Insurance Code, Sections 551.101 thru 551.113 deal with policy cancellations. But what about specific situations. Here is a 1997, case to look at. It is a U.S. Eastern District opinion styled, Clare v. Richards. Here is what it tells us.
Heilman applied for a commercial property insurance policy for his restaurant. Richards and City National were listed as an “additional interests” on the policy. City National held a mortgage on the property and Richards was the owner of the real property and building in which the restaurant was operated. Heilman entered into an insurance premium financing agreement with Texas Specialty Finance (TSF). Heilman gave TSF full power of attorney to cancel the insurance policy and collect any return premiums in the event of nonpayment of policy premiums when due. When Heilman failed to make payment, TSF mailed Heilman notice of intent to cancel the policy. Prior to cancellation, notice of cancellation was never sent to the “additional interests.”
On February 6, 1997, the policy was canceled effective January 31, 1997. The restaurant was destroyed by fire on February 9, 1997.
Underwriters, the insurance company, filed a declaratory judgment action seeking a declaration that (1) the policy was canceled as to the interests of Richards and City National effective January 31, 1997 and (2) there was no duty to indemnify Richards or City National for any losses resulting from the fire.
The defendants argued that Richards should have been given notice of the cancellation because he was listed as an “additional interest” on Heilman’s application for insurance and named in the “special conditions” section of the policy. Richards also argued that his interest is identical to the mortgagee and he should be protected. Finally Richards argued he as a lessee is entitled to the same protection as the bank as it relates to his receiving notice of the cancellation.
In making this ruling the court stated that premium finance agreements are allowed under Texas law. Texas law creates a separate insurance contract between the insurance company and the insured’s mortgagee which is unaffected by the acts or omissions of the mortgagor / insured. TSF was standing in the shoes of the insured and canceled the policy. Here, since City National was provided no notice of any kind until after the policy had been canceled, it did not have an opportunity to secure an alternative means of insurance coverage on the property. The acts of TSF and Heilman did not serve to cancel the policy as to the interests of City National.
Richards on the other hand, was not a mortgagee and, therefore, was not afforded any protection under Texas insurance laws.