Policy Cancellation – Late Payment

Fort Worth insurance attorneys will have clients come to them wherein the insurance company is denying a claim. The stated reason for denial is that the policy was cancelled due to late payment. The Austin Court of Appeals ruled on this issue in May 2015. The style of the case is, Plasma Fab, LLC v. Scottsdale Insurance Company.
Plasma Fab, an ornamental iron construction contractor, purchased a general liability policy from Scottsdale in May 2008 and financed payment through premium finance company BankDirect. BankDirect paid all premiums in advance, and Plasma Fab was to make monthly payments to BankDirect. The premium finance agreement gave BankDirect authority to cancel the policy on behalf of Plasma Fab and seek a refund of unearned premiums for nonpayment of premium “after proper notice has been mailed as required by law.” Plasma Fab was chronically late making payments, and twice the policy was cancelled and reinstated. It is the third cancellation that is at issue.
On November 24, 2008, BankDirect prepared a notice of intent to cancel the policy effective December 4, 2008, which was ten days following the date the notice was prepared. However, BankDirect did not mail the notice of intent to cancel to Plasma Fab until the next day, November 25, 2008, so that the stated date of cancellation was only nine days after the date the notice was mailed. On December 4, 2008, after 5:00 p.m., BankDirect mailed a notice of cancellation to Scottsdale effective December 4, 2008.
In February 2009, Plasma Fab was sued for causing a fire on December 8, 2008, that destroyed the La Frontera apartment complex in Round Rock, Texas. Scottsdale denied coverage on the ground that the policy had been cancelled prior to the fire. After a judgment was rendered against Plasma Fab for approximately $6 million. This lawsuit was then filed.
Plasma Fab argues that Scottsdale was not entitled to summary judgment because it failed to establish cancellation as a matter of law. In particular, Plasma Fab argues that there was no “advance written notice” of cancellation. The policy provided that the insured may cancel the policy “by mailing or delivering to [Scottsdale] advance written notice of cancellation.” Plasma Fab contends that because BankDirect did not mail the notice of cancellation until after 5:00 p.m. on December 4, 2008, Scottsdale could not have received it until December 5 at the earliest, making cancellation effective December 4 retroactive. Consequently, Plasma Fab argues, the notice was not “advance.” It is Plasma Fab’s contention that Scottsdale, which had the burden to prove its affirmative defense of cancellation, had to establish that this provision of the policy had been met. Although cancellation is an affirmative defense on which Scottsdale had the burden of proof, the court did not find this argument persuasive.
First, is was Plasma Fab who cancelled the policy, through its agent, acting with apparent authority under the power of attorney BankDirect. Further, the policy also provided that the notice of cancellation “will state the effective date of cancellation” and “the policy period will end on that date.” Texas courts have long held that, in circumstances other than retroactive cancellation after a loss has occurred, when less notice is given than is required by the policy, cancellation becomes effective at the earliest date allowed under the contract.
Here, the record reflects that Plasma Fab, through BankDirect, gave notice of cancellation to Scottsdale, with the stated effective date of December 4, 2008, and that Plasma Fab received the notice on December 5, 2008. Under the terms of the policy requiring advance written notice, cancellation was therefore effective subsequent to receipt on December 5, 2008, or on December 6, 2008, at the latest. Either way, advance written notice of cancellation was provided prior to cancellation, and cancellation was effective prior to the fire. Thus, the Court concluded that Scottsdale met its burden of establishing that the policy was cancelled by Plasma Fab in accordance with the terms of the policy and that it was entitled to summary judgment on this issue as a matter of law.