Does an Auto Accident Affect the Insured’s Ability to Reinstate an Auto Liability Policy?

In Anderson v. Cooperative Insurance Companies, __ A.2d __, 2006 WL 73430 (Vt. Jan. 13, 2006), the Supreme Court of Vermont was presented with an interesting question involving the reinstatement of coverage under an automobile insurance policy. In Anderson, the insured argued that the insurer was obligated to cover a loss that occurred after her automobile insurance policy had expired because the insurer was aware of the loss when it extended her an offer to reinstate her automobile liability policy retroactive to the expiration date.

The facts are relatively straight-forward for the case. The insured was covered by an automobile liability policy issued by the insurer defendant. Despite receiving a renewal notice from the insurer approximately one month before the policy expiration date, the insured failed to pay her renewal premium on time. In turn, the policy expired on August 13, 2003. On August 16, 2003, the insured’s car sustained substantial damage in an accident. The insured reported the accident to her insurance agent on August 18, 2003, and she was informed on the same day that the insurer was denying coverage because the policy had expired. Later, the insured received a notice identified as a “Final Notice” generated by the insurer’s computer system on August 18, 2003. The notice provided that the insured could reinstate the policy “back to 8/13/2003” if she paid her premium by August 31, 2003. The insured forwarded the requested premium and subsequently the insurer generated a document, “Acknowledgment of Late Payment,” stating that it received the premium payment and that the coverage under the policy had been reinstated and remained in force without interruption.

On August 27, 2003, the insured re-submitted her claim for coverage related to the August 16th accident. By letter dated August 29, 2003, the insurer denied coverage for the accident and stated that reinstatement of the policy did not provide coverage for the accident. Further, the letter explained that the policy covered only unknown losses and the previous denial of coverage had never been withdrawn.

The insured initiated litigation, contending that the insurer wrongfully refused to provide coverage for the auto accident. She contended that the insurer could have withdrawn or modified its offer to reinstate coverage concerning the accident that occurred after the policy had lapsed, but the insurer failed to do so. The trial court ruled for the insurer, finding that while an insurer may agree to cover a loss already known to it, there was no evidence that such a situation existed in this case.

The Vermont Supreme Court affirmed the trial court’s decision in favor of the insurer. The Court explicitly stated that the insured could not demonstrate that the insurer was required to cover the accident by virtue of an offer to reinstate. In response to the insured’s argument that the insurer impliedly waived its right to deny the claim when it provided an offer to renew the policy, the Court noted that the offer to reinstate did not reflect any intention to reverse the previous denial of coverage nor could the plaintiff point to any detrimental change on the part of the insured’s position based upon the insurer’s actions. Unlike other cases where the actions of the insurer in such situations were ambiguous, the Court concluded that the insurer’s actions in the instant case were unequivocal in denying coverage for the claim. With respect to the insurer’s reliance on the known loss rule (i.e. insurance does not apply to losses that have already occurred, as opposed to providing insurance coverage for risks of loss), the Court stated that the known loss rule was somewhat inapplicable given the insurer’s prompt and proper denial of coverage without any alteration of that position at a later time. Thus, the declination of coverage, in the court’s view, was the controlling factor in finding for the insurer.

With insurers routinely offering to reinstate coverage, the fact scenario in the Anderson case is somewhat predictable. Importantly, it was the insurer’s (and the agent’s) unwavering declination of coverage that appears to have been controlling in the case. Despite the insured’s pleas to the contrary, the Court found nothing in the instant case that would suggest the insurer’s conduct concerning the declination of coverage would have led the insured to believe that she had coverage for the accident. If the insurer or agent had offered an opinion inconsistent with the initial declination of coverage based upon the insurer’s subsequent offer to reinstate coverage, the Court may have approached the case in a different manner.

Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, directors and officers liability, professional liability, environmental, and asbestos cases. Questions and responses to this article are welcome at aboris@tsmp.com.