Successfully Cancelling Policies For Nonpayment Of Premium
By: Daniel P. Scapellati
Occam's Razor Summer Issue,
In a recent summary judgment ruling, Bepko v. St. Paul Fire & Marine Ins. Co., 2006 WL 2331076 (D.Conn.2006) (Dorsey, J.), the District Court of Connecticut highlighted the degree of care insurers must exercise regarding the timing and delivery of a cancellation notice based upon nonpayment of premium. Bepko involved the construction of Connecticut General Statutes § 38a-324. That statute requires that insurers seeking to cancel professional liability policies must provide at least 90 days advance notice to the insured. In principal part, the Court held that, in order for the notice of cancellation to be effective, a liability insurer must demonstrate actual notice of cancellation to the insured. The Court's ruling in this regard was consistent with a line of cases interpreting insurance policy cancellation notice statutes as requiring actual notice, over and above mere proof of mailing by a statutorily prescribed delivery method. This ruling underscores, among other things, the need for insurers to create an evidentiary record demonstrating the insured's actual receipt of the cancellation notice.
St. Paul Fire & Marine insured Dr. Donald Evanko, a dentist, under a "claims-made" professional liability insurance policy, effective from July 2001 through June 2002. Dr. Evanko failed to pay his premiums and at the end of July, 2001, St. Paul sent to Dr. Evanko, by certified mail, return receipt requested, a policy cancellation notice for nonpayment of premium. According to the notice, the cancellation would be effective October 29, 2001. The return receipt indicated that the notice was received on August 13, 2001. The signatory of the return receipt was "Dr. Evanko."
In mid-August 2001, Dr. Evanko received a demand letter from one of his patients, George Bepko, for negligent dental work. Dr. Evanko did not forward this notice of claim to St. Paul within the 30-day reporting period. On December 4, 2001, Bepko sued Dr. Evanko, and on December 28, 2001, Dr. Evanko tendered the suit to St. Paul. This was the first that St. Paul learned of the claim. In response to the tender, St. Paul denied coverage on the grounds that the policy was cancelled on October 29, 2001. Dr. Evanko ultimately agreed to a $175,000 stipulated judgment in favor of Bepko, and he assigned to Bepko his rights to pursue any claim that he might have against St. Paul.
Thereafter, Bepko sued St. Paul under Connecticut's direct action statute. St. Paul moved for summary judgment on the ground that it had effectively cancelled Dr. Evanko's policy on October 29, 2001. Bepko opposed the motion claiming that: 1) as a matter of law, the policy language and relevant Connecticut law required 90 days notice to cancel coverage; 2) there was an issue of fact as to whether Dr. Evanko received actual notice of cancellation, notwithstanding that the return receipt appeared to have been signed by Dr. Evanko; and 3) St. Paul should be compelled to accept Bepko's claim because, even if notice of suit was untimely, St. Paul suffered no prejudiced.
In denying St. Paul's motion for summary judgment, the Court held that where a policy requires a certain number of days notice, calculation of the number of days begins from the date of receipt of the notice by the insured. Here, St. Paul sent notice of cancellation on or about July 31, 2001, with a stated effective cancellation date of October 29, 2001. In a footnote, the Court observed that "October 29, 2001 is 90 days from the date that the notice was sent, but since the notice had to travel by mail, the notice arrived with less than 90 days remaining until October 29." The Court then looked to the date notice presumably was received by Dr. Evanko, or August 13, 2001, as evidenced by the Return Receipt, as the operative date from which the 90-day advance notice period began to run. The Court concluded that cancellation was not effective on October 29, 2001, but rather, 90 days from August 13, 2001, or November 11, 2001. Yet, even with the policy's 30-day post-cancellation reporting period, Dr. Evanko's December 28, 2001 notice of claim still appeared untimely.
Bepko's second argument asserted that the policy was still in effect because Dr. Evanko never received St. Paul's cancellation notice, as the signature on the Return Receipt was not Dr. Evanko's. In support of this argument, Bepko provided the deposition testimony of Dr. Evanko, claiming that the signature on the Return Receipt was not Evanko's nor was it the signature of Evanko's secretary. Dr. Evanko testified that he did not authorize anyone to sign in his absence and that he was out of the country on the date indicated on the Return Receipt. St. Paul argued that sending the cancellation notice was sufficient to effect cancellation and that it should not have the burden of verifying the signatures on returns of receipt. As a result, the Court discerned two questions of law: (1) whether mailing of the cancellation notice was sufficient to cancel the policy regardless of whether the notice was actually received by the insured; and (2) whether the testimony of Dr. Evanko was legally sufficient to overcome Connecticut's presumption of receipt once a letter is correctly mailed. The Court opted to address the question regarding presumption of receipt first. The Court recognized that Connecticut follows the mailbox rule, which provides a rebuttable presumption of receipt where the addressee received a correctly addressed and mailed letter. To rebut the presumption of receipt, the party claiming that a letter was not received has the burden of showing lack of receipt by "substantial evidence." In this case, the Court determined that Dr. Evanko's denial, under oath, that the signature on the Return Receipt postcard was not his, assertions that he was out of the country on the date of delivery and the conclusory assertion that no one signs his signature in his absence, constituted "substantial evidence" sufficient to rebut the presumption of the mailbox rule. As such, there was an issue of fact as to whether notice was actually received.
The Court then turned to the question of whether proof of mailing a cancellation notice is sufficient to effect cancellation, when the cancellation notice was never received by the insured. The Court observed that the policy indicated that mailing a cancellation notice was to be proof of cancellation, stating "[w]e'll mail any notice of cancellation or nonrenewal to you by Registered Mail, Certified Mail, or by U.S. Proof of Mailing. Proof of such mailing to your last address known to us will be considered proof that you were notified." However, the Court also recognized that the policy provided that "[a]ny part of this policy which conflicts with state law is automatically changed to conform to the law." As no Connecticut court had interpreted § 38a-324, the Court looked to similar cancellation provisions in Connecticut statutes pertaining to automobile insurance. After a thorough analysis, the Court concluded that § 38a-324 required actual notice. Accordingly, the Court held that St. Paul must demonstrate that Dr. Evanko received actual notice of cancellation.
Finally, Bepko claimed that St. Paul should be compelled to accept his claim because, although the claim was made after the policy was cancelled, it was made only a short time after Bepko initiated suit against Dr. Evanko, and, as such, St. Paul would not be prejudiced in its defense of the claim. The Court rejected this argument on the basis that Dr. Evanko's policy was a "claims-made" policy, not an "occurrence" policy to which a prejudice analysis would apply.
Overall, the Bepko decision demonstrates the length to which some courts may go in order to find coverage, despite the proper cancellation of a policy. As such, insurers should carefully review their policy cancellation protocols to ensure that their cancellation procedures will properly effect the intended policy cancellation. When canceling policies for nonpayment of premium, it is advisable to make allowances for the time the policy cancellation notice travels in the mail, to ensure that the means of notification is by an approved method of delivery and to scrupulously develop and retain evidence of both proof of mailing as well as proof of actual receipt.
1/ Specifically, this statute provides:
If the basis for cancellation is nonpayment of premium, at least ten days' notice shall be given. . . . Notwithstanding the provisions of this section, the advance notice period for cancellation of any professional liability policy, as defined in section 38a-393, shall be at least ninety days. No notice of cancellation shall be effective unless it is sent, by registered or certified mail or by mail evidenced by a United States Post Office certificate of mailing, or delivered by the insurer to the named insured by the required date.