Court Upholds Cancellation for Failure to Exclude or Add Driver on Request as a “Substantial Increase in the Hazard Insured Against”

by Haight Brown & Bonesteel LLP
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In Mills v. AAA Northern CA, NV and Utah Ins. Exch. (No. C072644, filed 9/20/16), a California appeals court held that an insurer’s cancellation of a personal auto policy was valid where based upon the insureds’ failure to respond to a request that they either sign a named driver exclusion for their son or request that he be added to the policy, since the failure to respond constituted a “substantial increase in the hazard insured against” under Insurance Code section 1861.03 and section 2632.19 of the insurance regulations. In doing so, the court confirmed the sufficiency of the cancellation notice mailing procedures outlined in Preis v. American Indemnity Co. (1990) 220 Cal.App.3d 752.

In Mills, the insureds’ unlisted son had an accident in their insured vehicle. At the next renewal, AAA advised them that it sought information necessary to underwrite the policy accurately. Specifically, it supplied them with a named driver exclusionary endorsement listing their son as an excluded driver for signature and return to AAA or, in the alternative, requesting that they contact AAA if they wished to add him to the policy. The letter stated: “We do not have all the information necessary to accurately underwrite your automobile insurance policy. We are required to advise you in writing that if you fail to provide the necessary information requested within 30 days of the above date, your policy will be cancelled,” which was also repeated in Spanish. The insureds did not respond and AAA canceled the policy.

The insureds’ daughter had been listed on the policy and was subsequently in an accident with an uninsured motorist that severely injured her passenger, who obtained a $12 million default judgment against the other driver. Tenders of UM claims by the daughter and the passenger were denied on the ground that the policy had been cancelled and was not in effect at the time of the loss.

The trial court in the following bad faith lawsuit granted summary judgment to AAA and the appeals court agreed, saying that “California law grants an insurer the right to cancel an automobile insurance policy prior to its expiration due to ‘a substantial increase in the hazard insured against.’ (Ins. Code, § 1861.03, subd. (c)(1).) A ‘substantial increase in the hazard insured against’ occurs when, among other events, the insured refuses or fails to provide the insurer, ‘within 30 days after reasonable written request to the insured, information necessary to accurately underwrite or classify the risk.’ (Cal. Code Regs., tit. 10, § 2632.19(b)(1).) The written request for information must inform the insured ‘his or her failure to provide the requested information within the time required may result in the cancellation or nonrenewal of his or her policy.’”

The Mills court noted that other than to require the written request in English and Spanish, no case law or other authority has further specified what constitutes a reasonable request for information. The court said that Proposition 103 had been enacted to protect consumers from arbitrary rates and practices while encouraging competition in the insurance marketplace. The court said that to meet the test, “the request must be rational, appropriate for the circumstance, and necessary to the insurer’s ability to evaluate the risk of offering the policy. The request cannot be arbitrary or unrelated to the insurer’s need to reevaluate the risk it incurs.”

AAA’s request to either add or exclude a driver was deemed sufficient: “There is no evidence showing the letter was arbitrary or unrelated to AAA’s needs. It arose from having a car AAA insured incur damage in an accident by a family member who was not named on the policy. It was reasonable for AAA to attempt to seek information to determine whether Patrick would be a regular driver of a family vehicle or, if not, to seek to have Patrick excluded from coverage.” The court rejected an argument that a mere request to either add or exclude the son was not specific enough, saying in effect that it was a logical first step, because even if exclusion of the son would not change the risk, notification that the insureds wanted to add their son would require more information to determine whether (and on what terms) to continue underwriting the policy.

The Mills court went on to reject an argument that AAA had failed to strictly comply with cancellation procedure, with the insureds claiming they never received the notice. AAA had offered declarations of three employees, one stating that she had printed a series of cancellation notices and inserted each one into a properly addressed envelope; a second stating that she used a machine to affix the correct postage, including to the insureds’ envelope; and a third stating that he took the envelopes to the Post Office and received a date stamp. The court stated that under the controlling statutes, proof of mailing to the address on the policy or last known address is prima facie evidence of sufficient notice. (Citing Ins. Code, §§ 38; 664.) The Mills court cited Preis v. American Indemnity Co. (1990) 220 Cal.App.3d 752, 759-760 for the requirements: “To prove the notice was mailed, the witness’s affidavit must describe the following steps: ‘(1) the witness placed a notice of cancellation of the subject policy in an envelope, (2) the envelope was addressed to [the insured] at the declared address, (3) the envelope was affixed with the proper postage, and (4) placed in the United States mail at a certain location.’”

At the same time, the Mills court noted that this only shifts the burden of proof, and that the insureds’ declarations in opposition had evidentiary defects rendering them inadmissible. Namely, the insureds had failed to sign their declarations under penalty of perjury. Thus, the insureds’ claim of never having received the cancellation notice was not actually considered by the Mills court in deciding that the cancellation was effective.

Finally, the Mills court discounted evidence of an internal email debate by AAA employees about whether some error had occurred in the mailing process as inconclusive to establish a triable issue of fact about the mailing. And the court rejected out of hand a claim that coverage attached because the policy’s declarations page stated it was in effect at the time of the loss, pointing out that the declarations page had been issued before the cancellation and before the loss.

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