Cancellations Case Analysis

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The decision leaves unanswered what the result would be in the following common scenario:

The insured fails to make a payment, and the insurer sends a notice that the policy will be cancelled if payment is not made in 10 days, but fails to send a notice to the lienholder. After the policy is cancelled, the insured totals the vehicle. The insured then stops making payments to the lienholder on the vehicle and defaults on the loan (or lease).

The court did not decide whether the cancellation would be effective as to the lienholder, limiting its decision to the insured and parties injured by the insured or his permissive users.

The court wrote, “Whatever the situation might be with any claim that Mitsubishi Motors Credit might have against Acuity in connection with Mitsubishi Motors Credit’s designation as a ‘Lienholder’ under the ‘Car Damage Coverage’ part of the policy, or that Mitsubishi Motors Credit might have against Major League Sports, Monfre, or Erickson as a result of its lease agreement with Major League Sports, Acuity’s failure to give Mitsubishi Motors Credit notice of the pending policy cancellation does not negate Acuity’s proper cancellation of Monfre’s liability coverage in connection with the Galant.”

Numerous states require that, before an insurance policy is cancelled, the insurer must provide notice to both the named insured and any lienholders. Wisconsin, however, does not.

Nevertheless, cases from other jurisdictions suggest that policy language would be enough, and that the policy at issue in this case would require that the lienholder be paid by the insurer, even in the absence of a statute requiring notice.

The hypothetical above presented itself in Pocatello Railroad Federal Credit Union v. Dairyland Ins. Co., 926 P.2d 628 (Idaho 1996).

Like Wisconsin, Idaho only requires that notice of cancellation be sent to the insured, not the lienholder. As in the case at bar, however, the policy required notice be sent to the lienholder.

The court held that the insurer was liable to the lienholder, concluding that the plain language of the policy entitled it to notice of cancellation.

Similarly, in Mackey v. Bristol West Ins. Service of Cal., Inc., 105 Cal. App. 4th 1247, 1266-67 (Cal. 2003), the court held that a lienholder’s coverage continues, even though the insured’s does not, when only the insured receives notice. The court relied both on a statute requiring notice to the lienholder, and policy language as well.

Case law from other jurisdictions can also be beneficial to the insured in these situations, as Metropolitan Property & Casualty Ins. Co. v. Zeller, 541 S.E.2d 433 (Ga.Ct.App. 2001), shows.

Interestingly, the lienholder in Zeller did not sue the insurance company, but sued its lessee directly, to recover the balance due under the lease. The lessee then filed a third-party complaint against its insurer, alleging that the loss was covered under the policy.

The court of appeals agreed with the lessee. Unlike Wisconsin, Georgia’s equivalent statute requires that notice be given the lienholder, and the insurer failed to do so.

However, the court relied not just on the statute, but on the policy itself to find that notice to the lienholder was required, and thus, coverage was present.

Thus, it is possible for the insured to benefit from the insurer’s failure to notify the lienholder, even though the insured’s failure to pay premiums is the root cause of the problem.

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The particular facts of the case at bar suggest another problematic hypothetical. In this case, the lease required that the lessee’s insurance policy give it 30 days notice prior to cancellation. Standard practice, however, is that automobile insurance policies provide only the 10 days notice required by statute.

Suppose the insurer does give notice to both its insured and the lienholder, but only states that the policy will be cancelled if no premium is received within ten days; the hypothetical accident then occurs after the cancellation, but less than 30 days from the date of the notice.

In such a case, the lessee would properly bear the brunt of his failure to pay the policy, because of his failure to obtain a policy that gives the lienholder 30 days notice. If sued, like Zeller was, for defaulting on his loan, he would likely not be able to invoke coverage.

The result would be particularly harsh, though. A reasonable person assumes that, when he obtains coverage for collision, and lists the lienholder as a “loss payee” in the policy, he has satisfied his contractual obligations. A reasonable insured is unlikely to notice a 10/30 day discrepancy.

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David Ziemer can be reached by email.