Gotkin v. Allstate Insurance Co., 2014-01403

This is an interesting scenario but more from the perspective of the individual who feels wronged that an insurer cancels or changes coverage and increases the premium without notice.  Insurance Law §3425 imposes restrictions on a liability insurer’s right to cancel, refuse to renew, or condition renewal of a policy, and requires the insurer to provide notice to the policyholder before any cancellation, nonrenewal, or conditional renewal occurs. 

In this case, Plaintiff, Gotkin, maintained two policies of insurance with Allstate: a primary automobile insurance policy and an excess liability umbrella policy.  At the time of purchase, the umbrella policy, required that Gotkin maintain underlying primary automobile insurance policy limits of at least $100,000 per claimant and $300,000 per occurrence for automobile bodily injury liability. The liability limit for the umbrella was $1 million.  At some point down the line, Gotkin changed his primary automobile insurance carrier to Nationwide, keeping the same policy limits of $100,000 per claimant and $300,000 per occurrence and renewed his umbrella with Allstate while continuing to maintain the same underlying automobile insurance policy limits.  Allstate then increased premium on the umbrella.  Thereafter, Allstate sent a letter informing Gotkin that the increased premium for the umbrella was billed in error.  Importantly, enclosed with the letter was an amended policy declarations page, which changed the requirements for the underlying policy limits, now requiring policy limits of $250,000 per claimant and $500,000 per occurrence.  However, no such language existed with the letter concerning this change other than the declaration page.  Allstate created a gap in coverage between the then-existing primary insurance policy issued by Nationwide and the umbrella policy issued by Allstate.  Allstate then sent a renewal policy with an amended endorsement reflecting the policy changes but did not mention the increase of the required underlying insurance limits to $250,000 per claimant and $500,000 per occurrence.  Gotkin blindly renewed without realizing that he had a gap in coverage. 

In July 2009, the plaintiff was involved in an automobile accident with another vehicle. The owner and operator of that vehicle subsequently commenced a personal injury action against the plaintiff and his wife. When the plaintiff submitted a claim for coverage under his umbrella policy, Allstate informed him that there was a gap in his insurance coverage of $150,000 due to his failure to maintain underlying policy limits of $250,000 per claimant and $500,000 per accident.  Allstate denied coverage for any damages between $100,000 and $250,000 but extended coverage for $250,000 and over.

The Appellate Division, 2nd Dept said:

At issue on this appeal is Insurance Law §3425(d)(1), which requires an insurer to notify a policyholder, at least 45 days before the end of the coverage period, of its intention to condition renewal “upon change of limits or elimination of any coverages,” and to provide a specific reason for so conditioning renewal. For the reasons which follow, we find that the notice requirement of Insurance Law §3425(d)(1) applies where, as here, an insurer issues an umbrella policy providing the policyholder with additional coverage above the limits of his or her automobile coverage, and then increases the amount of underlying automobile liability insurance the policyholder must maintain before the additional coverage provided by the umbrella policy becomes available. We further find that an insurer’s failure to comply with Insurance Law §3425(d)(1) provides a basis for reformation of the subject policy.

The Court further said:

The crux of this controversy is whether the plaintiff is entitled to reformation of his insurance contract based on Allstate’s alleged violation of Insurance Law §3425(d)(1). Granting reformation of an insurance contract under appropriate circumstances is not new or novel. Indeed, courts recognized well before the statutory notification requirements of Insurance Law §3425(d) were enacted that where a change to a renewal policy was not brought to the insured’s attention at the time it was made, the insured was entitled to reform the policy so as to conform it to the earlier one (see Hay v. Star Fire Ins. Co., 77 NY 235, 240; see also Byron v. Liberty Mut. Ins. Co., 63 AD2d 710). More recently, courts have granted reformation of an insurance contract based on Insurance Law §3425(d)(3), which requires an insurer to give notice “in the same manner as is prescribed in paragraph one of this subsection” when the insurer, at the annual renewal date of a policy, substitutes “another approved policy form which contains at least substantially equivalent value in the aggregate of benefits” (see Valentine v. Quincy Mut. Fire Ins. Co., 123 AD3d 1011, 1016; Bloom v. St. Paul Travelers Cos., Inc., 57 AD3d 819, 820; Janes v. New York Cent. Mut. Ins. Co., 281 AD2d 982). However, the question of whether an insurer that issues an umbrella policy is required to provide notice of a change in the underlying limits pursuant to Insurance Law §3425(d)(1), and whether the failure to do so provides a basis to grant reformation of the umbrella policy, is an issue of first impression in our Court.  We hold that a change to the requirements of the underlying limits to the primary automobile insurance policy, which would create a gap in coverage in an umbrella policy and upon which renewal is conditioned, requires that the insurer provide proper notice pursuant to Insurance Law §3425(d)(1), and that the failure to do so provides a basis to grant reformation of the umbrella policy.  Pursuant to Insurance Law §3425(d)(1), written notice is required, among other things, of an insurer’s intention “to condition [a policy’s] renewal upon change of limits or elimination of any coverages” (Insurance Law §3425[d][1]). Here, the Supreme Court interpreted the phrase “change of limits” in Insurance Law §3425(d)(1) to mean a change only in the umbrella policy limits. The court, in effect, held that there was no change of the policy limits because the umbrella policy covered up to $1 million both before and after the change of the underlying limits. However, this narrow interpretation is not supported by the language of the statute, and defeats the primary aim of the notice requirements of Insurance Law §3425(d).

The Court further stated:

Thus, Allstate was required, “at least forty-five but not more than sixty days in advance of the end of the policy period,” to mail or deliver to the plaintiff “a written notice of its intention…to condition its renewal” on what was a new condition to coverage under the umbrella policy (Insurance Law §3425[d][1]). Further, “[t]he specific reason or reasons for…conditional renewal” were required to “be stated in or…accompany the notice” (id.). Pursuant to Insurance Law §3425(h)(2), “[n]o notice of cancellation, reduction of limits, substitution of policy form, elimination of coverages, conditional renewal or of intention not to renew, or notice of the reasons therefor, that fails to include a provision required by this section shall be an effective notice for purposes of this section” (Insurance Law §3425[h][2]). ” Insurance notice requirements are strictly construed and any ambiguities are to be interpreted in favor of the insured'” (Essex Ins. Co. v. George E. Vickers, Jr., Enters., Inc., 103 AD3d 684, 688, quoting Gedan v. Home Ins. Co., 176 AD2d 914, 916).  Here, Allstate failed to provide proper notice of the change of the underlying limits in the amended policy declarations accompanying the February 2005 letter or in the subsequent renewal notice of the policy in October of 2005. While these documents indicated that the underlying limits were $250,000 per claimant/$500,000 per occurrence, they did not indicate that this was an actual change to the umbrella policy or provide any reason for the conditioned renewal. Further, Allstate failed to provide this notice in any of the subsequent renewal policies.

 Notice is key.  The insurer clearly has a duty to overtly and clealry apprise its insured of any changes to coverage.

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