Failure To Make Premium Finance Payments Can Materially Affect Coverage Under Commercial Liability Policies

Many businesses facing the prospect of large insurance premiums choose instead to finance the premium payments through lenders known as premium finance companies. These companies typically pay the entire annual premium to the insurance company up front, and the policy purchaser then makes monthly payments to the premium finance company, plus interest. If a policy purchaser fails to make its monthly payments, the premium finance company sends a notice of cancellation – with an “effective date” – to the policyholder. If payment is not made by the “effective date” on the cancellation notice, the policy is cancelled.

It is a smooth enough process when businesses are making their payments on a timely basis and when the business paying the premiums is the same business that maintains the policy, but that is not always the case. When the situation gets complicated, businesses may lose out on valuable claims.

Take for example a recent case issued by the 11th Circuit U.S. Court of Appeals: Lake Buena Vista Vacation Resort, L.C. v. Gotham Ins. Co., 2014 WL 7234825 (Dec. 19, 2014). Lake Buena Vista illustrates the problems a business can encounter when it is not the business that originally purchased the insurance and when it has not performed enough due diligence to ensure that its coverage is in effect when it files a claim. In Lake Buena Vista, the court ruled that the effective date a premium finance company chooses to include in the notice of cancellation can materially affect coverage under the policy.

In Lake Buena Vista, the policyholder was attempting to recover damages under a professional services liability policy issued by Gotham Insurance. Lake Buena Vista had been awarded the rights to recover money under the Gotham policy as part of a default judgment against another company, Coastal Title Services, from another lawsuit. Lake Buena Vista, as the new policyholder, had expected to recover a large sum of money from Gotham. However, its claim was denied because it had not reported the claim to Gotham before the effective date of the policy’s cancellation notice.

Coastal had originally purchased the Gotham policy and had been required to turn the policy over to Lake Buena Vista as part of the default judgment. Coastal had financed the policy through a premium finance company, and granted the premium finance company a power of attorney to cancel the policy if it did not receive the required monthly payment. This is standard practice. However, Coastal failed to pay a monthly installment payment and, after notice was given to Coastal, the premium finance company sent a notice of cancellation to Gotham. The premium finance company’s notice of cancellation stated that the notice would be effective “one day after” October 3, 2007, meaning October 4, 2007.

In Lake Buena Vista, the court found that Gotham properly denied coverage because no claim had been made against Coastal and properly reported it to the insurance company under the policy before the October 4, 2007 effective date of cancellation. Ultimately, although Lake Buena Vista had received a large default judgment against Coastal, it was unable to recover any amount under the Gotham policy because its claim was reported to Gotham after October 4, 2007.

The clear takeaway from this case is that a business is best served by first confirming coverage for a claim before trying to reach into the “deep pockets” of an insurance company. This is not always an easy task, and takes considerable legal know-how in order to navigate and understand the scope of insurance coverages and complex regulations.

For questions related to coverage and other insurance issues, contact Alex Brown, partner in SSGS’s Litigation Department and head of its insurance practice, at 410-385-0202.