BASIS OF CANCELLATION OR NONRENEWAL
In the last issue, we discussed the timing of the notice of cancellation or nonrenewal. This issue presents the basis for a notice of cancellation or nonrenewal. Again, in New Jersey, the rules are set forth in the New Jersey Administrative Code, this time at N.J.A.C. 11:1-20.4
The rules are straightforward. An insurer may not cancel or nonrenew a policy based upon underwriting guidelines that are arbitrary, capricious or unfairly discriminatory. All
underwriting guidelines and standards, with their effective dates, that the insurer uses to cancel or nonrenew a policy must be maintained in writing by the insurer and must be furnished to the insured upon written request. Every policy must contain a provision advising of these rules.
Once a policy has been in effect for 60 days, the insurer can cancel or refuse to renew only for reasons that have been a part of its underwriting guidelines at the inception or anniversary of the policy. Thus an insurer cannot construct a new rule to cancel or nonrenew a policy held by a problem insured.
The Commissioner has approved 13 specific guidelines for use, including nonpayment of premium, moral hazard, increase of hazard, material breach of duties, lack of cooperation on loss control matters, fraud, loss or reduction of insurance capacity*, material increase in exposure arising out of changes in statutory or case law*, loss of or substantial changes in applicable reinsurance*, failure of the insured to comply with law which substantially increases the hazard, failure to provide reasonable and necessary underwriting information, and agency termination*. The Commissioner's list is not all-inclusive. An insurer may use other guidelines provided they are not arbitrary, capricious or unfairly discriminatory. The guidelines noted with an * are subject to further regulatory requirements that are set out further in the regulations. Note that loss experience is not one of the approved guidelines.
The Commissioner has addressed loss experience in a provision allowing adverse loss experience to be used as a basis for nonrenewals only (not cancellations), provided that the insurer specifically identifies the type of loss experience which supports and justifies the nonrenewal action. The type of loss experience that would justify a nonrenewal is not specified in the rules. Is it the number of losses, the size of any losses or the relationship between the size of the loss and the premium charged (a profitable policy)? There is a dearth of case law on the issue. Certainly hiring a public adjuster or attorney to assist in the adjustment of a claim, demanding appraisal or availing oneself of other policy rights cannot be a basis upon which to nonrenew a policy.
If you have not already done so, we suggest that you begin to request, in the name of the insured, copies of the insurer's guidelines for cancellation and nonrenewal in every case in which the insurer cancels or nonrenews a policy following a loss.
As always, if you encounter a situation involving a cancellation or nonrenewal that you would like to discuss, please feel free to contact me at 973-538-4100 or by email at firstname.lastname@example.org. We are here to help!
We wish you all a wonderful Thanksgiving holiday!