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Insurer Properly Cancels Auto Policy Due to "Substantial Increase in Hazard Insured Against" After Insured Fails to Respond to Insurer's Request For Information Needed To Underwrite Risk

An insurer properly cancelled an automobile policy due to a "substantial increase in the hazard insured against" after the insured failed to respond to the insurer's request for information necessary to accurately underwrite or classify the risk. (Mills v. AAA Northern California, Nevada and Utah Insurance Exchange (2016) --- Cal.App.4th ----, 2016 WL 5092708)

Facts

Effective March 18, 2004, AAA Northern California, Nevada and Utah Insurance Exchange (AAA) issued an auto policy to Jeff and Denise Fields for a one-year period. The policy identified Mr. and Mrs. Fields and their daughter Krystal as insured drivers. It provided that AAA could cancel the policy for any permissible reason by mailing notice to Mr. and Mrs. Fields at least 20 days prior to the date of cancellation.

On February 5, 2005 (shortly before the end of the policy period), Mr. and Mrs. Fields' son Patrick collided with a parked vehicle while driving one of the cars listed on the AAA policy. At the time of the collision, Patrick was not listed as an insured driver on the policy.

On March 18, 2005, AAA renewed the policy for a one-year period. However, a few days later, on March 23, 2005, AAA sent Mr. and Mrs. Fields a letter stating that AAA needed information necessary to underwrite their policy accurately. The letter stated that Mr. and Mrs. Fields could exclude their son Patrick from coverage by completing and returning an enclosed form. The letter further stated that if instead Mr. and Mrs. Fields wanted to add Patrick to the policy or if they had other questions, they needed to call AAA. The letter concluded by stating that if Mr. and Mrs. Fields did not respond by April 22, 2005, AAA would cancel the policy. Mr. and Mrs. Fields did not respond to AAA's letter.

On April 28, 2005, AAA sent Mr. and Mrs. Fields a second letter stating that it was cancelling their policy effective May 28, 2005. According to AAA's letter, the cancellation was "based on the refusal or failure to provide necessary information to accurately underwrite your policy following the request for the same." Again Mr. and Mrs. Fields did not respond.

On July 6, 2005, Mr. and Mrs. Fields' daughter Krystal was driving one of the listed cars with Trent Mills riding as a passenger. They were involved in an accident caused by an uninsured motorist, resulting in severe injuries to Mills.

Mills obtained a $12.7 million default judgment against the uninsured motorist who had caused the accident. Mills then requested UM benefits under Mr. and Mrs. Fields' policy through AAA. AAA denied coverage on the ground that it had canceled the policy before the accident occurred.

Mills sued AAA for breach of contract and bad faith. The trial court found that AAA had validly cancelled the policy before the accident and granted summary judgment in favor of AAA. Mills appealed.

Holding

The Court of Appeal affirmed the summary judgment in favor of AAA.

The appellate noted that under California law, an insurer has the right to cancel an automobile insurance policy prior to its expiration due to "a substantial increase in the hazard insured against." (Cal. Ins. Code § 1861.03(c)(1).) A "substantial increase in the hazard insured against" can occur when 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." (10 Cal. Code Regs. § 2632.19(b)(1).) The insurer's written request for information must inform the insured that "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." (Ibid.)

Here, AAA's March 23, 2005 was a "reasonable" written request for information necessary to underwrite or classify AAA's risk. The letter was not arbitrary or unrelated to AAA's needs. Rather, it arose because a car AAA insured incurred damage in an accident by a family member (Patrick) who was not listed 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.

Mills argued that AAA's letter was not "reasonable" because it did not request any specific information from Mr. and Mrs. Fields. The court disagreed. AAA's letter asked if Mr. and Mrs. Fields intended to exclude or include Patrick from coverage. If they were willing to exclude Patrick from coverage, then AAA would not need any additional information as AAA's risk would remain unchanged. If, however, Mr. and Mrs. Fields wished to include Patrick on the policy, then AAA would need additional information to determine whether to continue underwriting the policy.

Accordingly, AAA had validly cancelled Mr. and Mrs. Fields' auto policy prior to the accident in which Mills had been injured. As such, Mills was not entitled to UM coverage under the AAA policy.

Comment

The California Insurance Code sets forth limited grounds on which an insurer may cancel an auto insurance policy prior to its termination. One of the allowable grounds is "a substantial increase in the hazard insured against." Although the Insurance Code does not define what constitutes a "substantial increase in the hazard insured against," Department of Insurance regulations state that such an increase occurs when the insured fails "to provide to the insurer, within 30 days after reasonable written request to the insured, information necessary to accurately underwrite or classify the risk."

In this case, the appellate court held that in order to be a "reasonable" written request for information necessary to underwrite or classify the risk accurately, the request must be "rational, appropriate for the circumstance, and necessary to the insurer's ability to evaluate the risk of offering the policy." Here, AAA's written request satisfied that test and thus AAA had validly cancelled the policy.

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