Can an Insurer Non-Renew a Business That’s in Chapter 11 Bankruptcy?
Question from an IIABNY member: “We have a situation where one of our insurance companies is non-renewing a commercial middle market client due to bankruptcy/Chapter 11. One of our other carrier reps has informed us that this might be illegal; if the insured is in Chapter 11 bankruptcy and is working with the courts to have it remedied, the Bankruptcy Court can force the insurance company to renew the policy at the same/similar rate. If all the alternatives we were able to find were significantly more expensive (E&S or standard), our insured could claim that the insurance company is preventing them from reorganizing by forcing them to pay the more expensive premium with other carriers. If the insurance company had non-renewed because of the outstanding loss control or because of the significant losses, this may not be the case, but the non-renewal notices were for bankruptcy only. Do you have any information relating to this topic?”
Answer: While the U.S. Bankruptcy Code is way outside my area of expertise, I found an article from the July 30, 2009, issue of the Insurance Journal, written by the president of NIP Specialty Brokerage, a wholesaler that has created a special Bankruptcy Facility to help risks in Chapter 11. He wrote in part:
Bankruptcy laws do not prevent an insurer from canceling or refusing to renew. Rather state laws or specific policy cancellation or non-renewal terms control whether the insurer may terminate coverage. Even in states with restrictive cancellation laws, a bankruptcy filing may be considered a material change in hazard, which many states recognize as a legitimate reason for mid-term policy termination with the proper advance notice.
I also found a 2007 New York Insurance Department advisory legal opinion stating that New York law does not prohibit an insurer from non-renewing a policy due to the insured’s bankruptcy.
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