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Mar 12
When Can a Homeowners Policy Be Cancelled for 'Willful or Reckless Acts or Omissions'?

RECKLESS.jpgQuestion from a Big I New York member: We have a client who has a homeowners policy with [Carrier X], which was not supposed to be renewed by the carrier due to a 1/1/2020 loss involving "under-age drinking".  The policy was due to be non-renewed at its March 4th, 2021 expiration date. On February 5th, 2021, the underwriter notified us that the policy was inadvertently renewed; however, a mid-term cancellation will be issued for "Increase In Hazard" surrounding the 1/1/2020 loss.  A copy of the Cancellation Notice is attached. I'm concerned about the legality of this.  Is a carrier allowed to mistakenly renew a policy when they intended not to, only to send a mid-term cancellation notice for an "Increase in Hazard"?  I feel they should have remained on the policy until 3/4/2022.

Answer: This is actually a gray area. I can't say with any certainty that the insurer's action is impermissible.

The renewal policy should include the attached endorsement. On page 6, it states:

2. We may cancel the entire policy only for the reasons stated in this condition. The cancellation notice will be mailed to you at the address shown in the Declarations. Proof of mailing will be sufficient proof of notice. … 

c. When this policy has been in effect for 60 days or more, or at any time if it is a renewal with us, we may cancel the entire policy only for one or more of the following reasons by notifying the "insured" at least 30 days prior to the proposed cancellation date: 

(1) Conviction of a crime arising out of acts increasing the hazard insured against;

(2) Discovery of fraud or material misrepresentation in obtaining the policy or in the presentation of a claim thereunder;

(3) Discovery of willful or reckless acts or omissions increasing the hazard insured against;

(4) Physical changes in the property insured occurring after issuance or last annual anniversary date of the policy which result in the property becoming uninsurable in accordance with our objective, uniformly applied underwriting standards in effect at the time the policy was issued or last voluntarily renewed; or

(5) A determination by the Superintendent of Financial Services that the continuation of the policy would violate or would place us in violation of the New York Insurance Law. 

If one of the reasons listed in this Paragraph c. exists, we may cancel the entire policy. 

This endorsement makes the policy compliant with New York Insurance Law Section 3425(c); the language here is taken straight from that law. The cancellation notice provides as the reason for cancellation, “Increased Hazard: Circumstances surrounding the 01.01.2020 loss." It appears that the carrier is relying on the reason given in 2.c.(3) above as the legal justification for cancellation. 

Here's where it gets interesting. Paragraph (4) permits an insurer to cancel because of physical changes in the property insured, but only if they occur “after issuance or last annual anniversary date of the policy." Paragraph (3) doesn't contain that limitation – it doesn't limit when the insurer can discover the “willful or reckless act or omission" that increases the hazard. In other words, it doesn't appear to prevent the insurer from cancelling if it discovered the act or omission before the renewal date. The fact that the state legislature added that condition to (4) but not to (3) suggests that they did so deliberately. 

The NYS Department of Financial Services issued a detailed opinion in 2004 about the circumstances under which an insurer may cancel based on 2.c.(3). 

The opinion appears to say that the significance of the willful or reckless act or omission is what determines whether an insurer can use that reason for a cancellation. The question arose out of a homeowner adding an inground swimming pool and a trampoline:

The inquirer does not indicate how much greater of a risk would actually be engendered by the addition of the pool or trampoline or other attractive hazard. We are not aware of any insurer that either charges more or excludes coverage for a pool. Some insurers have explicit exclusions for trampolines. We also note that any greater exposure in risk would likely be on the liability portion of the coverage, not the property coverage. Since the portion of the premium attributable to the liability risk is usually less than 20% of the homeowners' premium, it is not clear to us how significant of an additional risk there would be. If the insured's act or omission results in an insignificant or minor increase in risk, it should not trigger a cancellation on the grounds that it was willful or reckless.

Both pools and trampolines are fairly common household additions and even if the hazard could be increased by their addition, one cannot generally characterize such addition as being "reckless" within the meaning of subparagraph (D). However, the failure of the insured to take ordinary and proper safety precautions, such as having a fence around the pool or trampoline, may constitute reckless behavior if the insured, after being notified of the increased hazard or danger, fails or refuses to take measures to ensure the safety of the pool or trampoline.

With respect to "willful", although the term implies merely a knowing act, in the context of subparagraph (D) and given the legislative intent of § 3425 to protect the insured from unwarranted cancellations, we think that such an interpretation in this context would be too broad. Because pools and trampolines are common and policies typically do not exclude liability exposure arising from them, insureds, in the absence of specific knowledge of the underwriting guidelines, have a reasonable expectation that the insurer would cover such risks and would not cancel a policy merely because a pool or trampoline was added. We do not think that an insurer should characterize the mere addition of a pool or trampoline as being willful in the absence of the insurer having specifically advised the insured that the insurer would not insure such risk. Moreover, if the policy contains a specific exclusion, as many do for trampolines, there would not appear to be any greater hazard insured against. …

For the reasons noted above, we do not believe that the mere addition of a business would in of itself be either a reckless or willful act within the meaning of subparagraph (D). However, the size and scope of the business would clearly be a relevant factor. If the insured conducted the business in a manner that was unsafe or unlawful or where the insurer has advised the insured that a business would violate the insurer's underwriting guidelines, or if the insured has reason to suspect that the operation of such a business would violate the underwriting guidelines, then such conduct may be reckless or willful. However, since the policy probably excludes liability or physical damage arising out of a business, it is not clear to us that another element of subparagraph (D) would apply; namely, an increase of the hazard insured against.

Therefore, it looks to me like the carrier’s ability to cancel this policy hinges on just how significant that 1/1/20 loss involving underage drinking was. Did it involve blatant failure of the adults in the home to supervise the individuals under age 21, or was the alcohol snuck in despite the adults’ clear instructions forbidding it? What was the nature of the loss – did it involve a serious injury or a minor one? Major property damage or a broken window? As a side note, the opinion I quoted above refers to the insured failing to act after being notified that the carrier objects to the lack of protection. The dangers of underage drinking are well known enough that I don’t believe it necessary for an insurer to warn an insured about them. 

I have three sons who all went to college and spent summers living in my house, and I’m quite confident that none of them abstained from alcohol before turning 21. It’s not hard to imagine a 20 year-old having some buddies over and breaking open some beer (it’s actually harder not to imagine it.) But there’s a big difference between 20 year-old college students and 16 year-old high school students. An incident involving the latter is much more serious and implies lack of parental supervision, in my opinion. An insurer would be far more justified in cancelling for that reason, as another loss of that type could reasonably be expected. 

This is all a very long way of saying that I don’t know whether the carrier can do this or not, but if you examine the details of the loss, you’ll know whether or not you have a strong argument for rescinding the cancellation. 


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