The Midnight Hour: It’s Too Late to Pay Your Premiums After the Fire has Started

Procrastinators put things off until the last minute.  Waiting until “the midnight hour” to take care of important tasks, however, can have some truly negative consequences.  A recent example of this can be found in Megna v. Leading Insurance Services, Inc., 2017 WL 393573 (N.J. Super Ct. App. Div. Jan. 30, 2017).  There, the insureds purchased insurance to cover their business.  However, the insureds failed to pay the premium for the policy.  Consequently, the insurer sent out a notice of cancellation, which indicated that the policy would be reinstated if the insureds paid the premium prior to the cancellation date.  The insureds failed to do that and you can guess what happened.

In accordance with Murphy’s law, one day after the cancellation date, a fire caused damage to the insureds’ property.  While the fire was still burning, the insureds attempted to pay a portion of the outstanding  premium electronically through the insurer’s electronic portal system.  You can’t make this stuff up.

Three days later, the  insureds’ insurance broker advised the insurer that there had been a fire.  The insureds then made a second electronic payment.

The insurer informed the insureds’ broker that it would not reinstate the policy unless the insureds provided a statement that there were no losses between the date of cancellation and the reinstatement date.  When that statement was not received, the insurer returned the two payments.  One month later, however, it sent the insureds an invoice for the outstanding premium in error, which the insureds paid.  That payment also was returned to the insureds.

The insurer ultimately denied the claim because the policy had been cancelled prior to the loss.  The insureds then sued the insurer, arguing that the insurer waived its rights to cancel the policy, and/or was estopped from doing so, based on its “acceptance” of the electronic premium payments and the mailing of the premium invoice.

Both the insureds and the insurer moved for summary judgment.  The trial court granted the insurer’s motion, and denied the insureds’ motion, concluding that the policy had been validly cancelled prior to the loss.  The court also rejected the insureds’ waiver/estoppel argument.  The Appellate Division affirmed.

The Appellate Division noted that “even giving plaintiffs the benefit of all favorable inferences from the evidence, no rational fact-finder would conclude that plaintiffs’ policy was not properly cancelled and that they were entitled to coverage for the . . . loss.”  Id. at *2.  With respect to the waiver/estoppel argument, the court reasoned:

New Jersey courts have only recognized waiver in cases where the insurer either retained a late premium payment or engaged in some other course of conduct that clearly manifested an intent on the part of the insurer to continue coverage.

We discern, however, no evidence from which it could be inferred that [the insurer] intended to reinstate the policy by retaining plaintiffs’ post-cancellation payments or otherwise.

Id. at *3 (citations omitted).

Thus, the cancellation of a policy will be enforced as long as an insurer returns any post-cancellation payments and takes no actions clearly showing that it intends to continue coverage.  The Megna case makes it clear that an insured who ignores a cancellation notice based on the non-payment of premium does so at its own peril.  The insured must pay the premium before the cancellation becomes effective if it wants to continue coverage.  In this case, hindsight was not 20/20.

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