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Dishonest Policyholder Sues Agency over a Backdated Cancellation

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Most insurance agents, at one time or another, have received a request from a client to “backdate” the cancellation of a policy - that is, make the cancellation of a policy effective at some point in the past. Backdating a cancellation enables the client to receive a refund on premiums paid for the policy. While the motivation for backdating is understandable, honoring that request can cause problems for the agent later.

A married couple in Kentucky had an automobile insurance policy purchased from a local agent. They had a friend who was an agent with another agency, and they decided to give him their business. The friend obtained a replacement policy with another insurer. On September 17, 2015, the husband phoned the first agency and asked the customer service representative to cancel their auto policy. On September 25, the agency emailed a cancellation request form (likely a lost policy release,) listing September 17 as the cancellation date, to the insureds for their signatures.

The insureds had set their premium payments up on a schedule of automatic withdrawals from their checking account. When they did not immediately return the signed form, the insurer continued to withdraw the funds each month. The agency sent them a follow-up email with another copy of the form. The husband later testified that he did not notice the monthly premiums being deducted from his account and did not recall whether he received the agency’s emails. When the policy expired without the insureds submitting the cancellation form, the insurer issued a renewal policy and continued deducting the monthly premiums.

The husband eventually called the agency to ask where his premium refund was. He was reminded that he had to complete the cancellation request form, and the agency sent a third copy to him through regular mail. He signed the form, which still showed September 17, 2015 as the cancellation date, and mailed it back on May 11, 2016.

On May 19, the wife was injured in a car accident. The insureds later claimed that they notified their first agent at that time, while the agency disputed this. On May 24, a producer within the agency signed the cancellation request form and sent it to the insurer. The insurer required verification of replacement coverage before it would process the cancellation, and the agency provided this on May 27. The insurer then issued two refund checks - one for cancelling the renewal policy flat, the other for cancelling the expired policy effective September 23, 2015.

The wife, apparently seeking coverage under two policies, made a claim for underinsured motorist benefits with the first insurer. The court opinion does not state the size of the claim. However, since she sought double coverage, the claim was likely in the six-figure range. The insurer denied coverage because the policy had been cancelled before the accident occurred. The insureds sued the insurer and the agency, accusing the agency of negligence in handling the cancellation request. They said that the agency’s handling was unreasonable and put the insurer’s interest ahead of theirs. The agency argued that it simply followed the insured’s instructions.

The judge’s ruling was mixed for the insurer, but not for the agency. “Indeed, the facts conclusively demonstrate that Assured did exactly as Mr. Brown requested in handling the policy cancellation,” he wrote. “Even given that there is a dispute over whether Mr. Brown called Assured to report the accident, there is no evidence that Mr. Brown gave Assured instructions to withdraw the cancellation request.” The case against the agency was dismissed.

This case illustrates the perils of backdating a cancellation. Many agencies, wishing to please a client, routinely honor backdated requests. However, most policies require the insured to give advance notice when he wishes to cancel. If advance notice is provided, there can be no question as to whether a subsequent loss is covered. As this agency discovered, an insured who wants to change a contract retroactively may change his mind.

Even though this agency was blameless, they still got dragged into court and had to involve their errors and omissions liability insurer for defense.  If state law does not require them to backdate, prudent agencies may want to think carefully about whether honoring a request to backdate cancellation is worth the risk.

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