Although regular risk assessments and re-evaluations of insurance coverage are generally a good idea, it’s not uncommon for construction companies to take the approach of renewing their existing insurance policy when it comes up for renewal. Some policies – particularly specialty policies – have renewal clauses in them that sophisticated companies should be aware of when renewing their insurance though. A recent decision by the Third Circuit Court of Appeals in Philadelphia sheds some light on this issue.
In Indian Harbor Insurance Co. v. F&M Equipment Company, the Court held that a policy provision stating that the policy would be renewed upon its expiration required that the insurance carrier offer the insured substantially the same policy as the one about to expire. To do otherwise, according to the Court, would violate the intent of the parties in agreeing to the renewal clause.
In Indian Harbor, the insurance company issued a policy providing for $10 million in pollution and remediation coverage over a 10 year term. The policy covered 12 different sites, including locations that a predecessor company to F&M was required to remediate. The coverage limits of the policy were subsequently increased to $14 million in exchange for additional premium. When Indian Harbor made its offer to renew, it reduced the coverage to $5 million and the term to one year. The only site for which a claim was made on the previous policy was also excluded from coverage.
After F&M rejected this offer and claimed it was not truly a renewal, Indian Harbor brought a declaratory judgment action asking the Court to affirm that it was in compliance with the renewal clause. The District Court agreed on grounds that Pennsylvania law allows changes to the policy as long as notice is given. The Third Circuit then overturned the District Court declaring that the new policy must be substantially the same coverage.
The Circuit Court was clear that an identical policy is not required. Premium prices, for example, can change with proper notice given. But the bulk of the renewal policy must be a “recognizable extension” of the original policy. Since the length of the contract, the amount of coverage, and the properties covered were all significantly less in this instance, the Court held that this renewal was not in fact a renewal.
Insurance companies, insurance brokers, and construction company insureds should heed the warning this case provides. The underlying principal is that parties should deal with each other in good faith and be aware of what is required by the terms of the existing policy.