Recently, the Supreme Court of Texas ruled against a premium finance company in a policy cancellation dispute, reversing a favorable summary judgment by the trial court and potentially exposing the premium finance company to liability for a $6 million dollar loss that occurred four days after the attempted cancellation of the policy.  BankDirect Capital Finance, LLC v. Plasma Fab, LLC, 2017 WL 1968024 (Tex. May 12, 2017) (slip op.) involved an insured, Plasma Fab, who was habitually late paying its premiums.  Its liability policy had previously been cancelled and reinstated twice due to late premium payments. The Texas Insurance Code requires a premium finance company to mail a notice of cancellation to the insured ten days before the cancellation date stated in the notice.

The third time Plasma Fab was late paying its premium, BankDirect, the premium finance company, issued a notice of intention to cancel dated November 24, which stated an effective cancellation date ten days later, on December 4.  But the notice was not actually mailed until the next day, November 25, giving only nine days’ notice between mailing and the stated cancellation date. Plasma Fab did not pay the premium by December 4, and a notice confirming the cancellation was issued that day.  Four days later, a fire occurred which resulted in a claim against Plasma Fab. Plasma Fab paid the overdue premium the day after the fire and requested reinstatement of the policy.  The carrier refused, citing internal rules prohibiting reinstatement after three cancellations for failure to pay premiums. The carrier denied the claim resulting from the fire, and Plasma Fab ultimately became liable for a $6 million judgment.

Plasma Fab sued the carrier and BankDirect, asserting that because the notice was not mailed in compliance with the Insurance Code’s ten-day notice requirement, the cancellation was not valid. The case was defended on a “substantial compliance” theory.  The trial court agreed with this theory and granted summary judgment in favor of the carrier and BankDirect.  The court of appeals reversed as to BankDirect only, and the issue then reached the supreme court. 

BankDirect argued that failure to give ten days’ notice did not render its notice of intent to cancel completely ineffective, but merely pushed the effective date back to the earliest allowable date that would provide ten days of actual notice.  In other words, because the notice was not mailed until November 25, the cancellation did not become effective until December 5, rather than December 4 as stated on the notice.  The court agreed this position had an internal logic, but stated it could not be upheld by anything in the statute.

In a majority opinion authored by Justice Willett, the court observed that when the Legislature deems substantial compliance adequate, it can enact statutes which expressly allow for substantial compliance, and cited numerous examples where the Legislature had done exactly that. It also observed that a statutorily fixed time limit is generally not subject to the notion of “substantial compliance,” stating, “The essential requirement of a deadline is the deadline, and, as with a missed statute of limitations, the degree of delay matters not: A miss is as good as a mile.”

The majority also looked to the Code Construction Act and relied on it to conclude that the notice requirement at issue required BankDirect to mail the written notice of cancellation to the insured, and simultaneously prohibited BankDirect from stating a date in the notice that was less than ten days after the date of mailing.  BankDirect violated the clear requirement of the statute by mailing a notice which stated a cancellation date only nine days after the date of mailing.  Because the notice requirement is clear and unambiguous, the majority concluded it must enforce it as written, and declined to look to extrinsic factors such as the legislative history, the object of the statute, or the public policy implications of enforcing or not enforcing it. The court noted, “Statutes that impose timelines naturally burden those who miss them,” and urged that courts must resist the temptation to alter a statute to realign perceived inequities.

Justice Guzman filed a concurring opinion which gave more credence to the idea of substantial compliance, but concluded that in this case, the only way to substantially comply with the specific and express ten-day notice requirement was to fully comply with it. 

Justices Johnson and Hecht dissented, noting the absence in the statute of any penalty for failing to comply with the ten-day notice requirement and concluding the statute should be construed as merely directory rather than mandatory. The dissent looked to Hines v. Hash, in which the supreme court examined a pre-suit notice requirement under the DTPA.  There, the statute required 30 days’ notice, but did not specify a penalty for non-compliance.  The court concluded that the purpose of the statute could be accomplished by merely abating the lawsuit until the notice period had elapsed.  This abatement remedy is now well known and has been codified in more recent versions of the statute.  The dissent argued for a similar result here, pushing back the effective date of cancellation until the ten days had elapsed. The dissent further argued that as long as an insured has at least until the tenth day after the date of mailing to cure the default, then the essential requirement of the deadline has been met, and the concept of substantial compliance can still be meaningful.

Editor’s Note: The trial court’s summary judgment in favor of the carrier, Scottsdale Insurance Company, was not appealed, and the absence of Scottsdale from this appeal may have changed the way these issues were addressed by the court.  Cancellation notices issued by carriers and those issued by premium finance companies are governed by two different sections of the Texas Insurance Code.  Section 651.161, governing notices issued by premium finance companies, and which was at issue in this case, reads, 

“The insurance premium finance company must mail to the insured a written notice that the company will cancel the insurance contract because of the insured's default in payment unless the default is cured at or before the time stated in the notice. The stated time may not be earlier than the 10th day after the date the notice is mailed.”

In contrast, Section 551.053, governing cancellation by an insurer, reads,

“Not later than the 10th day before the date on which the cancellation of a liability insurance policy takes effect, an insurer must deliver or mail written notice of the cancellation to the first-named insured under the policy at the address shown on the policy.”

The wording of the second appears more flexible than the first.  The court’s interpretation of the first provision in this case focused heavily on the interplay of the words “must” and “may not,” and held that BankDirect had violated the “may not” in the second sentence.  Section 551.053 contains no equivalent provision, and focuses more on the amount of notice given to the insured than on what the cancellation notice says.  This difference, combined with the arguments made by the dissent, leaves open the possibility that had BankDirect been an insurer and not a premium finance company, its argument that cancellation became effective on the 10th day after mailing might have worked, and the outcome might have been quite different.

Additionally, had Scottsdale remained in the case, more substantive coverage concerns likely would have been at issue, such as the fortuity doctrine, which prohibits insurance coverage from attaching for a loss that has already occurred. Therefore, while this opinion is certainly a cautionary tale on the importance of mailing notices on time and being ready to prove up proof of mailing when required, it may not be the last word on a notice mailed one day late by an insurer rather than a premium finance company.

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