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Federal Court Of Appeals Determines That Holder Of Insurance Policy Entitled To “Same Or Nearly the Same” Terms Upon Renewal


Posted on November 25, 2015

This blog has discussed various issues related to insurance coverage in the context of the construction industry on numerous occasions, including, under what circumstances coverage is warranted, and, if coverage is warranted, at what time it is triggered under a policy.  Commercial insurance policies can be incredibly complex, often implicating several levels and types of coverage, as well as various limits and exclusions.  Because of this intricacy, it is important for a policyholder to understand exactly what it is they are buying, both initially and upon renewal of the insurance contract.  The significance of having this awareness is perfectly illustrated by a case recently decided in the Third Circuit Court of Appeals, Indian Harbor Insurance Co. v. F&M Equipment Company, No.14-1897 (Oct.15, 2015).

In Indian Harbor, Indian Harbor Insurance Company (“Indian Harbor”) issued an insurance policy to F&M Equipment, Ltd. (“F&M”) extending $10 million in pollution and remediation coverage over a ten year term. The policy covered twelve different sites, including one which F&M was obligated to clean up pursuant to a consent decree with the federal government.  Indian Harbor knew about the consent decree at the time the Policy was originally issued. The Policy included a section listing five reasons for which Indian Harbor could “refuse to offer a renewal extension of coverage,” and stated that Indian Harbor could not “cancel nor non-renew” the Policy except for the stated reasons.

After the Policy was issued, the coverage limits were increased to $14 million in exchange for payment by F&M of an additional premium.  In 2011, near the end of the ten year policy period, Indian Harbor made F&M an offer to renew the policy, but reduced the coverage to $5 million and the term to one year. The renewal Policy also omitted coverage for the site which F&M was obligated to clean up.  F&M rejected Indian Harbor’s renewal offer, which prompted Indian Harbor to file a declaratory judgment action asking the United States District Court for the Eastern District of Pennsylvania to determine that Indian Harbor was in compliance with the renewal provisions of the Policy.  The District Court found that “Indian Harbor’s offer constituted a renewal because an insurance company need only notify the insured that a policy will change for the later offer of a contract to constitute a renewal.”

On appeal, the Third Circuit vacated the order of the District Court, rejecting Indian Harbor’s contention that the “renewal need only be any offer of a new contract, so long as advance notice is provided for any changed terms and the terms are commercially reasonable.”  The Court held that, if it were to adopt Indian Harbor’s argument, than “the promise of a renewal is illusory[.]”  The Court emphasized that “the relevant provision of the contract is a promise to offer a renewal, not a reasonable insurance contract” and that “a renewal requires ‘continuation of coverage on the same, or nearly the same, terms as the policy being renewed.’”

Further clarifying its ruling, the Court opined that “a reasonable change in price should not alone render a new contract a nonrenewal.  But the remaining terms must be recognizable extensions of the initial policy.” The Court held that, because the length, amount, and scope of coverage being offered by Indian Harbor were different, it did not offer a contract that was either the same or nearly the same as the Policy, thereby breaching its promise to offer a renewal extension of coverage.

The Third Circuit’s ruling not only makes sense, but it provides certainty to holders of insurance policies that there is value to guaranteed renewal provisions in insurance policies. The provisions and language of insurance policies, especially in the context of construction claims, can be incredibly complicated and difficult to follow.  Insurance companies often use such confusion to deny coverage to those who might be entitled to it.  In such situations, dealing with insurance companies is something that can and should, be handled by experienced legal counsel.  For questions regarding insurance coverage in the construction context of construction claims, or any other aspect of Ohio construction law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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