Opinion ID: 663730
Heading Depth: 2
Heading Rank: 1

Heading: Right to Extend Coverage

Text: 15 FDIC argues that the exclusion of coverage for regulatory suits added in the 1984 policy was such a material change that it constituted a constructive nonrenewal of the 1981 policy and therefore triggered First Federal's right to purchase a discovery period and notice of this alternative. CNA contends, and the District Court agreed, that the 1981 policy was renewed and thus there was no right to a discovery period or notice. 16 CNA further contends that, even if First Federal was entitled to purchase a discovery period, the interval ran from the end of the 1981 policy for one year; because no notice was given of these claims during that year, the discovery period would not be helpful to the defendants. The FDIC asks us to declare that the 1981 policy continues in force because effective notice of nonrenewal has not yet been tendered by CNA; therefore, either a claim filed now would be covered by the 1981 policy directly or the FDIC could purchase a discovery period beginning on the date of termination when an effective notice is delivered. 17 The district court relied on the parties' agreement that this case is governed by federal common law as given substance by New Jersey law. American Cas. Co. v. Continisio, 819 F.Supp. 385, 396 (D.N.J.1993). During oral argument, the FDIC indicated that the parties agree New Jersey law applies. Because the task before us is interpretation of a contract, the law applicable to the original contracting parties seems appropriate. In any event, the distinction is not important because there appears to be no conflict in New Jersey and federal law for purposes of the issues we resolve today, so we will look to New Jersey's substantive law so far as it goes. 18 The primary issue to be resolved is whether a change in material terms constitutes constructive nonrenewal of an insurance policy under New Jersey law. Only if CNA refused to renew the policy did First Federal have a contractual right to purchase a discovery period and a right to be notified of its option. 19 Defendants believe that the mirror-image rule of contract offer and acceptance should apply to insurance renewals. Cf. Looman Realty Corp. v. Broad St. Nat'l Bank, 74 N.J.Super. 71, 180 A.2d 524, 530 (App.Div.), certification denied, 37 N.J. 520, 181 A.2d 782 (1962) (holding that a purported acceptance on different terms is a rejection and a new offer). They interpret the application of this rule to defeat renewal if the parties agree to vary any terms (presumably other than premium and policy period). If defendants' application and interpretation of this rule applies, CNA's offer to renew the policy only if there is a regulatory exclusion is no renewal at all, but rather an entirely new policy, and all provisions regarding nonrenewal are triggered. 20 New Jersey statutes imply that renewal can be effected without an exact replication of terms from policy to policy. The New Jersey automobile insurance statutes define the term renewal as the issuance and delivery by an insurer, at the end of the policy period, of a policy superseding a policy previously issued and delivered by the same insurer.... N.J.S.A. 17:33B-33(b) (1990) (emphasis added); see also N.J.S.A. 17:29C-6(E) (1968). New Jersey has also incorporated this definition into its insurance regulations, including those on nonrenewal of commercial insurance policies. See N.J.A.C. 11:1-20.2(j) (Supp. 3/18/91). These statutes and regulations also permit the issuance and delivery of a certificate or notice extending the term of a policy beyond its policy period or term as alternative methods of renewal. If extension of identical terms is required, there would be no reason for a superseding policy as an alternative. 21 The New Jersey Supreme Court addressed the effect of a material change in terms upon renewal of a comprehensive personal liability policy in Bauman v. Royal Indemnity Co., 36 N.J. 12, 174 A.2d 585 (1961). The insurance company changed the terms, without notifying the insured, to exclude coverage for workers' compensation claims. The New Jersey Supreme Court voided any reduction in coverage upon renewal that was not called to the insured's attention in order to fulfill the insured's expectations. Id. 174 A.2d at 590. Bauman went on to comment that 22 [The insurer] had the undoubted right, by appropriate alteration in the terms of its policies, to exclude such coverage in later renewals but, in such event, common fairness as well as legal duty dictated that it call the lessened coverage to the attention of the insureds so that they might suitably protect themselves. 23 Id. 174 A.2d at 592 (emphasis added). Thus, if an insured accepts coverage on different terms, with knowledge of the change in coverage, a valid renewal could exist. 24 Even in a state where renewal is strictly defined as continuation of coverage on the same, or nearly the same, terms as the policy being renewed, acceptance of new terms constitutes a renewal. McCuen v. American Cas. Co., 946 F.2d 1401, 1404 (8th Cir.1991). A rejected offer of materially different terms, including a regulatory exclusion, decrease in policy and discovery periods, and increase in premium and deductible, was held to be a nonrenewal under Iowa law. Id. In contrast, Iowa law recognizes an agreement to a material change in the terms of a directors' and officers' liability policy, including an exclusion for regulatory suits, as a renewal. American Cas. Co. v. FDIC, 944 F.2d 455, 460 (8th Cir.1991). 25 Defendants contend, however, that Barbara Corp. v. Bob Maneely Insurance Agency, 197 N.J.Super. 339, 484 A.2d 1292 (App.Div.1984), requires a notice of nonrenewal during the renewal process if the renewal is conditioned upon a change of terms. In Barbara Corp., the court considered a regulation requiring fire insurers to provide written notice of intent not to renew. The insurer did not renew a fire insurance policy when the insured did not pay its premium; the insurer also did not notify the insured of its loss of coverage. The insurer argued that it was not required to notify the insured of its intent not to renew because it intended to renew the policy upon the condition that the insured pay its premium. However, the Barbara Corp. court held that notification is required whether the intent not to renew is absolute, such as for underwriting reasons, or only conditional, depending, as ... here, upon the insured's failure to pay the premium. Id. 484 A.2d at 1295. 26 Defendants argue that Barbara Corp. should be extended to require notice of nonrenewal in this case, where renewal was conditioned upon the acceptance of the regulatory exclusion. But Barbara Corp. is distinguishable. Barbara Corp. was never notified that the policy was about to expire without renewal and believed the fire insurance policy was still in effect. If Barbara Corp. had known that a premium was due, it would have paid the premium and its insurer agrees that it would have renewed the insurance policy. The New Jersey public policy underlying formal notices of intent not to renew is to enable the insured to avoid lapses in coverage due solely to lack of notice. With notice, the insured has the choice to meet the insurer's preconditions, obtain alternative coverage, or choose to allow the policy to lapse. Id. 27 In this case, the addition of the regulatory exclusion was brought to the attention of First Federal and it had time to seek alternative coverage or accept the new policy. No need existed for a notice of nonrenewal because First Federal remained covered. A more formal notice could not have prevented an unintended lapse when there was neither a lapse nor a lack of awareness of the insurer's conditions. Where the conditions for renewal coverage are made evident to the insured, we predict New Jersey law would not require formal notification until the insured rejects the renewal conditions. Cf., e.g., Adams v. Greenwood, 10 F.3d 568, 571-72 (8th Cir.1993) (reaching the same result under Minnesota law); American Cas. Co. v. RTC, Civ. No. MJG-92-1138, slip op. at 1114, 1993 WL 655032 (D.Md. Nov. 1, 1993) (construing Maryland law). 28 Defendants also argue that First Federal's agreement to the terms of the 1984 policy did not constitute a valid renewal because First Federal was not aware of its right to purchase a discovery period upon nonrenewal and was not notified by CNA of this right during the renewal process. They argue that a renewal based upon agreement to new terms is only valid if First Federal knowingly waived its right to a discovery period. Therefore, they believe both a notice of nonrenewal and a notice of a discovery period were required. 29 The 1981 policy provision creating the right to a discovery period reads as follows: 30 If the Insurer shall cancel or refuse to renew this Policy, [First Federal] shall have the right to an extension of the cover granted by this Policy in respect of any claim or claims which may be made against the Directors or Officers during the period of twelve calendar months after the date of such termination but only in respect of any Wrongful Act committed before the date of such cancellation or nonrenewal. The Insurer shall give written notice informing [First Federal] of its option to purchase this extension at a rate of 25 percent of the current annual installment. Application for this extension must be made within thirty (30) days after the effective date of cancellation or nonrenewal of the Policy. 31 Emphasis added. 32 As defendants acknowledge, the policy language clearly indicates that the right to a discovery period only accrues upon nonrenewal or cancellation. Since First Federal's agreement to the 1984 policy constituted a renewal, the right to a discovery period was not triggered. Therefore, First Federal had no right to knowingly waive. 33 Defendants alternatively contend that notice of the discovery period should be required during the renewal process in order to allow the insured to make a fully informed decision about renewal. However, as a sophisticated financial institution, First Federal should be aware of the rights printed in its policy. First Federal hired an outside risk counselor in addition to the insurance manager it employed full-time. Cf. McNeilab, Inc. v. North River Ins. Co., 645 F.Supp. 525, 547 (D.N.J.1986) (limiting sympathy for an insured that maintained a Corporate Insurance Department consisting of an expert insurance staff with a legal staff at its disposal), aff'd mem., 831 F.2d 287 (3d Cir.1987). Although First Federal did not enjoy the bargaining advantages Johnson & Johnson had in McNeilab, only the ability to read the policy is at issue here, not the ability to negotiate more favorable terms. Especially in light of the policy's 2 1/2-page length with concise endorsements, we perceive no unconscionable unfairness. 34 Because First Federal's agreement to the terms of the 1984 policy with knowledge of the regulatory exclusion constituted a renewal of the 1981 policy as a matter of New Jersey law, CNA was not required to provide either notice of nonrenewal or notice of the discovery period. Therefore, we need not consider defendants' remedy contentions.