Source: http://www.thelegalintelligencer.com, October 15, 2015
By: Gina Passarella
In an apparent case of first impression, the Third Circuit has ruled an insurance company’s policy renewal must offer the same or similar terms as the original policy.
Thursday’s ruling in Indian Harbor Insurance v. F&M Equipment from the U.S. Court of Appeals for the Third Circuit reversed a lower court judge who had determined an insurer only had to put a policyholder on notice of changes in the renewal policy for it to meet a contract’s requirement that the company offer a renewal.
The dispute involved a $14 million insurance policy Furnival Machinery, which is now F&M Equipment, had with Indian Harbor Insurance from 2001 through 2011. The “pollution and remediation legal liability policy” covered 12 Furnival locations, including one in which it was known to all parties that Furnival was responsible for environmental cleanup of the site. The insurance policy required Indian Harbor to offer a renewal of the 10-year policy at its conclusion.
When Furnival asked for a renewal in 2011, Indian Harbor offered a one-year policy for $5 million that did not include coverage for the only site for which Furnival had made a claim during the initial policy period. Furnival rejected that offer and Indian Harbor filed a declaratory judgment seeking a ruling that it made its contractually obligated renewal offer, Furnival rejected it and Indian Harbor had no duty to offer the same terms and conditions of the expiring policy.
Furnival has argued in the Eastern District of Pennsylvania and before the Third Circuit that “renewal” means a new contract with the same or substantially similar material terms. Indian Harbor argued such an interpretation would lock it into the same contract for “eternity,” according to the Third Circuit’s opinion by Senior Judge Jane R. Roth. Instead, Indian Harbor argued, it only had to offer a new contract with commercially reasonable terms and provide advanced notice of any changes in the terms from the original contract. Furnival said that interpretation rendered the renewal requirement “illusory,” Roth said.
“We conclude that for a contract to be considered a renewal, it must contain the same, or nearly the same, terms as the original contract,” Roth said for the court.
Roth said case law on the issue is “quite thin,” with neither the Third Circuit nor any Pennsylvania court having addressed the issue in the context of an insurance contract.
The Third Circuit’s decision doesn’t go as far as to say the policy terms must be identical, with Roth noting a tenant’s lease renewal at a new market rate would still be considered a renewal. But she rejected Indian Harbor’s argument that a renewal can be any new contract with notice of new terms.
“Neither case law nor logic suggests that notice implies that such a new contract is a renewal,” Roth said.
The judge gave the example of a 100-year policy for which an insurer offered a 30-day renewal. She said the court would be hard-pressed to determine that was a renewal.
“While the terms of a renewal contract may change with notice, the key question is how similar the new contract must be, and whether the indication here meets that standard,” Roth said.
No matter what the standard, Roth said, Indian Harbor’s stance couldn’t be what the parties intended because it would do what Furnival suggested, render the renewal requirement “illusory.” She said Indian Harbor could not satisfy its renewal obligation by making an offer it knew Furnival would refuse.
“On the question of what constitutes a renewal, it is clear under our precedent that a renewal need not be identical to the original,” Roth said. “But to hold that it can be any modification at all would not give effect to the parties’ intentions.”
Roth said that while a reasonable change in price is acceptable, the remaining terms must be “recognizable extensions” of the initial policy. She said that was not the case in Indian Harbor’s offer. She said the length, amount and scope of coverage was different from the initial policy.
In response to Indian Harbor’s argument that the court’s ruling creates a perpetual contract, Roth said the company doesn’t have to include such broad renewal requirements in future contracts. The question of whether a renewal means also renewing the renewal requirement, however, was not directly before the court in the instant case, Roth said, declining to rule on that issue.
Judges Thomas Ambro and Julio Fuentes joined Roth in the decision.
Thomas M. Peterson of Morgan, Lewis & Bockius in San Francisco represented Furnival. Joel C. Hopkins of Saul Ewing in Harrisburg represented Indian Harbor. Neither responded to calls seeking comment.