8.12 Cancellation

• Jurisdiction: Arizona

The cancellation of commercial policies are governed by A.R.S. Sec. 20-1671 et seq. which provides in relevant part:

20-1671. Scope of article

This article applies to commercial property insurance policies, commercial liability policies and commercial multi-peril insurance policies other than automobile policies. . . .

. . .

20-1673. Grounds for valid cancellation

A. No insurer may cancel an insurance policy before the expiration of the agreed term or one year from the effective date of the policy or renewal, whichever is less, if one of the following is true:

1. The policy has been in effect for sixty days.

2. The policy is a renewal, effective immediately.

B. Notwithstanding subsection A, an insurer may cancel a policy for either of the following:

1. Nonpayment of a premium.

2. One of the following grounds, which must be stated in the policy:

(a) Conviction of the named insured of a crime arising out of acts increasing the hazard insured against.

(b) Acts or omissions by the insured or his representative constituting fraud or material misrepresentation in obtaining the policy, in continuing the policy or in presenting a claim under the policy.

(c) A substantial change in the risk assumed, except to the extent that the insurer should reasonably have foreseen the change or contemplated the risk in writing the contract.

(d) A substantial breach of contractual duties or conditions.

(e) Loss of reinsurance applicable to the risk insured against, but only if the absence of reinsurance has resulted from termination of treaty or facultative reinsurance initiated or implemented by the reinsurer or reinsurers of the company issuing the policy.

(f) A determination by the director of insurance that the continuation of the policy would place the insurer in violation of the insurance laws of this state or would jeopardize the solvency of the insurer.

(g) Acts or omissions by the insured or his representative which materially increase the hazard insured against.

A proper notice of cancellation, in order to be effective, requires the insurer to: (1) mail a copy of the notice of cancellation to the insured's agent and (2) provide written notice of the cancellation by mailing by certified mail to the named insured at the address shown in the policy or to the last known address of the insured.^[444] The notice of cancellation must be mailed 60 days before the effective date of the cancellation, except that, if cancellation is for nonpayment of premium, the notice of cancellation can be issued on 10 days' notice of cancellation.^[445] The notice of cancellation must state the specific facts, which constitute the grounds set forth in A.R.S. Sec. 20-1673 which are relied upon.

The notice of cancellation must be accompanied by a refund of unearned premium, except where the premium has been financed.

The statutory requirements for cancellation in the commercial lines context is set forth in A.R.S. Sec. 20-1671 et seq. A.R.S. Sec. 20-1673 allows an insurance company to cancel a policy prior to the expiration of the policy term for non-payment of premium. Further, A.R.S. Sec. 20-1674 sets the requirements for a valid notice of cancellation.

While there is no Arizona case law discussing A.R.S. Sec. 20-1674, there are cases discussing similar provisions in the context of other types of insurance. Those cases have held that "[s]trict compliance with the notice provisions of the statute is required."^[446] The elements required under this statute can be broken down as follows:

(1) the insurer must mail a copy of the notice of cancellation to the insured's agent;

(2) the insurer must send written notice of the cancellation to the named insured by certified mail;

(3) the insurer must give the insured notice at least sixty days before the effective date of the cancellation, except that, if cancellation is for nonpayment of premium, at least ten days' notice of cancellation must be given;

(4) the notice must state the specific facts which constitute the grounds set forth in section 20-1673 which are relied on;

(5) the notice of cancellation shall be accompanied by a refund of unearned premium, except a premium that has been financed.

Acceptance of and retaining premiums after a policy is purportedly canceled may give rise to a claim that the insured had a reasonable expectation that the coverage was still in effect under these circumstances and/or detrimentally relied upon the actions of the insurance company.^[447]

The third element provides that "if cancellation is for nonpayment of premium, at least 10 days' notice of cancellation must be given". While Arizona has not specifically addressed this issue, it is the general rule, and an overwhelming majority of jurisdictions have held, that even if the notice gives a shorter time than prescribed by the policy or statute, the cancellation simply becomes effective only after the required period of time has elapsed.^[448] It has consequently been observed that "[t]he fact that the notice of cancellation does not allow the proper period of time is immaterial where the loss is sustained subsequently to the lapse of what would be the required period of time."^[449]

The fifth element requires the notice of cancellation to be accompanied by a refund of unearned premium. In the automobile insurance context, it has been held that a notice of cancellation was invalid where the language of the applicable cancellation statute mandated that a premium refund must be included in the notice itself or accompany the notice when it is mailed to the insured and the insurer did not mail the premium refund to the insured until more than one month after it had issued the notice...