Chapter 8, C. Cancellation of an Insurance Policy

• Jurisdiction: United States

C. Cancellation of an Insurance Policy

Bankruptcy's automatic stay prevents insurers from canceling a policy post-petition without cause. Once the insured files for bankruptcy, court approval must be obtained prior to cancellation of an insurance policy.²¹⁹ The court in Minoco Group held that the cancellation of insurance policies would render the reorganization of Minoco more difficult, if not impossible, and stayed the cancellation of the policies.²²⁰ The automatic stay applied because the insurance policies were considered property of the estate and protected against diminution of the value of the estate.²²¹ The stay could be lifted only for "cause."²²² Therefore, an insurer must demonstrate to the court that it is not adequately protected and should be allowed to cancel the policy.

A bankruptcy court may even require an insurer, against its will, to renew a policy that expired post-petition. In In re Garnas,²²³ the court required an insurer to renew a policy even though the policy expired pursuant to its own terms. The insurer's underwriter testified that the policies were renewed automatically upon expiration unless the company took some overt action to terminate. Further, the underwriter testified that the company was not renewing the policy because of the insured's poor financial condition. The court determined that this was an improper reason to fail to renew a policy, citing 11 U.S.C. § 365(e)(1), which provides that an executory contract may not be terminated based on a provision that is conditioned on the insolvency of the debtor. Thus, the court required the insurer to honor the policy.

Generally, the rule is that an insurance policy will expire according to its terms if the insurer provides the debtor with an unconditional notice of termination prior to the filing of bankruptcy, even when the termination date is post-petition.²²⁴ Despite the pre-petition termination of an insurance policy, if the insurer continues to bill the debtor and to accept premium payments, a court may determine that the policy is effective and allow the debtor to assume the insurance contract.²²⁵

While court approval is necessary for the cancellation of a policy obtained by the insured pre-petition, the same is not true of the cancellation of a policy obtained post-petition. If the debtor-in-possession or trustee purchases an insurance policy after the bankruptcy filing, it is considered a post-petition contract. As such, the insurer can terminate the policy without...