Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co.
__ Cal.App.4th __, 07 C.D.O.S. 4912

Financing Company's Directive To Cancel Auto Policy For Nonpayment Is Conclusive And Effective On Date Of Its Notice To Insured

The Second Appellate District affirmed summary judgment for defendant St. Paul Surplus Lines Ins. Co. ("St. Paul") to plaintiff Pacific Business Connections, Inc.'s ("Pacific") breach of contract and bad faith claims.

Pacific entered into a contract with a financing company to pay the premium on a St. Paul policy covering a fleet of trucks. The contract "[i]rrevocably appoint[ed]" the financing company as Pacific's attorney-in-fact "with ... full authority upon any default to cancel" the insurance policy. When Pacific failed to make the first payment, the financing company sent Pacific a notice of intent to cancel. Pursuant to that notice, the financing company sent Pacific a "notice of cancellation" with an effective date of September 28, 2003. On November 4, 2003, St. Paul mailed Pacific a notice of cancellation for nonpayment effective November 20, 2003. On November 12, 2003, St. Paul received a request from the financing company to honor its earlier cancellation effective date. In response, St. Paul processed a policy change endorsement and reimbursed the unearned premium to the financing company.

On November 15, 2003, after the financing company's cancellation date but five days before St. Paul's initial cancellation date, one of Pacific's trucks was damaged in an accident. Pacific submitted a claim to St. Paul which was denied on the ground the loss was suffered after the policy had been cancelled. Pacific then sued St. Paul for breach of contract and bad faith.

The trial court granted St. Paul's motion for summary judgment, and Pacific appealed. On appeal, Pacific argued the financing company's notice of cancellation did not apply, and St. Paul argued it was entitled to rely on it.

Insurance Code section 673 governs the cancellation of financed insurance policies: "The statute provides that the lender's [] instructions to cancel are conclusive for all purposes with respect to the insurer. (See § 673, subd. (i).) Thus, once the lender has instructed the insurer to cancel, the cancellation is effective." Pacific Auto. Ins. Co. v. Wolff (1977) 72 Cal.App.3d 537, 540-541.

Applying Pacific Auto Ins., supra, the Court of Appeals concluded: "[A]s authorized by section 673, subdivision (a), pursuant to the terms of the finance agreement, [Pacific] specifically transferred to [the financing company] the authority to cancel the policy. [The financing company] cancelled the policy effective September 28, 2003, and St. Paul properly relied upon the notice of cancellation it received from [the financing company] in issuing its cancellation endorsement to the policy."

The Court of Appeals rejected each of Pacific's arguments.

First, Pacific argued the financing company's cancellation notice was defective because it did not notify either St. Paul or Pacific that the insurance policy was being cancelled. Relying on Hoffman v. Citadel General Assurance, Ltd. (1987) 194 Cal.App.3d 1356, 1363, the court found "[t]his argument is not compelling" because "[Pacific] lacks standing to object to the alleged lack of notice of an insurance carrier in the application of section 673."

Second, Pacific argued it never received notice of the cancellation from the financing company. The court found this argument "irrelevant" because "[w]hile [Pacific] may have a gripe with [the financing company], that has nothing to do with [Pacific's] claims against St. Paul." The court relied on Holland v. Sterling Casualty Ins. Co. (1994) 25 Cal.App.4th 1059, 1064: "If the lender does not send the precancellation notice to the insured, it must be the lender who is responsible to the insured, not the insurer." The court reasoned, "Once St. Paul received notice of the cancellation, St. Paul was required to honor the cancellation, even if notice to the insured was defective. [Citation omitted.]" The Court found, "It was not incumbent upon St. Paul to notify [Pacific] that [the financing company] was exercising its contractual right to direct St. Paul to cancel the insurance policy."

Pacific also argued St. Paul was not permitted to rely on the financing company's cancellation notice after it initiated its own cancellation procedure. The court was "not convinced by [Pacific's] strained interpretation of section 673, subdivision (j)," which provides that where the insurer exercises its own right to cancel the policy for nonpayment it is "subject to all applicable provisions of the policy, this code, except this section, and any rights of the lender of which the insurer has written notice." St. Paul did not exercise its own right to cancel the policy for nonpayment of premium. Rather, it followed [the financing company's] directive in cancelling the policy.

Third, Pacific argued that because St. Paul notified Pacific that it was cancelling the policy effective November 20, 2003, St. Paul did not have an obligation to back-date and honor the financing company's notice. Again, the court disagreed. Section 673(d) states: "Cancellation shall be effective on the financed insurance policy…on the confirmation date specified in the written exercise of that right." Likewise, Section 673(g) requires the insurance company to return all unearned premiums upon notice of cancellation by a financing company. "As applied to this case, these statutes indicate that cancellation of the St. Paul policy became effective on the date specified in [the financing company's] notice." At that time, St. Paul was required to return all unearned premiums, which it did."

Fourth, citing Kotlar v. Hartford Fire Ins. Co. (2000) 83 Cal.App.4th 1116, Pacific argued it had a right to rely on St. Paul's notice that it had insurance coverage through November 20, 2003. The court found Kotlar "readily distinguishable." In Kotlar, the court considered whether an insurer was required to give notice of cancellation, pursuant to Insurance Code section 677.2, to all named insureds under an insurance policy. Here, "once the financing company notified St. Paul that it was cancelling the insurance policy, St. Paul was relieved of any duty of notification."

Finally, Pacific argued St. Paul waived the purported lapse in coverage. The court disagreed, explaining the waiver requires "an existing right, a knowledge of its existence, an actual intention to relinquish it, or conduct so inconsistent with the intent to enforce the right as to induce a reasonable belief that it has been relinquished." Here, the court found there is "no evidence that St. Paul intended to relinquish its right to cancel the insurance policy pursuant to [the financing company's] instructions."

"Because St. Paul had the right to rely upon section 673 and follow [the financing company's] directive to cancel the insurance policy effective September 28, 2003," the Court of Appeals concluded the trial court properly granted St. Paul's motion for summary judgment.

This opinion is not final. It may be depublished, modified on rehearing, or review could be granted. This events would render this decision unavailable for use as legal authority.

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