Auto insurer must honor policy paid by bad check, court rules

By Steve Korris | Dec 8, 2005

Justice Larry Starcher CHARLESTON – West Virginians can buy auto insurance with worthless checks, the Supreme Court of Appeals decided Dec. 2.

Justice Larry Starcher

CHARLESTON – West Virginians can buy auto insurance with worthless checks, the Supreme Court of Appeals decided Dec. 2.

The decision requires West Virginia National Auto Insurance to honor a policy it issued in 2001 to Stephanie Michelle Conley in exchange for a check that bounced.

The insurer sent Conley a cancellation notice, but Cabell County Circuit Judge David Pancake declared it invalid and the Supreme Court of Appeals backed him up.

West Virginia National must cover the costs of a collision that happened 16 days after Conley wrote the check, or the insurer can try to prove that she did not cause the crash.

Justice Larry Starcher wrote for the majority that Pancake committed no error in concluding that the policy was in effect when the collision occurred.

Justice Elliott "Spike" Maynard, in a dissenting opinion, called the decision "one of the most outrageous court decisions in the history of American jurisprudence."

Conley applied for insurance Aug. 15, 2001. The application stated that, "…if my premium remittance is not honored by the bank no coverage will be bound."

Fifteen days later, West Virginia National issued Conley a policy and asked her to send $88.55 by Sept. 9, to "avoid the termination of your coverages."

A day after that, Conley was involved in an auto accident that injured three people.

Eleven days after that, West Virginia National told Conley it had rescinded her policy.

The insurer of the injured trio, Dairyland Insurance, paid them $26,000. Dairyland sought to recover the payout by filing a subrogation claim against Conley in 2003.

Conley filed a third party claim for relief against West Virginia National, arguing that it failed to give her ten days notice of cancellation.

She claimed the insurer owed her coverage and a defense.

Conley moved Pancake for summary judgment. He granted it in November 2004.

The four Justices who affirmed Pancake's order recognized that the decision flies in the face of common law as another Supreme Court of Appeals expressed it 71 years ago.

"The premium is the price of the insurance and payment of the premium is the essence of the insurance contract," the Court declared in a 1934 decision. "No payment – no insurance. A worthless check is not a payment of anything."

Starcher held for the majority that West Virginia laws have cancelled common law.

He wrote that West Virginia and other states enacted laws in the 1960s, "in reaction to the public perception of a nationwide legacy of arbitrary and capricious policy termination practices by insurance companies."

Some of the laws limited the reasons why an insurer could cancel a policy, Starcher wrote, and some required advance notice of cancellation.

He wrote that in 1967 the West Virginia legislature adopted limits on cancellations, "specifically intending to prevent the retroactive cancellation practices such as that done by the appellant in this case."

The law applied after a policy had been in effect 60 days. In the first 59 days, Starcher wrote, an insurer could investigate the customer and decide whether to accept the risk.

In 1981, the legislature rewrote laws so the state would not register a vehicle unless the owner provided evidence of insurance or financial responsibility.

The legislature mandated that an insurer could not cancel a policy until 30 days after it notified a customer of its intention to cancel.

The legislature also required an insurer to give 30 days advance notice to the state commissioner of motor vehicles.

Starcher wrote, "We believe that the thirty day notice requirements in these two statutes were designed to ensure that a policyholder had sufficient time to take remedial action to correct an erroneous cancellation notice or to obtain replacement insurance coverage."

If an insurer issued evidence of coverage to a customer without collecting a premium, he wrote, the state and the general public could presume that the customer was insured.

"Even though the insured had never paid a dime in premiums," he wrote, "the policy could not be properly cancelled until thirty days after the insurance company gave notice that the policy was being cancelled."

In 1982, the legislature reduced the advance notice to 10 days when insurers cancelled for "failure of consideration upon initial issuance of policy."

Starcher wrote that an insurer may cancel a policy if the insured fails to pay the initial premium. "However," he wrote, "the cancellation of the policy can take effect no earlier than ten days after notice of the cancellation is provided to the insured."

In a footnote, Starcher rejected West Virginia National's argument that Conley got something for nothing. He wrote that the insurer never tried to collect the premium.

"We see nothing in the record to prevent the appellant from pursuing and collecting the missed premium payment from the appellee," he wrote.

Attorney Amy Crossan, of Bouchillon, Cross & Colburn in Huntington, represented Conley before the Court.

James Varner, Debra Herron and Dana Bonnell, of McNeer, Highland, McMunn and Varner in Clarksburg, represented West Virginia National.

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