Your auto insurance policy was canceled…or was it?

Mom and dad are the proud parents of a newly licensed driver. They add their daughter to their auto insurance policy. Daughter later buys her own car, which is also added to the policy. Mom and dad continue paying for the policy.

A few years go by, and mom and dad close the bank account from which they paid the auto insurance premiums. Not receiving the premium payment, the auto insurer sends mom and dad a notice of cancelation. The insurer does not send the notice to daughter. Mom and dad ignore the notice. The policy is canceled for non-payment.

Daughter is involved in an auto collision a few days later and is determined to be liable. She tenders the claim to her insurer. Imagine her surprise when the insurer notifies her that she was driving an uninsured vehicle and was not actually covered for the loss.

Daughter sues the insurer for breach of contract. She argues that, as a driver insured under the policy, she was entitled to receive the notice of cancellation too. The carrier counters that she was not the "named insured," so she was not entitled to receive it.

Who's right? That was the subject of the Court of Appeal's decision in Molinar v. 21st Century Insurance Company, 2024 DJDAR 1633.

Insurance Code Section 662

Insurance Code Section 662 governs an insurance company's requirements when notifying a customer of a pending cancellation. It holds:

"A notice of cancellation of a policy shall not be effective unless mailed or delivered by the insurer to the named insured, lienholder, or additional interest at least 20 days prior to the effective date of cancellation."

The plaintiffs in Molinar--father, mother, and daughter--did not claim they were lienholders or persons with an "additional interest." Instead, they argued that daughter was a "named insured" and thus entitled to receive the notification. The insurer argued that the daughter was not the actual "named insured" on the policy declarations page. Rather, that distinction belonged to mother and father because they were ones who purchased and paid for the policy.

Kotlar v. Hartford Fire Insurance Company

In ruling for the plaintiffs, the Court of Appeal analogized to Kotlar v. Hartford Fire Insurance Company (2000) 83 Cal.App.4th 1116. In Kotlar, a landlord rented out his commercial property to a tenant who operated a retail store. The policy named both the tenant and the landlord as "named insureds." When the tenant stopped paying his insurance premiums, Hartford Insurance sent the tenant a notice of cancellation. Hartford did not send the notice to the landlord. In a subsequent slip and fall case brought by an injured shopper, the landlord was surprised to learn that the policy was canceled. He sued Hartford Insurance for breach of contract, arguing that as a named insured, he too was entitled to receive the notice of cancellation.

The Court of Appeal agreed. It rejected Hartford Insurance's argument that "named insured" can only refer to one person. Furthermore, the case implicated important public policy considerations. Had the landlord received an advance notice of cancellation, he could have protected his rights by paying the premium due or by obtaining another insurance policy. Failing to notify the landlord of the policy's cancellation left him with the heavy burden of being exposed and uninsured. In contrast, the burden on Hartford Insurance was small; all it had to do was send an additional copy of the notice of cancellation and purchase one additional postage stamp. As a result, the Court concluded that all named insureds are entitled to the notice of cancellation.

Molinar v. 21st Century Insurance Company

Silvia and Alberto Molinar purchased a 21st Century auto insurance policy in 2006. They added their daughter Tania to the policy in 2013. Tania added her Mazda to the policy in 2016. In 2017, Silvia closed the Wells Fargo bank account from which the premiums were auto-deducted. 21st Century sent two notices of cancellation to Silvia and Alberto after the premiums were not paid. They did not send the notice to Tania. The policy was canceled for non-payment on May 1, 2017. Four days later, Tania was in a serious collision. Her passenger died of his injuries.

After 21st Century declined to afford coverage, the Molinars sued the insurer for breach of contract and bad faith. Similar to the landlord in Kotlar, they argued that Tania was entitled to receive the notice of cancellation because she too was a named insured. 21st Century countered that Tania was not a "named insured," but rather a "rated driver." 21st Century argued that under its internal underwriting procedures, there can be no more than two people listed as "named insureds," and they both must reside at the same household.

The Court was not convinced. The fact that 21st Century labeled Tania a "rated driver" instead of a "named insured" is insignificant. This distinction, though important to 21st Century, is nothing more than insurance company gobbledygook for the rest of the premium-paying public. The Courts reasoning in Kotlar applied here too. The burden on 21st Century to send one more notice of cancellation was slight compared to the burden of Tania driving an uninsured vehicle and exposing herself personally to a multimillion dollar wrongful death claim. For the same reasons mentioned in Kotlar, the Court rescinded 21st Century's cancellation of the policy. The Court ruled that all policyholders are entitled to receive an auto insurer's notice of cancellation.

Conclusion

Molinar v. 21st Century Insurance Company is a big win for consumers. It joins Kotlar v. Hartford Fire Insurance Company in affirming an insurer's obligation to send a notice of cancelation to all named insureds. We've all been in a situation where, for one reason or another, an important bill wasn't paid. Most of the time, these mistakes are easily corrected. But sometimes, a simple mistake can lead to catastrophic consequences, as it did for Tania Molinar. Her parents forgetting to set up a new auto-deduct account to pay their insurance premiums led to a cascading chain of events where Tania ended up uninsured and on the hook for millions. The tragic situation could have been averted had 21st Century sent Tania the same notice they sent her parents. Public policy supports requiring auto insurers to send notices of cancellation to all policyholders to avoid this result.