In the unpublished opinion of the Honorable Robert P. Contillo, J.S.C. in Supreme Tank, Inc., et al. v. Evanston Insurance Co., et al., BER-C-81-06, Chancery Division, Bergen County, September 18, 2006, the court determined that an insurance company cannot change the coverage provided to an insured without giving specific, direct, notice to the insured. In this case, the insurance company, Evanston, provided insurance coverage to a company engaged in the business of installing and removing underground oil storage tanks, ATS. ATS was insured with Evanston from 2002 through 2005. In 2004, Evanston changed the coverage from $2 million to $1 million but failed to directly notify ATS of the change. In December of 2005 a devastating explosion took place while ATS was removing an underground oil tank. The explosion killed three people and destroyed a 24 unit apartment building.
Evanston attempted to enforce the 2005 policy which contained only $1 million of coverage. ATS argued that it was unaware of the change in coverage until after the explosion occurred, when Evanston claimed to be responsible for only $1 million in coverage. The court found that Evanston had a non delegable duty to notify its insured of a material change in coverage. Therefore, notice to the wholesale broker of Evanston’s policies was insufficient to provide notice to the insured. The court stated that:
not every insured would fully appreciate what changes had been made. But any sentient adult would know that changes had been made. The insurers fiduciary duty includes this de minimus duty – which averts much mischief and grievous consequences – of simply altering your insured that the insurer has worked a change in coverage.
[Slip op. at 12.]
Evanston had failed to send even a simple letter alerting ATS to the change, and instead relied upon notice given to its wholesale broker. The court found this to be an imperfect chain of information. The court then found that the modifications in coverage by Evanston were improper, and should not be enforced. As such, the failure to alert the insured of the change in the 2004 policy, required that the pre-2004 policy limit of $2 million be restored.
This case has a direct correlation to many construction defect cases, in which an insurance company alters a contractors’ insurance policy to exclude a specific type of product or activity. Without direct notice to the insured, and arguably without a reduction in premiums, the insurance company will be bound by the policy in effect prior to the change. For example, several insurance companies have attempted to exclude coverage to contractors for the installation Exterior Insulation and Finish Systems (EIFS). Under the above case law, the insurance company would have to directly notify the insured contractor of such a significant change in its policy, or it would be bound by previous policies that did not contain such an exclusion.