Insurer Bound by Renewal Endorsement in Expiring Policy to Offer “Substantially Similar” Coverage Despite Known Losses

In a somewhat unusual insurance coverage case, the Third Circuit gave teeth to a “renewal” clause contained within a ten-year pollution and remediation policy and prohibited the insurer from materially changing the policy terms for the renewal period. Indian Harbor Insurance Co. v. F&M Equipment, Ltd., No. 14-1897 (3d Cir. 2015). Indian Harbor issued a ten-year pollution policy with a $10 million dollar limit (later upped to $14 million) to F&M Equipment’s predecessor in 2001 that covered twelve specific sites (the “Policy”). The Policy contained an endorsement (the “Renewal Endorsement”) requiring Indian Harbor to offer F&M a renewal unless one of five specific enumerated conditions was met.

Indian Harbor, however, offered a materially different “renewal” policy: a one-year policy with a $5 million dollar limit that excluded coverage for one of the twelve sites (the only site where claims had been made). F&M rejected Indian Harbor’s offer and asserted that the Renewal Endorsement required Indian Harbor to provide a renewal policy with terms and conditions that are identical to the original Policy. After the insured sent Indian Harbor a premium check for a renewal policy, Indian Harbor filed a declaratory judgment action. Indian Harbor succeeded in obtaining a declaratory judgment from the district court, which reasoned that Pennsylvania law permits a “renewal” of a policy with different terms and conditions, provided that the insured is given notice of the different terms.

The Third Circuit reversed and remanded to determine the remedy for Indian Harbor’s breach of the Policy. Though it noted that there was scant authoritative Pennsylvania law on point the court was persuaded by the Eighth Circuit’s decision in McCuen v. Am. Cas. Co., 946 F.2d 1401, 1403 (8th Cir. 1991), and held that Indian Harbor’s “renewal” obligation required it to offer F&M a policy with substantially similar terms and conditions. The court specifically rejected Indian Harbor’s argument that its “renewal” obligation was met as long as the policy was not commercially unreasonable: “the relevant provision of the contract is a promise to offer a renewal, not a reasonable insurance contract.”

The Indian Harbor court, however, declined to fully answer the relevant question presented by the case: “how similar the new contract must be” to constitute a “renewal.” Instead, the particular facts of the case lead to the court’s holding that “regardless of the particular degree of similarity required, Indian Harbor’s position cannot be what the parties intended.” In short, the court explained, a renewal policy requires greater similarity to the original policy than just the same parties and “general subject matter.”

The Indian Harbor decision leaves a number of unanswered questions. First, while a “renewal need not be identical to the original,” the court declined to provide any guidance as to how similar a “renewal” must be.  Second, while the court suggested that an insurer could demand a “reasonable change in price” for a renewal, it did not define “reasonable.” Although the court did not allow the insured to exclude coverage for a site with known losses, it left open the question as to how the insurer may price the risk and what constitutes a reasonable change. Finally, the court punted on the question of whether the renewal provision itself is a substantially similar term which must be included in any renewal policy, leaving open the possibility that an insurer issuing a policy with a “renewal” term is obligated to cover an insured along the same terms and conditions in perpetuity. This is certainly a unique case but it deserves attention to the extent that the district court on remand holds the insurer to a potentially absurd result that was not intended by the parties at the time of contracting.