California Insurance - An Insurer is Not Required to Notify Additional Insureds of Policy Cancellation Where a Premium Financing Lender Cancels the Policy Pursuant to Its Agreement With the Insured
The Gorham Company, Inc. v. First Financial Insurance Company, No. B183477 (Cal. Ct. App., May 30, 2006)
A general contractor who was an additional insured on a subcontractor’s policy was not entitled to notice of cancellation of the subcontractor’s policy under California Insurance Code Sections 673 and 677.2 where the
premium financier cancelled the policy per the terms of its finance agreement. The Second District Court of Appeal (Los Angeles) rejected the general contractor’s arguments that additional insureds must be given notice
of cancellation by operation of statute and to protect themselves and any persons who might suffer bodily injury or property damage.
First Financial Insurance Company (“FFIC”) issued a Commercial Lines Policy to PDC Associates, a wood-framing subcontractor. The FFIC policy featured an additional insured endorsement adding The Gorham Company,
a general contractor, as an insured for any liability arising out of PDC’s work for Gorham. PDC financed the FFIC policy premiums through a lender, and assigned the right to cancel the FFIC policy to that lender as part
of the financing agreement. On November 25, 1997 (approximately two months into the policy period), as directed by the premium lender, FFIC canceled the policy for non-payment of the premium.
Gorham contracted with PDC for work on a project to build a publicly-owned community center; Gorham subsequently terminated its contract with PDC prior to the completion of PDC’s work. Litigation arising out of
the construction at the project followed involving, among others, Gorham and PDC. Gorham tendered its defense of claims alleging Gorham's negligent work to its own liability carriers and the subcontractors’ carriers
(including FFIC) pursuant to additional insured endorsements naming Gorham. FFIC denied Gorham’s tender on various grounds, including FFIC’s contention that, based on the date of the PDC policy cancellation, there
was no possibility of property damage during the effective dates of the policy. As of November 25, 1997, the work performed by PDC was not complete and, in fact, PDC continued its work at the project through July 8, 1998, the
date that Gorham terminated its contract with PDC.
In its discussion, the court found that the relevant provisions of California Insurance Code Sections 673 and 677.2 (governing cancellation of an insurance policy by a lender for nonpayment of the premium and requiring 10 days’
written notice of cancellation to the named insured, respectively) could not be read to require reinstatement of Gorham’s coverage as an additional insured based on improper notice of the policy’s cancellation.
The court reasoned that the statutory language (in Section 673) does not require the insurer to provide notice of cancellation to an additional insured, but only to the “person who has purchased or arranged to purchase an
insurance contract and who enters into a premium finance agreement with a premium finance company (ref. Cal. Fin. Code, § 18562). Further, the court found that Gorham’s reliance on Section 677.2 (outlining notice
of cancellation requirements) was misplaced, as that section applies only to termination of coverage other than at the request of the insured. In this case, PDC assigned its cancellation
right to the premium finance lender, who effectively was exercising the insured’s right to request cancellation based on PDC’s failure to pay premiums.