When the actions of an insured give rise to the need for a carrier to cancel a workers’ compensation policy, it is vitally important for the carrier to be aware of how to effectively cancel the policy under North Carolina law. The North Carolina Supreme Court has long established the principle that failure to comply with statutory requirements for cancelling an insurance policy renders the cancellation ineffective. Pearson v. Nationwide Mutual Ins. Co., 325 N.C. 246, 382 S.E.2d 745 (1989). Compliance with statutory requirements may seem straightforward but there are a few common pitfalls that prevent effective cancellation and create liability.
Cancellations of workers’ compensation insurance policies in North Carolina are governed by N.C.G.S. § 58-36-105, “Certain Workers’ Compensation Insurance Policy Cancellations Prohibited” (hereinafter the “Statute”). It is critical for an insurance carrier to be aware of the governing statute and the correct processes to effectively cancel a workers’ compensation insurance policy in North Carolina.
Provisions of the Statute
The Statute states:
(a) No policy of workers’ compensation insurance or employers’ liability insurance written in connection with a policy of workers’ compensation insurance shall be cancelled by the insurer before the expiration of the term or anniversary date stated in the policy and without the prior written consent of the insured, except for any one of the following reasons:
(1) Nonpayment of premium in accordance with the policy terms;
(2) An act or omission by the insured or his representative that constitutes material misrepresentation or nondisclosure of a material fact in obtaining the policy, continuing the policy, or presenting a claim under the policy;
(3) Increased hazard or material change in the risk assumed that could not have been reasonably contemplated by the parties at the time of assumption of the risk;
(4) Substantial breach of contractual duties, conditions, or warranties that materially affects the insurability of the risk;
(5) A fraudulent act against the company by the insured or his representative that materially affects the insurability of the risk;
(6) Willful failure by the insured or his representative to institute reasonable loss control measures that materially affect the insurability of the risk after written notice by the insurer;
(7) Loss of facultative reinsurance, or loss of or substantial changes in applicable reinsurance as provided in G.S. 58-41-30;
(8) Conviction of the insured of a crime arising out of acts that materially affect the insurability of the risk;
(9) A determination by the Commissioner that the continuation of the policy would place the insurer in violation of the laws of this State; or
(10) The named insured fails to meet the requirements contained in the corporate charter, articles of incorporation, or bylaws of the insurer, when the insurer is a company organized for the sole purpose of providing members of an organization with insurance coverage in this State.
(b) Any cancellation permitted by subsection (a) of this section is not effective unless written notice of cancellation has been given to the insured not less than 15 days before the proposed effective date of cancellation. The notice may be given by registered or certified mail, return receipt requested, to the insured and any other person designated in the policy to receive notice of cancellation at their addresses shown in the policy or, if not indicated in the policy, at their last known addresses. The notice shall state the precise reason for cancellation. Whenever notice of intention to cancel is given by registered or certified mail, no cancellation by the insurer shall be effective unless and until such method is employed and completed. Notice of intent to cancel given by registered or certified mail shall be conclusively presumed completed three days after the notice is sent if, on the same day that the notice is sent by registered or certified mail, the insurer also provides notice by first-class mail and by electronic means if available as defined in G.S. 58-2-255(a) to the insured and any other person designated in the policy to receive notice. Any such supplemental notice given by electronic means shall be effective for the limited purpose of establishing this conclusive presumption. Notice of cancellation, termination, or nonrenewal may also be given by any method permitted for service of process pursuant to Rule 4 of the North Carolina Rules of Civil Procedure. Failure to send this notice, as provided in this section, to any other person designated in the policy to receive notice of cancellation invalidates the cancellation only as to that other person’s interest.
(c) This section does not apply to any policy that has been in effect for fewer than 60 days and is not a renewal of a policy. That policy may be cancelled for any reason by giving at least 30 days prior written notice of and reasons for cancellation to the insured by registered or certified mail, return receipt requested.
(d) Cancellation for nonpayment of premium is not effective if the amount due is paid before the effective date set forth in the notice of cancellation.
(e) Copies of the notice required by this section shall also be sent to the agent or broker of record though failure to send copies of the notice to those persons shall not invalidate the cancellation. Mailing copies of the notice by regular first-class mail to the agent or broker of record satisfies the requirements of this subsection.
Complying with Sections (a) and (b) to Reduce Risk of Improper Cancellation of Workers’ Compensation Insurance Policies
The central requirements of the Statute are that the insured be notified in writing of the precise reason for the cancellation of the policy and that the insured be given the required notice of such cancellation.
Some of the more common reasons for canceling a workers’ compensation policy include: failure to pay premiums, failure to submit to audits pursuant to the policy provisions, or other failures by the insured to otherwise cooperate with the carrier in providing coverage.
- Nonpayment of a premium is covered under section (1).
- Misrepresenting the nature of the insured’s business, and the risks connected with it, would come under section (2).
- If the insured changes the nature of its business, thereby increasing the risk of an employee’s injury, such behavior would come under section (3).
- Failing to submit to an audit would likely be deemed a substantial breach of contractual duties or conditions under the policy, which would be covered under section (4). Any form of fraud would be covered by section (5).
- Behavior that would be covered by sections (6) and (7) are less common.
- Clearly, if an insured commits a crime that impacts the insurability of the risk, that would be covered under section (8).
- If the Department of Insurance determines that continuation of the policy would cause the carrier to violate the laws of the state of North Carolina, this would implicate section (9).
- Finally, if the insured somehow violates its corporate charter, articles of incorporation or its bylaws, this conduct could give rise to cancellation of a policy where the carrier is a self-insurance pool or other similar organization, under section (10).
As mentioned above, when canceling a policy, it is critical for the carrier to state the precise reason, in writing, in its notice for the cancellation of the policy. Ideally, a citation to the particular section of the Statute, or at least tracking its language, would be best, since it would help to build a stronger case for effective cancellation in the event of litigation.
The Statute clearly sets out the manner by which the insured must be given notice of the cancellation of the policy. Specifically, the notice is not effective unless it is in writing and it is “given” to the insured, not less than 15 days before the proposed effective date of cancellation. Again, the written notice must be consistent with one or more of the 10 bases of cancellation as allowed under the Statute. Note that the Statute has no explicit requirement that the insured actually “receive” the notice of cancellation. Rather, the Statute clearly sets out the means by which the giving of the notice is rendered effective and how it can be proven as such. More specifically, the Statute provides that cancellation of a policy is effective once the mailing requirement is “employed and completed.” So, if the carrier can show its use and completion of the registered or certified mail and its return receipt process, such use is a showing of effective cancellation of a policy.
Importantly for a carrier, the Statute provides for a conclusive presumption of completion of the registered or certified mailing of notice of a cancellation of a policy, three days after the notice is sent. Specifically, on the same day that the notice is sent by registered or certified mail, if the insurer also provides notice by first-class mail and by electronic means if available (as defined in G.S. 58-2-255(a), which concerns and allows for electronic insurance communications and records) to the insured, this conclusive presumption applies. So, to enjoy this conclusive presumption, the best practice is for a carrier to (1) use the required registered or certified mail return receipt process and, (2) use the first class mail and electronic means of communications as allowed in the Statute for electronic insurance communications and records.
Complying with Section (c) Notice Requirements for Effective Cancellation
It is important to be aware that section (c) of the Statute has significantly different notice requirement for cancellation of those workers’ compensation insurance policies that have been in effect for less than 60 days and are not a renewal of a policy. More specifically, those policies may be canceled for any reason, and not just those set out in section (a)’s subsections (1) through (10), simply by giving the insured at least 30 days prior written notice of the reason for the cancellation.
In a homeowners insurance policy case which involved N.C.G.S. § 58-41-15, in Ha v. Nationwide Insurance Co., the Court held that an insured’s actual receipt of notice of the cancellation is necessary in these section (c) policy cancellations. In that statute, under its section (c), a carrier is required to “furnish” an insured with the notice of cancellation, rather than “giving” such notice to an insured in the workers’ compensation statute.
Keeping this in mind, it is not clear whether Ha would apply to a N.C.G.S. § 58-36-105 (c) cancellation of a workers’ compensation policy. In this writer’s opinion, the holding in Ha would very likely be found applicable to workers’ compensation policies. This is because of the very similar structure, language and provisions of each of the two statutes.
With all of this in mind, section (c) provides for the same registered or certified mail, return receipt requested process for giving an insured notice of a policy’s cancellation, as does section (b). However, it must be noted that section (c) does not provide for the conclusive presumption of completion of the registered and certified mailing of notice of a cancellation of a policy, as provided in section (b). So, in section (c), a carrier can only use and complete registered or certified mail and its return receipt process, to prove that an insured actually received the notice of cancellation of the policy to effectively cancel it under section (c)’s circumstances.
Additional Items to Consider When Canceling a Policy, Sections (d) and (e)
If a policy is canceled for nonpayment of premium, section (d) of the Statute provides that such cancellation is not effective if the amount due is paid before the effective date set forth in the notice of cancellation.
Finally, in section (e) of the Statute, it is required that copies of the notice required by the Statute be sent to the agent or broker of record. However, there is no sanction of invalidating the cancellation if copies of those notices are not sent to such persons. Nonetheless, it is the best practice to copy such persons, as that may serve to aid in proving that the notice of cancellation was also given to the insured.
Final Thoughts for Insurance Carriers Keep In Mind
The foremost considerations in effectively canceling a North Carolina workers’ compensation policy are 1.) N.C.G.S. § 58-36-105’s requirements that the precise reason be stated in writing, and 2.) that the notice be given consistent with both the 15-day timing, as well as the mailing requirements.