Think your insured is not on the up and up? Well, don’t cash their premium check after you cancel their policy

When insurance companies suspect fraudulent activity by their insureds, they face a critical decision: pursue immediate financial recovery or maintain the integrity of their policy cancellation. This tension came to a head in a recent New York case that highlights a fundamental principle in insurance law — accepting premium payments after canceling a policy can have serious legal consequences for insurers.

The case of Sensational Services, Inc. v. American Trust Insurance Co. involved an insurance company that canceled a policy due to suspected fraud but then made the costly mistake of cashing a premium check from the very policyholder they had terminated. This decision ultimately cost them over $166,000 and serves as a cautionary tale for insurance companies navigating New York No-Fault Insurance Law.

This scenario is particularly relevant in the no-fault insurance context, where insurance fraud cases are unfortunately common. Insurance companies must be vigilant about maintaining clear documentation and consistent actions when dealing with suspected fraudulent claims. The legal principle at stake — known as waiver — occurs when an insurance company’s conduct is inconsistent with their claimed position, potentially undermining their ability to deny coverage.

The implications extend beyond simple premium collection. When insurers accept payments after policy termination, courts may interpret this as evidence that the insurer has waived its right to claim the policy was void from inception. This can significantly impact the insurer’s ability to pursue fraud claims or deny coverage for legitimate claims that arose during the disputed period.

Jason Tenenbaum’s Analysis:

Sensational Serv., Inc. v American Tr. Ins. Co., 2015 NY Slip Op 30343(U)

Short term monetary gain ($166,505.79) or long term common sense? Read.

Key Takeaway

Insurance companies must exercise extreme caution when handling premium payments from policyholders whose coverage they have already canceled. The act of depositing or cashing these payments can be interpreted by courts as a waiver of the insurer’s right to claim the policy was properly terminated. This legal principle serves as a reminder that consistency in business practices is crucial — insurers cannot have their cake and eat it too by accepting the financial benefits of a policy while simultaneously claiming that policy never existed or was properly canceled due to fraud.