“Skinnying” Down Or Reducing Insurance Coverage When A Policy Is Renewed – Notice Requirements Under California Law

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When insurance policies are renewed, insurers sometimes change the coverage provided, often including new exclusions or limitations.  When insurance policy coverage or benefits are reduced upon renewal, it is sometimes referred to as “skinnying” down the policy.  An example of reductions in coverage include policy changes to limit benefits for post-traumatic stress disorder or wildfire smoke damage.

Under California law, to the extent coverage is reduced when the policy is renewed, the insurer must provide adequate notice of the new exclusion, limitation, or reduction.  Thus, the California Supreme Court has held that “no change may be made in the terms of the renewal policy without notice to the insured.”  (Industrial Indemnity Co. v. Industrial Accident Commission of California(1949) 34 Cal.2d 500, 506.)  For property insurance, the California Insurance Code explicitly provides that an insurance company must, “at least 45 days prior to policy expiration,” provide notice in a renewal offer of “any reduction of limits or elimination of coverage.” (California Insurance Code §678(a).)

Further, California law requires that when an insurance  company changes, reduces, or limits the coverage or benefits of a policy upon renewal, the notice of such change must “be provided in a ‘plain, clear and conspicuous writing.’” (Everett v. State Farm General Ins. Co. (2008) 162 Cal.App.4th 649, 663.)  To be conspicuous, the notice must be “displayed or presented” in a way that it would be “noticed” by a reasonable person.  (Broberg v. Guardian Life Ins. Co. of Am.(2009) 171 Cal.App.4th 912, 922-23.)  Examples of conspicuous notice “includes . . . a heading in capitals . . . larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size . . .”  (Id. at 923.)

Moreover, the notice of reduction in coverage must be “specific.”  (Davis v. United Services Auto Ass’n (1990) 223 Cal.App.3d 1322, 1332.)  Thus, “a general admonition to read the policy for changes is insufficient.”  (Id.)  The failure to provide “adequate notice” renders the attempted reduction or limitation in coverage “ineffective.”  (Id. at 1333.)

Insureds should review insurance policy renewal notices closely to determine whether there is any new exclusions, limitations, or reductions in the coverage being provided.  In practice, policyholders often only become aware of a reduction in coverage when they suffer a loss, make a claim believing they have coverage, and then learn that coverage they expected has been excluded or reduced.  If the policy included the coverage when it incepted, then there must be an adequate notice of the reduction of coverage during subsequent renewals in order for the reduction or limitation to be enforceable.

Insureds faced with a situation where there coverage has been reduced, resulting in a denial or limitation of payment of benefits for a claim, should ask his or her insurer for the notice they provided of the reduction in coverage.  If the insurer cannot provide the notice, or it appears that the notice is inadequate, there may be an avenue to challenge the coverage reduction.  Policyholders faced with such a situation may want to seek legal counsel to determine if there is a way to prevent the new exclusion, limitation, or reduction in policy coverage from impacting their claim.