Ector v. American Liberty Ins. Co.

• Decision Date: 04 May 1976
• Docket Number: No. 1,No. 51952,51952,1
• Citation: 226 S.E.2d 788,138 Ga.App. 519
• Parties: T. B. ECTOR et al. v. AMERICAN LIBERTY INSURANCE COMPANY
• Court: Georgia Court of Appeals

Page 788

226 S.E.2d 788

138 Ga.App. 519

T. B. ECTOR et al. v. AMERICAN LIBERTY INSURANCE COMPANY.

No. 51952.

Court of Appeals of Georgia, Division No. 1.

May 4, 1976.

Long, Weinberg, Ansley & Wheeler, George H. Connell, Jr., Atlanta, for appellants.

Ross & Finch, I. J. Parkerson, Atlanta, for appellee.

CLARK, Judge.

Does the procurement of new insurance with the uncommunicated intent that it take the place of existing insurance constitute in and of itself an effective cancellation of the existing policy? The trial court answered this question affirmatively and granted summary judgment to defendant insurer in plaintiffs' suit for recovery under their original fire insurance policy. On appeal, plaintiffs contend that the court erred in denying their motion for summary judgment and also in entering judgment for defendant.

The facts are undisputed. On December 16, 1972, defendant American Liberty Insurance Co. issued to plaintiffs a fire insurance policy stipulating three years coverage with premiums to be paid annually. These premiums were paid through B. M. Grant Co. which concern was the servicing agent for the holder of a loan deed on the insured residence of the plaintiffs. Under this arrangement, now standard with residential mortgages, payments of insurance premiums and taxes are made by the lender's servicing agent from an escrow account created out of the borrowers' monthly mortgage payments.

On January 24, 1974, on their own initiative and without the knowledge of the mortgage servicing concern, plaintiffs purchased a home owners insurance policy with the Horace Mann Insurance Co. for the purpose of substituting this policy with increased limits for the American Liberty policy. They paid the premium for this new policy from their funds and not through the escrow account. Their intention was to cancel their American Liberty policy as of February 1, 1974, the effective date of the new Horace Mann policy. They communicated this intention to cancel to the Horace Mann salesman who offered to 'take care' of this cancellation of the policy with defendant but never in fact did so. Thus, when plaintiffs' house burned as a total loss on February 16, 1974, notice of cancellation had never been sent to defendant by plaintiffs nor by any agent acting in their behalf. In fact on that date, the files of the servicing agent showed coverage for the plaintiffs from both Horace Mann and American Liberty.

Grant had received notification of the new policy from Horace Mann on February 11, 1974, but this notification contained no reference to cancellation of plaintiffs' policy with defendant. Although plaintiffs had never communicated to Grant their desire to cancel the Liberty policy the servicing agent sent American Liberty a cancellation notice on March 6, 1974. This notice stated that the policy which the plaintiffs had with defendant should be canceled as of February 1, 1974, the effective date of the Horace Mann policy. The delay in notification was due to there being a 'backlog' in the Grant office.

Defendant treated the plaintiffs' policy as having been canceled on the previous February 1 date on the basis of the Horace Mann policy having the effective date of February 1, and accordingly, refused to pay under their policy for the damages of the February 16th fire.

This suit was filed by the insureds under the provisions of a 'loan receipt' furnished by Horace Mann. This is customary in the insurance industry and authorizes suit to be filed in the name of the insured with legal proceedings to be under the insurer's control.

Following discovery, both parties moved for summary judgment. The court found the 'clear intention' of the plaintiffs to cancel their policy with defendant and the issuance of the Horace Mann policy in substitution thereof constituted an effective cancellation by the plaintiffs of their policy. Summary judgment was accordingly granted to defendant and plaintiffs' motion was denied. Held:

1. 'A number of cases, most of them of fairly early origin, give some support to the proposition that the taking out of a new policy of property insurance, with the intention on the part of the property owner that it take the place of the existing insurance, in and of itself constitutes a cancellation of the existing insurance.' Annot., 3 A.L.R.3d 1072, 1073. See Strauss v. Dubuque Fire and Marine Ins. Co., 132 Cal.App. 283, 22 P.2d 582 (1933); Ohran v. National Auto Ins. Co., 82 Cal.App.2d 636, 187 [138 Ga.App. 521] P.2d 66 (1947); Bache v. Great Lakes Ins. Co., 151 Wash. 494, 276 P. 549 (1929).

The so-called 'substitution rule' is presently rejected, however, by the vast majority of jurisdictions. California courts, which gave early acceptance to this rule, have now abandoned it. See Glens Falls Ins. Co. v. Founders' Ins. Co., 209 Cal.App.2d 157, 25 Cal.Rptr. 753 (1962). The modern approach followed by most jurisdictions is typified by the conclusion reached in Bumb v. American Home Assurance Co., 246 F.Supp. 509, 514 (S.D.Cal., 1965): 'Cancellation by substitution of one policy for another may be effected by mutual agreement of the parties . . . However, the mere procurement of additional insurance without requesting the original insurer to cancel its policy does not terminate the policy.' See also Baysdon v. Nationwide Mutual Fire Ins. Co., 259 N.C. 181, 130 S.E.2d 311 (1963); Northern Ins. Co. of New York v. Mabry, 4 Ariz.App. 217, 419 P.2d 347 (1966); Insurance Company of State of Pennsylvania v. Smith, 435 F.2d 1029 (10th Cir., 1971).

The substitution rule appears to have no logical basis within the law of contracts. On a theoretical level, the rule is inconsistent with the generally accepted principle that contracts can only be terminated by agreement of the parties, by the terms of the contract itself, or by operation of law. As a matter of public policy, the...