(Article from Insurance Law Alert, November 2015)
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Addressing a matter of first impression under Pennsylvania law, the Third Circuit ruled that in order to constitute a “renewal,” the terms of an insurance policy must be the same or nearly the same as the initial contract. Indian Harbor Ins. Co. v. F&M Equip., Ltd., 804 F.3d 310 (3d Cir. 2015).
Indian Harbor Insurance Company issued an insurance policy to F&M that included a promise by Indian Harbor to offer a renewal. At the end of the policy term, Indian Harbor offered a “renewal” that contained substantially different terms than the original policy. In particular, it provided $5 million of coverage over a one-year term. The original policy had provided $10 million in coverage for a ten-year term. In addition, the “renewal” omitted coverage for a site previously covered and for which F&M had previously made a claim. F&M rejected the policy and requested that Indian Harbor renew under the original terms and conditions. Thereafter, Indian Harbor sought a declaratory judgment that it had complied with its contractual obligation to offer a renewal and had no further duty to offer the same terms and conditions as the expiring policy. F&M counterclaimed for breach of contract and moved for summary judgment. A Pennsylvania federal district court denied F&M’s motion and ruled in favor of Indian Harbor. The Third Circuit vacated the judgment.
The Third Circuit ruled that for a contract to be a renewal, it must contain the same, or nearly the same, terms as the original contract. In adopting this fact-based approach, the court rejected bright-line rules at either end of the spectrum. The court reasoned that a renewal need not be “identical” to the original policy; however, it cannot be “any offer of a new contract, so long as advance notice is provided for any changed terms and the terms are commercially reasonable.” The court noted that under the interpretation advocated by Indian Harbor, the promise to renew would be illusory.
Applying the “same or nearly the same” terms standard, the Third Circuit concluded that Indian Harbor’s new offer did not constitute a renewal because the new policy differed in terms of price, term length, coverage limits and site exclusions. However, the court noted that a reasonable change in price alone would not render a new contract a non-renewal.