By: Mitchell H. Frazen

How does an insurer cancel a policy? Most policies contain a cancellation provision that prescribes a method -- but if that method is inconsistent with the one set out in the Illinois Insurance Code, the provision is meaningless.

The notice of cancellation requirement of the Insurance Code has been the subject of frequent judicial interpretation. Although the Illinois Supreme Court has stated that only a "low threshold of proof" is required for an insurer to establish an effective cancellation, a recent Illinois Appellate Court decision seems to have raised the threshold of proof required to establish that a notice of cancellation was sent by the insurer.

Section 143.14(a) of the Illinois Insurance Code, 215 ILCS 5/143.14, provides:

No notice of cancellation of any policy of insurance … shall be effective unless mailed by the company to the named insured and the mortgage or lien holder, at the last mailing address known by the company. The company shall maintain proof of mailing of such notice on a recognized U.S. Post Office form or a form acceptable to the U.S. Post Office or other commercial mail delivery service. A copy of all such notices shall be sent to the insured’s broker if known, or the agent of record, and to the mortgagee or lienholder, if known, at the last mailing address known to the company.

In Marketview Motors, Inc. v. Colonial Insurance Co. of California, 175 Ill.2d 460, 677 N.E.2d 870 (1997), the Illinois Supreme Court held that Section 143.14(a) does not require that a cancellation notice actually be received by the insured in order to be effective.

The next year, however, in Ragan v. Columbia Mutual Insurance Co., 183 Ill.2d 342, 701 N.E.2d 493 (1998), the Illinois court specified that the only "proof of mailing" sufficient to prove that the insurer sent its cancellation notice is that authorized by the statute. The court explained the intent of the notice statute as follows:

[T]he purpose of the statute is to protect the insured from cancellation of his insurance without his knowledge. In order to accomplish this purpose, the legislature could have required insurance companies to prove receipt by the insured. However, by enacting this section, the legislature clearly sought to strike a balance between the interest of the insured in being informed of a cancellation of his insurance policy and the burden that would be put on an insurance company to prove receipt by the insured. The statute, therefore, requires proof of mailing rather than proof of receipt by the insured. In order to maintain this balance of interests, the legislature set forth the types of proof of mailing that are reliable enough to afford the insured the necessary protections.

701 N.E.2d at 497.

In Ragan, the insurer did not produce proof of mailing on a recognized post office form; rather, it produced the very envelope in which the notice had been sent and returned undelivered. Since delivery is not required to accomplish cancellation, this might seem like adequate proof of mailing. But the Illinois Supreme Court disagreed, because a finding that the statute allows an insurance company to use other evidence as proof of mailing when the statute explicitly requires it to maintain a particular form "would disturb the balance that the legislature sought to achieve in enacting this section." 701 N.E.2d at 497. The envelope itself, bearing the scars of its passage through the postal system, was therefore found insufficient to prove that notice had been sent in compliance with the statutory procedure.

Section 143.14 does not specify or describe what an adequate proof or mailing form should look like. After Ragan, he question remained: What will be necessary to satisfy this "low threshold" of proof? A recent Illinois Appellate Court case, Valor Insurance Co. v. Wallace, 1999 WL 1116822 (December 7, 1999), provides an answer, but suggests that the allegedly "low threshold" of proof may not be so easy to reach.

Valor Insurance issued an auto insurance policy to Walter Hornik. In January 1995, Hornik was involved in an automobile accident in which his passenger, Beatrice Ann Williams, was killed. Annie Wallace, the administrator of Williams’ estate, sued Hornik. Valor denied coverage and brought a declaratory judgment action, asserting that it had cancelled Hornik’s policy prior to the accident. Wallace countered that Hornik’s policy had not been canceled in compliance with Section 143.14.

To prove that it had sent a cancellation notice, Valor produced the file copy of its cancellation letter with a corner of an envelope showing a U.S. Post Office meter stamp and cancellation stamp copied onto the lower right-hand corner of the letter. Both stamps were from a U.S. postal facility and were dated. The trial court felt that his was sufficient proof that the notice was sent, and summary judgment was entered in Valor’s favor. The Illinois Appellate Court, however, reversed on the basis of Ragan. The Valor court found that the insurer’s records did not represent a "recognized U.S. Post Office form or a form acceptable to the U.S. Post Office or other commercial mail delivery service."

The problem with the Valor decision is that the proof of mailing that was held to be inadequate in that case included a "U.S. Post Office meter stamp and cancellation stamp copied onto the lower right-hand corner" of the insurer’s file copy of the cancellation letter. This stamp clearly indicated that the cancellation letter had been mailed from the Park Ridge postal facility. Valor had a record of something more than mere postage, such as one might get by running an envelope through the office postage meter.

If the stamps used by Valor are inadequate, what form will be "recognized" for purposes of Section 143.14? The statute itself provides no guidance, and the Valor court likewise provided no guidance. As a result, insurers may have no easy way of assuring themselves that their attempted cancellations will in fact be effective under Illinois law.

Businesses other than insurers do not face this same uncertainty in Illinois. In general, the law raises a presumption that an item mailed is in fact received, and proof of the mailing of an item need not be by direct evidence. A letter properly addressed, stamped and mailed is presumed to have been duly received where there is proof that the item was contained in a properly addressed envelope with adequate postage affixed and that it was deposited in the mail. Proof of mailing can be by evidence of corroborating circumstances tending to establish the fact that the custom as to mailing has been followed in a particular. " [P]roof that a notice was properly filled out together with evidence of an office custom as to mailing is sufficient to establish the fact that the custom was followed in the particular case." Tabor & Co. v. Gorenz, 43 Ill.App.3d 124, 129-30, 356 N.E.2d 1150, 1154 (1st Dist. 1976). See also, First National Bank of Antioch v. Guerra, 153 Ill.App.3d 662, 505 N.E.2d 1373 (2nd Dist. 1987).

Under Ragan and Valor, an insurer cannot use these traditional methods to prove that it sent a policy cancellation notice. An insurer cannot prove cancellation of a policy without proving that it maintained the required form. Apart from certified mail and registered mail forms, it is not clear precisely what other forms will be acceptable to the Illinois courts.

But it is not difficult to determine what constitutes a "recognized U. S. Post Office form or a form acceptable to the U. S. Post Office" for purposes of the Illinois Insurance Code. We recommend a visit to the local post office, or using the U.S. Postal Service Internet site at http://www.usps.gov to search for "Certificate of Mailing." The USPS Certificate of Mailing service includes an individual certificate of mailing, PS Form 3817, that costs sixty cents. A mass mailer such as an insurance company can obtain PS Form 3877, Firm Mailing Book for Accountable Mail, or print its own form for three or more pieces of mail presented at one time, at a cost of twenty-five cents per piece.

Because the use of non-conforming forms can change the "low threshold" of proof for an insurer into quite a high hurdle, particular care must be taken to maintain approved forms of proof of mailing whenever a notice of policy cancellation is sent to an Illinois insured.

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We hope this update and analysis will be helpful to you in making and maintaining adequate records of your notice to Illinois insureds of policy cancellations. Please feel free to contact us for further information about this or any other insurance coverage issue.

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