In Mustang Beach Development Corp. v. Fidelity and Casualty Company of New York,1 the insured suffered the loss of a 1965 30-foot steel Diesel hydraulic dredge called “Mustang” as the result of Hurricane Celia, which occurred on August 3, 1970. Fidelity and Casualty Co. of New York issued policies for the period of August 5, 1969, to August 5, 1970, insuring the policyholder against loss of the dredge. During litigation, the parties stipulated that all premiums due on the policies had been paid to Fidelity. The court noted that if it determined that the policies were in force at the time of Hurricane Celia, then the insured would recover for the loss. Fidelity argued that the policies had been canceled prior to Hurricane Celia, and it has no liability for the loss of the dredge.
The insured’s president said he received the notice of cancellation in on July 30, 1970, only a few days before the storm. The parties discovered that the insured received a letter dated May 7, 1970, from its general insurance agent in which he advised that the “Mustang” no longer met the underwriting requirements and that the company was “… releasing direct notice of cancellation on May 8th to be effective May 18, 1970.” The Plaintiff did not follow up on this, and the Court opined that, if Fidelity had done every act necessary to complete the termination of the insurance coverage, the insured had adequate notice of the cancellation of the policies prior to Hurricane Celia.
The insured argued that Fidelity’s attempt to cancel the policies was defective, regardless of the effectiveness of the written notice, and the insurance coverage was not terminated, but was in effect at the time the “Mustang” was lost. The insurance policies provided:
Either party may cancel this policy by giving ten days’ notice in writing; if at the option of this company pro-rata rates, if at the request of the assured short rates will be charged-and arrival.
The Court found this language ambiguous because it was uncertain how and when any unearned premiums were to be refunded. Fidelity failed to refund any unearned premiums to the insured at the time of the cancellation notice, although the insured received unearned premiums on a pro-rata basis after the actual destruction of the vessel.
In its analysis, the Court cited the 1898 case of Hartford Fire Insurance Company v. Cameron,2 where the Court was asked to determine whether cancellation of a policy, by giving the notice called for, terminated the coverage. In Cameron, the trial court refused to submit the issue to the jury since there was no evidence of a repayment or tender of the unearned premiums to the insured when the notice of cancellation was given. The Court noted that although Cameron was relatively old, the case was still the law in Texas.
The Court of Civil Appeals in Cameron pointed out that “… while it does not in terms declare when the return shall be made, it would be unreasonable and unjust to allow it to cancel its obligation, and retain the consideration upon which it was based.” The Court in Cameron further elaborated: “[i]t is a well-settled rule in equity that one who seeks to cancel an obligation must tender back the consideration in his bill to cancel, and we see no reason why this rule should not apply in the more summary method of cancellation of the contract by giving notice.”
The Mustang Court determined that the policies issued by Fidelity were not canceled because the company failed to perform a necessary act –tendering the unearned premiums — in accomplishing the cancellation of the policy. The Court concluded the insured was entitled to recover for the loss of the vessel “Mustang.”
1 Mustang Beach Development Corp. v. Fidelity and Cas. Co. of New York, 348 F. Supp 1270 (S.D. Tex 1972).
2 Hartford Fire Insurance Company v. Cameron, 45 S.W. 158 (Tex. App. 1898)