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Third-Party Debt Cancellation Insurance Is Insurance in West Virginia

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Debt cancellation insurance, such as GAP Insurance for car loans, is considered insurance in West Virginia when issued by an entity other than the lender.  Only if a lender offers a debt cancellation contract directly to a product’s purchaser is that contract not considered insurance.  When the debt cancellation contract is offered by a third-party, the contract and its issuer are subject to the insurance laws of West Virginia.  The Supreme Court of Appeals of West Virginia established this holding for the first time in its recent decision in State ex rel. Safe-Guard Products International, LLC v. Robin Hinkle, Case No. 14-1134 (W. Va. March 11, 2015).

In Hinkle, Safe-Guard provided “GAP Insurance” to Mr. and Mrs. Hinkle at a cost of $495 when she bought a new car in 2006.  The car salesman told the Hinkles that the GAP Insurance would relieve them of payment owed on the vehicle if it was declared a total loss as a result of an accident and more was owed for the vehicle than the value assigned to it at the time it was totaled.  Mrs. Hinkle later totaled the car in 2011, but Safe-Guard denied her claim for the balance owed after her auto insurer paid for the total loss.  Mrs. Hinkle then brought suit against Safe-Guard. 

In the course of that lawsuit, the trial court ruled as a matter of law that the GAP Insurance was, in fact, insurance and not a “debt cancellation contract” that would be exempt from West Virginia’s insurance laws.  Safe-Guard appealed that ruling, and the Supreme Court of Appeals of West Virginia recently affirmed the trial court.

The Hinkle decision describes and adopts guidance from the West Virginia Office of the Insurance Commissioner (the “OIC”) on this subject as set forth in its 2009 Informational Letter No. 171.  That letter states that “in order to fall outside OIC regulation, the cancellation or waiver of the debt must be directly provided by the lender.”  Thus,

"[a] debt cancellation contract is not considered insurance, if it is directly provided by a lending institution to the purchaser of a product. On the other hand, a contract that requires a third party to indemnify a lender, as a result of a specified event that causes the lender not to be repaid by a borrower, is not a debt cancellation contract. The latter type of contract is an insurance contract that is governed by the insurance laws of the State of West Virginia."

Syl. Pt. 2, Hinkle.

Accordingly, so long as a bank directly provides a debt cancellation insurance product, it is not, in fact, insurance.  If, however, a third-party, including a bank’s subsidiary or affiliate, offers the debt cancellation insurance, that third-party is subject to regulation as an insurer in West Virginia. 

Regulation of insurers in West Virginia includes compliance with West Virginia Code §§ 33-1-1, et seq., and the Legislative Rules of the Insurance Commissioner as set forth at W. Va. C.S.R. §§ 114-1-1, et seq., which, among other things, include registration requirements and prohibitions on bad-faith conduct in handling claims.

Steptoe & Johnson’s insurance and banking attorneys have extensive experience advising and defending insurers and banks in all areas of their businesses.  If you would like advice on loan-related insurance or any other issue facing insurers or lenders, please contact Melanie Norris, melanie.norris@steptoe-johnson.com, 304-231-0460; Tammie Alexander, tammie.alexander@steptoe-johnson.com, 304-598-8110; or Russell Jessee, russell.jessee@steptoe-johnson.com, 304-353-8103.