The insureds purchased a standard homeowners policy with additional coverage for water damage caused by sewer or drain backup. Their home was damaged by drain backup, and the insurer paid the loss under that endorsement.

In 1991, the insureds received renewal notices, together with a booklet setting the coverage. The notice, termed a "renewal certificate," listed the number of the renewal policy on its face and provided that $5,000 of drain backup coverage could be added for an additional $60. In 1992 and 1993, similar renewal notices were received by the insureds who paid the basic premium, but they did not pay the additional $60 for drain backup damages. The amount of the premium did not reflect the elimination of that coverage. In 1993, flooding again damaged their property and they filed a claim, which was denied since the additional premium had not been paid for that coverage.

The insureds, and others, filed this class action on the theory of breach of contract, alleging that the insurer did not provide "plain, clear and conspicuous notice" of the nonrenewal of the drain backup coverage. The insurer argued that the coverage was not shown on the policy, and furthermore the renewal notice contained a statement that an additional $60 would have to be paid for that coverage.

The trial court granted the company's motion to dismiss, and the insureds appealed.

The higher court decided that when the insureds "renewed" their policy, there was no reason for them to believe the renewal differed from the previous policy. Therefore, an ambiguity existed. The company contended that the insureds should have known the drain backup coverage was not included since the renewal notice contained language to that effect in the upper corner of the renewal notice. The language differed on the various policies, but the court said the insurer did not use plain language to indicate that coverage would be available only upon payment of an additional $60.

The court noted that the general rule is that, unless otherwise provided, when a policy renewal is made, the terms of the original policy become part of the renewal contract. In addition, the premium was not reduced because of the elimination of that coverage. The company insisted that the cover document provided a statement of the coverage reductions or eliminations of coverage, and contained a statement that the backup of drain or sewer was not renewed but could be obtained for an additional charge.

The insureds contended they did not receive that part of the policies.

The Illinois Insurance Code specifies that any successive policy issued by the company to the same insured, for the same or similar coverage, would be considered a renewal policy. The code further requires the company to send by mail to the named insured at least 30 days' advance notice of its intention not to renew an insurance policy. In this case, the original policies and the subsequent policies eliminating the drainage coverage were different, and the company did not comply with the notice requirement of 30 days' notice of the nonrenewal.

The higher court found that the trial court erred in its dismissal of the complaint and reversed the action since the insureds stated a cause of action based on breach of contract and violation of the Illinois renewal statute. The action was remanded for further proceedings in accordance with this opinion.

B. John Elson et al., Appellants v. State Farm Fire and Casualty Company--No. 96-4354--Appellate Court of Illinois, First District, First Division--February 17, 1998--691 North Eastern Reporter 2d 807.