
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN





NO. 03-97-00630-CV





Kino Express, Inc., Appellant


v.


Consumers County Mutual Insurance Company, Appellee





FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT

NO. 96-11988, HONORABLE PAUL R. DAVIS, JR., JUDGE PRESIDING






	Kino Express, Inc., appeals from a summary judgment recovered by Consumers
County Mutual Insurance Company.  We will reverse the judgment and remand the cause to the
trial court.

THE CONTROVERSY

	Kino operated in Travis and Hays counties a package-delivery service using a
number of motor vehicles operated by drivers employed by the company.  Based on Kino's
application, Consumers issued a commercial automobile-liability policy that became effective May
4, 1994, and by its terms expired after one year. (1)  The policy was based on a "fixed rating plan"
that did not allow for a change in premium amounts for causes arising after the effective date.
	Consumers cancelled the policy effective October 3, 1994, asserting a right to do
so because of an "[i]ncrease in hazard due to failure of insured to cooperate with inspectors."  The
cancellation involved policy provisions that gave Consumers the right to
	(1)  examine and audit Kino's "books and records as they relate to [t]he policy";
	(2)  "[m]ake inspections and surveys at any time" relating to "insurability and the
premiums to be charged";
	(3)  cancel the policy for any reason within sixty days of the effective date; and
	(4)  cancel the policy after sixty days for "[a]n increase in hazard within the control
of the insured which would produce an increase in rate."
	Item four, the policy basis given by Consumers for cancellation, is inconsistent with
the "fixed rating plan" required by the Kino policy but is taken almost verbatim from section
(c)(3) of article 21.49-2A of the Texas Insurance Code applicable to all commercial automobile-liability insurance policies.  Tex. Ins. Code Ann. art. 21.49-2A, § (c)(3) (West Supp. 1999).
	Kino sued Consumers for a declaratory judgment that Kino's failure to cooperate
did not constitute "[a]n increase in hazard" within the meaning of the policy provision and the
statute. (2)  Consumers' answer included a counterclaim for declaratory judgment that its cancellation
of the policy was within the scope of the policy provision and the statute.  Consumers recovered
summary judgment that its cancellation was justified by the statute, and Kino appealed to this
Court. (3)

THE SUMMARY-JUDGMENT RECORD

	We will set out a rather extended description of the materials attached to
Consumers' motion for summary judgment.  
	Barry Randall, a Consumers officer, swore as follows in an affidavit:

[Consumers] cancelled the policy due to an increase in the hazard insured against
as indicated on the Notice of Cancellation.  The increase in hazard was the direct
result of [Kino's] failure and refusal to cooperate with [Consumers'] repeated
requests to inspect [Kino's] premises and business operations.

[Kino] also refused to identify the names, addresses and license numbers of its
drivers. [Consumers'] premium rates contemplate fleet drivers with satisfactory
driving records.  When drivers are not identified, [Consumers] is unable to obtain
a motor vehicle report on those drivers and consequently . . . is unable to
determine whether the driving records are satisfactory.

When [Kino] did identify a driver whose record was unsatisfactory, [Consumers]
would prepare an endorsement to exclude that driver.

[Kino] refused to sign the endorsements to acknowledge that certain drivers had
unsatisfactory driving records and would not be covered by the policy.



	Consumers' business records indicate the following transactions with Kino:
	May 23, 1994.  Consumers attempted unsuccessfully to call on Kino to arrange for
an inspection.  The address supplied by Kino was an apartment residence and no one was available
to authorize an inspection.
	May 24, 1994.  Consumers obtained a telephone number from Kino's insurance
agent.  Consumers called the number to arrange for an inspection and was told that Kino was no
longer at the number.  Consumers called several times another number supplied by Kino's
insurance agent and was again unsuccessful in reaching Kino.  The insurance agent told
Consumers that Kino's owner was in Arizona.
	July 3, 1994.  Consumers' right to cancel the policy for any reason expired. 
	July 14, 1994.  In a letter to Kino's insurance agent dated July 14, 1994,
Consumers requested the following:  (1) execution and return of policy exclusions applicable to
five named drivers employed by Kino; (2) a copy of an accident report pertaining to one named
driver employed by Kino who was involved in an accident on January 20, 1994; (3) the complete
driver's license numbers for eleven named drivers employed by Kino;  and (4) a clarification of
the correct date of birth and driver's license number of another named driver employed by Kino.
	August 4, 1994.  In a letter to Kino's insurance agent dated August 4, 1994,
Consumers made a second request for the items designated in Consumers' letter dated July 14,
1994.
	August 17, 1994.  In a letter to Kino's insurance agent dated August 17, 1994,
Consumers pointed out that the items requested in the letters of July 14, 1994, and August 4,
1994, had not been received; in addition, Consumers complained that it had been unsuccessful in
contacting Kino to arrange for an inspection.
	August 22, 1994.  In a communication to Kino dated August 22, 1994, Consumers
requested that it be permitted to make an inspection.
	September 12, 1994.  Consumers called at an address supplied by Kino.  It was a
residence and no one was present to authorize an inspection.  A telephone number obtained by
Consumers was illegible.  Consumers contacted Kino's insurance agent who said the "insured"
was out of town.  Consumers left several messages on the "insured's" telephone-answering
machine after calling a number in the telephone book.  Consumers called another number supplied
by Kino's insurance agent and left a message with a secretary for a supervisor to call Consumers.
	September 19, 1994.  In a communication to Kino dated September 19, 1994,
Consumers notified Kino that the policy was cancelled effective October 3, 1994, because of an
"[i]ncrease in hazard due to failure of insured to cooperate with inspectors."

DISCUSSION AND HOLDINGS

	Kino appeals on two points of error.  In the first, Kino complains that its alleged
failure to cooperate with Consumers does not, as a matter of law, amount to an "increase in hazard
which would lead to an increase in rate" as stated in section (c)(3) of article 21.49-2A of the
Insurance Code, properly construed.  In the second point of error, Kino contends genuine issues
of material fact preclude summary judgment in any event.
	We should first set out our understanding of the applicable rules and terms.  The
purpose and effect of automobile-liability insurance is to protect the insured against having to pay
sums it might become legally obligated to pay because of a liability claim arising from a covered
insured's operation of a covered automobile.  See Rowland H. Long, The Law of Liability
Insurance § 1.03, at 1-6 (1991).  The "hazard" in this context is therefore the legal liability that
an insured might incur by reason of such a claim against the insured.  "Risk" is the result of a
hazard--a chance of loss arising from the bringing of a liability claim.  A liability insurer assumes
the risk by agreeing, for compensation, to pay any sums the insured might become legally
obligated to pay by reason of such a claim.  The insurer's compensation is denominated a
"premium" or a "rate."  Id. § 1.02, at 1-5.  An insurer has the right to select the risks it will
assume.  Id. § 4A.04, at 4A-13.  The identity, number, experience, and status of covered drivers,
the character and condition of covered automobiles, and the purposes to which they will be put,
are generally material to the insurer's decision whether to accept or reject a risk because they
might reasonably be expected to influence the insurer's decision.  See 6B Appleman, Insurance
Law and Practice § 42.52, at 9-13 (1979); 6 Couch on Insurance, 3D, § 94; 83, at 94-91 (1997).
	Consumers therefore argues in support of the judgment that employing drivers who
have a history of accidents and moving violations, the total number of automobiles involved, their
age, mileage, condition, intended use, and places of operation, and perhaps other aspects of Kino's
business operations, were all material to Consumers' accepting or rejecting the risk.  We agree
that any of these factors might enlarge (or diminish) the hazard and the corresponding risk.  We
do not agree, however, with Consumers' resulting deduction that Kino's failure to cooperate in
supplying information about these factors, in and of itself and as a matter of law, increased the
hazard. (4)  Moreover, the record shows that Consumers accepted the risk before knowing the extent
of the hazard and cancelled the policy without ever obtaining information necessary to assess the
magnitude of the hazard.
	Consumers' argument implicitly assumes that the information it attempted to obtain
from Kino, by either an inspection of Kino's books and records, automobiles, and operations, or
in response to Consumers' several requests for specified information, would have increased the
hazard had the information been obtained.  Nothing in the summary-judgment record establishes
that conclusion as a matter of law.  The substance of Randall's affidavit is that Kino failed to
supply or make available the information necessary for Consumers to assess the hazard and the
resulting risk.  Nothing in the record suggests that the hazard and resulting risk were assessed on
the basis of information obtained from any source, with the result that Consumers determined that
the hazard had increased, from the date the policy became effective, owing to matters within
Kino's control.

	The summary judgment record shows one exception to the foregoing.  Kino
evidently did supply the names and other information pertaining to five drivers among the nineteen
or so employed by Kino.  According to Randall's affidavit, Consumers rejected coverage of these
five drivers and, accordingly, requested that Kino execute and return to Consumers documents that
would have excluded the five drivers from coverage. (5)  Kino failed to execute and return the policy
exclusions.  From the fact that Consumers rejected coverage of the five drivers, one may infer that
the information previously supplied by Kino (or obtained from information supplied by Kino) was
adverse in some respect.  But we are required to indulge the opposite inference in our review of
the summary judgment.  See Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 549 (Tex.
1985).  Moreover, the summary-judgment record does not permit one to conclude as a matter of
law that Consumers cancelled the policy based on information obtained about the five
drivers--poor driving records, for example.  Randall's affidavit states the opposite--that
cancellation was based on Kino's general lack of cooperation, including its refusal to execute and
return the policy exclusions "to acknowledge that [the five drivers] had unsatisfactory driving
records and would not be covered by the policy."(Emphasis added.)
	The summary-judgment record shows in substance that Consumers accepted the risk
and issued the policy without knowing the material factors pertaining to Kino's drivers,
automobiles, and operations, or the degree of hazard they created in the aggregate.  When
Consumers' attempts to obtain information about those factors were unsuccessful owing to Kino's
want of cooperation, and when Kino did not supply the requested policy exclusions for the five
drivers, Consumers cancelled the policy in a letter dated some 138 days after the effective date of
the policy.  The record shows prima facie a lack of cooperation.  The record does not show prima
facie that the hazard was enlarged beyond what it was on the effective date of the policy; (6) a
fortiori, the record does not show such an increase as a matter of law.  It shows instead that
Consumers never had the information necessary to assess the hazard and resulting risk at either
point in time.
	While we do not rest our decision on that part of section (c)(3) of article 21.49-2A
that refers to an increase in hazard that "would produce an increase in rate," we should add the
following in view of our remand of the cause.  The statute purports by its terms to apply to all
commercial automobile-liability policies, whether fixed or variable rate, and suggests no reason
for discriminating between the two kinds of policies nor any intention to do so.  We believe the
correct construction is that the legislature intended to allow cancellation whenever the rate charged
under either kind of policy becomes substantially disproportionate to the risk originally assumed
by the insurer due to an increase in hazard within the control of the insured.

	For the reasons given, we reverse the judgment below and remand the cause to the
trial court for proceedings not inconsistent with our opinion.


  
					John E. Powers, Justice
Before Justices Kidd, Patterson and Powers*
Reversed and Remanded
Filed:   February 11, 1999
Publish









* Before John E. Powers, Senior Justice (retired), Third Court of Appeals, sitting by
assignment.  See Tex. Gov't Code Ann. § 74.003(b) (West 1998).
1.        Another insurer actually issued the policy.  For convenience, however, we will refer only
to Consumers.  The distinction is immaterial for purposes of this appeal.
2.        Kino also alleged causes of action for violation of certain provisions of the Insurance Code,
negligence, and breach of contract, praying also for a declaration that the cancellation of the policy
was wrongful, an order continuing the policy in force, and money damages.
3.        The judgment denied all other relief requested by either party.
4.        The policy does not, of course, authorize Consumers to cancel the policy, after sixty days,
based upon Kino's failure to cooperate.  Consumers' basic position on appeal is that not having
the information necessary to appraise the magnitude of the hazard is the same thing as an increase
in the hazard, meaning an increase in the likelihood of liability claims against Kino.  We disagree.
This position fails to distinguish between the risk and the hazard. 
5.        Consumers did not cancel the policy as a result of information obtained about the five
drivers.  Instead, Consumers kept the policy in force for the time being, presumably because the
policy exclusions would have kept the risk commensurate with the premium.
6.        We believe the word "increase," found in section (c)(3) of article 21.49-2A of the Insurance
Code, necessarily implies an augmentation or enlargement of the hazard between the time the
policy is effective and the subsequent point in time when the insurer determines to cancel the
policy because of the increased hazard.  Tex. Ins. Code Ann. art. 21.49-2A, § (c)(3) (West Supp.
1999).


essful owing to Kino's
want of cooperation, and when Kino did not supply the requested policy exclusions for the five
drivers, Consumers cancelled the policy in a letter dated some 138 days after the effective date of
the policy.  The record shows prima facie a lack of cooperation.  The record does not show prima
facie that the hazard was enlarged beyond what it was on the effective date of the policy; (6) a
fortiori, the record does not show such an increase as a matter of law.  It shows instead that
Consumers never had the information necessary to assess the hazard and resulting risk at either
point in time.
	While we do not rest our decision on that part of section (c)(3) of article 21.49-2A
that refers to an increase in hazard that "would produce an increase in rate," we should add the
following in view of our remand of the cause.  The statute purports by its terms to apply to all
commercial automobile-liability policies, whether fixed or variable rate, and suggests no reason
for discriminating between the two kinds of policies nor any intention to do so.  We believe the
correct construction is that the legislature intended to allow cancellation whenever the rate charged
under either kind of policy becomes substantially disproportionate to the risk originally assumed
by the insurer due to an increase in hazard within the control of the insured.

	For the reasons given, we reverse the judgment below and remand the cause to the
trial court for proceedings not inconsistent with our opinion.


  
					John E. Powers, Justice
Before Justices Kidd, Patterson and Powers*
Reversed and Remanded
Filed:   February 11, 1999
Publish









* Before John E. Powers, Senior Justice (retired), Third Court of Appeals, sitting by
assignment.  See Tex. Gov't Code Ann. § 74.003(b) (West 1998).
1.        Another insurer actually issued the policy.  For convenience, however, we will refer only
to Consumers.  The distinction is immaterial for purposes of this appeal.
2.        Kino also alleged causes of action for violation of certain provisions of the Insurance Code,
negligence, and breach of contract, praying also for a declaration that the cancellation of the policy
was wrongful, an ord