Extend NOC if Leinholder was added the day before cancel?

Good morning, I work for a GA in Texas and have a question regarding leinholder notification. The agent processed an endorsement on-line effective 02/22/10 adding a 2008 Jetta, OTC/Coll and a lienholder. At the time, the policy was already pending cancellation for the 1st installment of $118.34 with a due date of 02/13/10, cancellation date of 02/23. The endorsement generated another additional premium of $597.00. The system notified both the agent and insured(in writing) that the policy was pending cancellation. The agent uploaded a payment in the amount of $38.16. On 02/23, the policy cancelled for Non Payment.On 02/27/10, insured hit a coyote. Claim was denied due to cancellation. DOI is stating that due to lack of a 10 day notice of Intent to the Leinholder, we are obligated to issue a 10 day of Intent and pay the claim. The policy has been cancelled since 02/23, the policy would have expired on 07/29, the total amount of premium owed would be approx $1400.00 earned premium to extend coverage. The insured is not going to pay and the Leinholder has never contacted us to pursue a claim due to re-possession of the vehicle. Should we be required to reinstate, reissue a 10 day notice of Intent to cancel and pay this claim? There would be no dispute if the Leinholder were the one to be pursuing the claim, but it is the insured's attorney. Any input would be greatly appreciated.Thanks