Insurance Policy Cancellation

Insurance Policy Cancellation

Though insurance policies generally have a term date, in certain instances, they may be canceled by the insurance company or the policyholder (the insured) before the term is done.

Some methods of policy cancellation commonly used by the insured or the insurer

At times, either the insurance company or the policyholder may opt to use one of these three methods of canceling an insurance policy before the term is due. The amount owed by either the insured or insurer to the other party will be determined by the cancellation method used, and other factors, all of which should be stated in the policyholder’s insurance documentation.

1. Flat cancellation - usually means the policy is canceled on the effective date before the insurance company assumes any liability on the policyholder’s behalf.
2. Pro rata cancellation - usually means if the policy is canceled mid-term, before the year is up, the insured must pay a percentage of the policy in effect. The exact amount is determined by calculating the number of days remaining in the policy period, then dividing this number by days left in the policy term. This amount is then multiplied by a predetermined amount, based on the policy, to get the pro-rata total. 
3. Short rate cancellation - usually means the premium is returned to the insured, minus a penalty of 10% of the unearned premium.

When insurers may be more likely to cancel the insured’s policy mid-term

Insurance rules vary among the 50 U.S. states and D.C., but most regions allow insurers to cancel policies mid-term for reasons such as those seen below:

• Insured hasn’t paid premiums for a long period of time
• Insured has misrepresented or misstated on forms
• Insured has breached their contract or policy provisions
• There has been a major change in the amount of risk than was originally assumed or an increase in hazard 
• Too many claims filed by the insured 
  

Certain charges or requirements of policyholders may apply if canceling mid-term

The policyholder should check their contract before canceling early as some policies may include a cancellation clause stipulating an (unexpected) charge or fee upon early termination. Also, some policies may allow the insurance company to keep the full premium or require other financial compensation be kept from the insured after policy cancellation. Some common insurance policies that may have these fees or requirements if policy is canceled early include landlord insurance, business owners insurance, personal insurance and more.

Policyholders who choose to cancel their policy may also need to meet other requirements, based on the terms of their contract. For example, some insurers may require 30 days advance notice from the insured before insurance policy cancellation is complete.

Some policies may cover injuries, other events, even after policy cancellation

Occurrence policies may cover claims made for injuries that occurred during the insurance policy term, even if the insured party files for compensation of their claim after a cancellation. These types of contracts allow the insured to request compensation for as long as several years after the agreement has been terminated or is no longer in force. They’re tailored to events that cause injury/damage to the insurers for long periods of time after occurrence. 

One example: exposure to dangerous materials while on the job. Health issues may not show up until years later.

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