"Can I get a refund if I cancel my small business insurance policy and switch insurance carriers?"
We get this question often, and the good news is, yes you can.
When you cancel your errors and omissions insurance policy before the end of your one-year term, you should expect to receive a refund or “return premium” which is the unused portion of your premium.
For example, if you have a one-year policy with a $3,000 annual premium and you maintained the policy for exactly six months, you might expect to receive a prorata (daily calculation) return premium of $1,500. However, depending on your insurance carrier and the type of policy, there will likely be additional cancellation provisions.
Businesses with commercial package policies (CPP) that often include general liability, property and casualty, and a host of other optional coverages are subject to standard cancellation clauses, in addition to statutes specific to each state. Those can be found in your business insurance contract’s terms and conditions – and can also be called “policy provisions” or “certificate provision”.
Here are some standard provisions you might see in your insurance terms of cancellation:
Who Can Request a Cancellation – Usually the first insured (at any time) and the insurer (based on specific mandates by state). For example, in California, “A notice of cancellation of a policy shall not be effective unless mailed or delivered by the insurer to the named insured, lienholder, or additional interest at least 20 days prior to the effective date of cancellation”. CA Ins Code § 662 (2019)
Cancellation Exclusions - You may see exclusions for refunds if you have made a claim or are in active litigation.
Statewide Regulations – What separate inclusions or exclusions are mandated by law in your state. These laws cover what type of insurance individuals and businesses are required to have, but mainly strict regulations for insurance companies on how they may conduct business.
Premium Refunds (Return) Options – How your insurer will calculate your return.
Calculating Your Return
Short-Rate and Prorata Cancellations are the standard two formulas used by insurance companies to calculate the amount of the return premium you receive.
Some, but not all, insurance policies include a “short-rate cancellation” provision, also called an early cancellation fee. Typically, early cancellation fees include and administration fee and any non-refundable government charges resulting from the insurer incurring costs to set up and maintain your account. Instead of charging these fees upfront, insurers include them in your monthly premium. If you cancel early, you are still subject to those fees. Your insurer will either deduct what you owe from your premium balance or bill you for the penalty.
Other insurance carriers process cancellations on a prorata basis, with no charge for early cancellation. The amount of unearned premium that you get back is determined by dividing the number of days the policy was active by the total number of days in the policy term. So, if you paid for a 365-day E&O policy, but the carrier cancels it at 183 days (six months), you’ll receive a refund for the full amount you paid for the remaining 182 days of coverage.
If you're considering switching insurance carriers, contact your broker for additional information.
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