Refund policy by Nick Youngson CC BY-SA 3.0 Pix4free
We’ve been receiving one question a lot recently. It’s so common that it’s worth a post for all Big I New York and Big I Connecticut members to read. This recent email is representative:
“Client was non-renewed approximately five years ago by Acme Insurance for his auto, home, and fire dwelling policies. Apparently, one was not non-renewed, and the premiums were paid out of his escrow account. We replaced the coverage in the meantime. Client recently discovered the error. In a case of duplicate coverage, where can I find out the law? The carrier will not go back the full five years to cancel despite all correct documentation being provided."
A request to cancel a policy back five years is unusual. More commonly, an insured replaced a policy mid-term or even a year before. They never asked the original carrier to cancel it.
There is a common belief that, if an insured can show that they replaced the coverage, a law requires the original carrier to retroactively cancel the policy and refund the premium to the insured.
That belief was and is incorrect. Some carriers will do this as a courtesy. However, in every case I’ve seen, no law obligates them to do it.
I want to say it again plainly: The law does not require an insurance carrier to retroactively cancel a policy and refund the premium. It doesn’t matter if the insured can prove they replaced the policy.
I’ve found a mention of insured-initiated cancellations only once in the New York Insurance Law. It’s in subsection (a) of Section 3428.
“Except as provided in subsection (e) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract."
Subsection (e) pertains to premium-financed policies. Subsection (a) says that carriers must follow their rate filings. It does not say they must retroactively cancel a replaced policy.
The Connecticut Insurance Code has a law about canceling premium-financed policies. There is nothing else about the insured canceling.
When no applicable law governs the terms of a contract (such as an insurance policy,) the terms of that contract rule how either party may terminate it. For example, contracts between insurance carriers and agencies contain termination provisions.
Every state requires that certain insurance policies include “amendatory" endorsements. These conform the policy to the state legal requirements. I checked the state amendatory commercial lines endorsements for New York, Connecticut, and every state that borders them. Four states use the wording from the ISO Common Policy Conditions endorsement, IL 00 17 11 98:
“The first Named Insured shown in the Declarations may cancel this policy by mailing or delivering to us advance written notice of cancellation."
New York uses the phrase “entire policy" in place of “policy." Rhode Island expands the provision. It says that the insured may cancel by “giving, mailing or delivering advance written notice of cancellation to us or to the insurance agent or producer who issued the policy." Only Pennsylvania left out the word “advance" in front of “written notice."
In every state other than Pennsylvania, the terms of a commercial lines policy explicitly require the insured to notify the carrier before the effective date that they wish to cancel. Not on the inception date; not within 30 days; not within 365 days; and certainly not within five years. If an insured wants to cancel a policy effective October 1, they must notify the carrier by the prior September 30.
The relevant state endorsements to Homeowners and Personal Auto policies are similar. The insured must provide advance notice of cancellation. Even Pennsylvania has the word “advance" in the Cancellation condition for Personal Auto.
Again, some carriers have internal policies of backdating cancellations up to 30 days. That was my employer’s guideline when I was a commercial lines underwriter. However, that is merely a courtesy. It is not a legal obligation.
No laws in this part of the country require insurance carriers to backdate policy cancellations. This is true even when the insured shows proof of replacement coverage. Period. A store will likely decline to refund my money if I try to return an unused pair of sneakers I bought last winter. Likewise, an insurance carrier may decline to refund premium it reasonably believed that it earned.
Insurance agents and brokers should set their clients’ expectations accordingly.