There are various reasons why a Workers’ Compensation policy is canceled. Here we look at some of the reasons behind a policy cancellation by both the insured and insurance carrier and the process involved.
Changing Carriers During Policy Term
If an insured opts to change insurance carriers before the policy expiration date, a Loss Policy Release form must be sent to the insurer indicating the policyholder’s name, address, policy number, dates the policy is in force, effective date of the cancellation, and reason for the cancellation. It’s important to note that, with Workers’ Compensation, a short-rate penalty is triggered if the insured requests the policy be canceled before its expiration date. The penalty is significant if coverage is canceled early in the policy period and gradually lessens closer to the expiration date. Therefore, if an insured is changing carriers for financial savings, it’s important to review the short-rate penalty with an agent or broker to assess whether the move is worth it or if it’s better to wait until policy renewal.
Business Closures, Mergers & Acquisitions
Insureds may also cancel policies because they have shut down their operations or merged with or acquired another business. In these cases, there is no short-term penalty. Instead, the insured will pay the premium for the period the coverage was in effect with the carrier, which will be determined at an audit.
Moving from Assigned Risk to a Standard Carrier
Challenging business classes, such as start-ups with no Workers’ Compensation experience, may struggle to find a home in the standard market. Their only option may be to purchase Workers’ Compensation insurance through the assigned-risk market (state fund). These assigned-risk policies typically have higher premiums than standard-market policies. A business’s insurance agent may discover a standard market for the insured with better pricing, coverage, and value-added services at some point during the year. As a Workers’ Compensation insurance provider for difficult-to-place risks, we collaborate with independent agents at Prescient National to help insure their clients.
Furthermore, if a business can transition from the assigned risk to the standard market, they are typically able to do so without incurring a short-rate penalty from the state fund.
Nonpayment of Premium
An insurance company may cancel a Workers’ Compensation policy under certain circumstances, as outlined by state regulators. For example, nonpayment of premiums is one reason to cancel a policy. In this case, the insurance company will send a notice of cancellation within a certain number of days prior to cancellation. The insurer will also provide a window with a stipulated number of days in which the premium must be paid to avoid policy cancellation. The policy will be reinstated if the premium is received within the window provided.
Depending on the state, an insurance company may also cancel a Workers’ Compensation policy if the insured commits a material misrepresentation or fails to disclose a material fact in obtaining the policy, continuing the policy, or presenting a claim under the policy. In addition, in some states, failing to submit to an audit could also result in the insurance company’s canceling the policy, as this would likely be deemed a substantial breach of contractual duties or conditions under the policy.
The insurance carrier must provide the precise reason for cancellation in writing.
If a carrier decides to non-renew a policy, the nonrenewal notice must be sent to the insured in advance. In some states, for example, the notice must be sent 45 days before the policy expiration; in other states, the time frame is 75 days.
About Prescient National
Prescient National offers Workers’ Compensation insurance solutions to employers based on their individual needs, risk-taking appetite, and loss history: guaranteed cost policies; small-, midsize-, and large-deductible policies; retrospective rating policies; and excess/self-insurance and captive options.
