Cancellation
What Does Cancellation Mean?
Cancellation, in the context of insurance, refers to the termination of an insurance policy by either the insurer or the insured before the coverage period ends. A policyholder has the right to cancel their policy, although they must adhere to limitations set by the laws of their state. On the other hand, an insurer may cancel a policy for valid reasons, such as non-payment of premiums, misrepresentation, or concealment.
Insuranceopedia Explains Cancellation
There are three common methods of cancellation: pro-rata, short-rate, and flat rate.
- Pro-rata cancellation refers to the termination of a policy before its maturity, either at the request of the insured or by the insurer. In this case, a return premium is calculated based on the remaining days of coverage compared to the total number of days in the coverage period, and this is then multiplied by the premium.
- Short-rate cancellation occurs when the insured requests the termination of the policy. In this scenario, the unearned premium is returned, minus a 10% penalty.
- Flat cancellation takes place when the termination occurs on or before the policy’s start date. In such cases, no penalty or premium is charged.
If an insurance policy contains a cancellation clause, either party may legally cancel the policy before the end of the coverage period by sending a written notice to the other party. Depending on the grounds for cancellation, the insured may or may not receive return premiums. If the cancellation is based on intentional misrepresentation or concealment, the insured may forfeit any premium refund.
