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Cancellation vs. Expiration: The Subtle Distinction and Why it Matters
2/14/17
In most jurisdictions, insurers must adhere to a detailed set of statutory provisions when cancelling or refusing to renew certain types of insurance policies. Most notably, insurers are often charged with delivering or mailing a written notification to the insured providing clear and unequivocal notice that the insurance coverage at issue is ending. Even slight deviations from the statutory requirements governing such notices will likely vitiate the cancellation or nonrenewal and cause coverage under the policy to remain in place.
Although the law typically requires strict compliance with these provisions, there is an important distinction between cases where an insurer cancels a policy and cases where the policy simply expires by its own terms due to the insured’s failure to remit his or her premium payment. In the latter case, an insurer is not bound by the notice requirements in place for cancellations. The same distinction exists between cases where an insurer refuses to renew a policy and cases where the coverage simply lapses.
For example, say that an insurance company issues a standard residential fire insurance policy for a one year effective term. The insured consistently makes timely premium payments for five years and renews his coverage at the end of each term by paying the renewal premium. On the sixth year, however, the insured fails to pay the minimum balance required to renew his coverage and the policy expires at the end of that term. Although insurers are normally required to provide written notification of an impending nonrenewal, many courts have determined that this requirement only applies to cases where the insurer is unwilling to renew an insurance policy. In other words, the statutory notice provisions are generally inapplicable to situations where a policy is not renewed because of nonpayment of premium by the insured. Thus, in the above example, the insurer would have no obligation to notify the insurer that the policy was set to expire.
This distinction may prove crucial in cases where a loss occurs after the policy expires, and the insured insists that coverage should be afforded due to the insurer’s failure to abide by the statutory notice provisions. Although it is important for insurers to carefully follow the statutory guidelines when cancelling policies, insurers should also be aware of the distinction between instances where the termination of coverage is due to the expiration of the risk insured by the policy.
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