Agents and carriers do not tell their customers that they will inspect to see if they ever wanted to insure them from the beginning after issuing an insurance policy. In California, the law gives this right to residential and commercial carriers. In home damage, we often see carriers lure insured people away from a competitor with cheaper premium prices, fail to fully investigate whether the risk is sufficient during the application process, continue to issue insurance and then cancel after issuance and an insurance inspection. By this time, the insured has usually already terminated their insurance with their previous insurer.
Insurance companies have a 60-day period after issuance to terminate without penalty. Section 676 of the Insurance Code contains the rules for termination of home and business insurance. It provides some limited grounds for canceling a policy, but the critical language is that these cancellation restrictions only apply for 60 days. after the new policy has entered into force. Thus, carriers will order warranty inspections after issuance to ensure that they want to stay at risk.
Some carriers do not interrupt immediately if the inspection is less than appealing. Often the risks observed can be mitigated, so the carrier will send a list of somewhat confusing titled “mandatory recommendations”; or the like, describing steps that the carrier requires the insured to take to reduce the risk to the property and keep the insurance. The notice may state that failure to comply may lead to termination, but this is not a notice of termination per se. Cancellations must still be completed in accordance with the strict statutory rules, which require notification sent by a certain date and specific information about the reason for the cancellation.
According to Cal. Ins. Code § 676, on a policy that has existed for 60 days or more, a carrier may cancel for the following reasons:
(a) Default premiums, including non-payment of any additional premiums, calculated in accordance with the insurer’s current rating manual, justified by a physical change in the insured property or a change in its occupancy or use.
(b) Judgment of the named insured for a crime which has as one of its necessary elements an act which increases any risk against which the insured.
(c) Detection of fraud or material misstatement of any of the following:
(1) The insured or his representative to obtain the insurance.
(2) The named insured or his or her representative in a claim under the insurance.
(d) Detection of gross negligent acts or omissions by the insured or his or her representative that significantly increase any of the insured risks.
(e) Physical changes in the insured property that result in the property becoming uninsured.
Section 676.2 lists additional rules for discontinuing only commercial policies, some of which are merely variations on the wording of section 676, but they also include:
(2) A judgment of a court or administrative tribunal that the named insured has violated any law of that State or of the United States which has as one of its necessary elements an act which substantially increases any of the insured risks.
(5) Failure of the named insured or his or her representative to implement reasonable loss control claims that were approved by the insured as a condition of issuing insurance or that were conditions that preceded the insurer’s use of a particular interest rate or rating plan, if the error significantly increases any of the insured risks.
(6) A decision by the commissioner that loss of or changes in an insurer’s reinsurance covering all or part of the risk would threaten the insurer’s financial integrity or solvency. A certificate issued under penalty of perjury by an official of the insurer of the loss of, or change of, reinsurance and that the loss or change will threaten the insurer’s financial integrity or solvency if the termination of the insurance is not permitted shall constitute this decision unless not approved by the Commissioner within 30 days of submission. This 30-day period should not be extended.
(7) A decision by the Commissioner that a continuation of the insurance cover would mean that the insurer is in breach of the laws of that State or the State of its domicile or that continued insurance would threaten the insurer’s solvency.
(8) A change of the named insured or his representative in the business or industrial enterprise’s business or property that leads to a significantly increased risk, a significantly increased risk or a significantly changed risk, unless the added, increased, or changed risk is included in the insurance.
Not only can insurers terminate commercial insurance within 60 days of issuance, but after 60 days the insurer can retain the insurance in force and demand a change in the premium, lower the limits or change a condition for coverage for any of the following reasons:
(A) Detection of intentional or grossly negligent acts or omissions, or of violations of state laws or ordinances establishing safety standards by the named insured which significantly increases any of the risks or hazards insured against.
(B) the failure of the named insured to implement reasonable loss control requirements that were approved by the insured as a condition of issuing insurance or that were conditions that preceded the insurer’s use of a particular interest rate or rating plan, if the error significantly increases any of the insured risks; .
(C) A decision by the commissioner that loss of or changes in an insurer’s reinsurance covering all or part of the risk covered by the insurance would threaten the insurer’s financial integrity or solvency unless the change in terms or rate the premium is based is permitted.
(D) A change in the name or property of the named insured in the commercial or industrial enterprise that results in a significantly increased risk, a significantly increased risk or a significantly changed risk, unless the increased, increased or changed risk is included in the policy.
So do not be surprised if you or your customer comes to you with a notice of termination shortly after the issuance of a new insurance. It is important to do everything you can to keep that policy in place or replace it to maintain continuity of coverage. It is also important to remember these rules when purchasing a new insurance policy.