Grounds for cancellation of an insurance policy are determined by state statute. This is a question that comes up every so often so I thought we should take away some of the mystery about when a workers comp policy could be cancelled by the insurance company.
We were recently asked by an insurance agency to look into the mid-term cancellation of a workers compensation policy for one of their client’s. Here’s the scenerio:
- The policyholder had completed their audit with the insurance company for the previous policy period and their rating payroll was higher. The insurance company, as most do, increased the current term policy to match the rating exposure as generated on the recent audit. (It’s a standard way of doing things.)
- The policyholder contacted their agent asking that they get in touch with the insurance company and have the payroll reduced on their current term policy. The reason given was that in the previous policy period they had secured additional work that spiked their payroll over the norm. (A reasonable request.)
- The carrier underwriter balked at honoring the request to reduce the rating payroll but reluctantly made the change.
- The underwriter then did something a little unusual, they requested a mid-term audit. Now keep in mind that an insurance company is allowed to perform an audit of a policyholders workers compensation policy any time during the policy period and during normal business hours. This right is given to them in the policy provisions which the policyholder agrees to when they buy the policy. (Ever read your policy?)
- The policyholder refused to comply with the mid-term audit request as they thought since they had just completed their audit for the expiring policy period that this request was unreasonable. (Hmmm, makes sense.)
- The insurance company underwriter then cancelled the policyholders policy. (Wow! Can they do that?)
Most insurance agencies are used to dealing with clients who are non-compliant with completing their audits. Most of the time, when a client is non-compliant, the insurance company will set up the policy to non-renew. This means that the policy will continue in-force up until the renewal date and then end with no renewal being offered unless the policyholder complies with the original audit request. It’s always a pain, but most insurance agencies can usually work around things by working with their client and with the auditor to complete the audit for the insurance company.
In this case the insurance company underwriter took extreme measures. So back to the original question, can they do this? Well this just happened to be a Missouri policyholder, subject to Missouri statute. (Remember, each state will have their own rules on how a policy can be cancelled.) Missouri statute provides a specific section titled “Grounds for Cancellation.” And in paraphrase, here’s what they say:
“A notice of cancellation of a policy shall be effective only if it is based on one or more of the following reasons:
- Nonpayment of premium; or
- Fraud or material misrepresentation affecting the policy or in the presentation of a claim thereunder, or violation of any of the terms or conditions of the policy; or
- ……..etc. etc…there’s more in the statute but this is all we need”
As you can see a “violation of the terms or conditions of the policy” is one of the conditions that qualifies as grounds for cancellation in Missouri.
A heavy handed way for the underwriter to deal with this policyholder? Maybe. But in their defense, we don’t know any of the reasons that may have prompted this underwriter to go down this road. Hopefully they had documented reasons.
The takeaway: Don’t ever underestimate the power given by the policy terms and conditions to the insurance carrier and supported by state statute! Oh, and when asked to complete an audit, maybe you should.
Hope this helps you out! Thanks for reading!