Tips for Handling Client Cancellations for Non-Payment of Premium

Many agents contact their clients by email or phone when their carrier sends a notice of pending cancellation due to an unpaid premium. This allows agents to avoid the extra work when a policy is cancelled and then reinstatement or new coverage must be pursued. For clients, it can be a service to help them avoid a gap in coverage. While well-intended, this practice also opens up the agency to E&O claims. How?

When you set the precedent that you will pursue the client for payment at every pending cancellation, you may be found to have created a duty to continue this practice. If you stop this process, don’t apply it equally to all insureds, or miss an account, you could be found to have failed this duty. Juries have ruled in favor of the client in these instances – even when the client has a chronic history of late payments.

If you currently have a process in place to contact clients pending cancellations, it must be consistent and performed for all clients, with the contact attempts well-documented. Written documentation is critical. If you make phone calls and do not record them, back up this practice with written correspondence. From a legal perspective, you could document the file as evidence you made the call, without having a recording. In addition, make the same number of contact attempts for each client.

A best practice is to discontinue this process to eliminate the E&O exposure. To discontinue this process, you must notify your clients in writing, advising them of such and providing a clear date for when the process will stop. CLICK HERE to see a sample notification letter.

It's the Client’s Responsibility to Replace Coverage

The client’s policy has now canceled. What responsibility do you have to replace coverage? The agent does not have a duty to pursue the client to replace the coverage. It is the client's responsibility to approach the agent about replacement coverage.

As the agent, you can choose to reach out to your clients regarding replacement coverage. However, keep in mind that if you do it once, you will need to do the same for each client should they have a policy canceled again in the future. Bad-pay clients can be problematic in a variety of ways, so consider if you want to set this precedent.

Never advise the client you will be able to backdate coverage to address a gap in coverage created by the cancellation. It is fine to attempt to have the coverage backdated, but even if you have a carrier that will typically backdate coverage within a set timeframe, it can raise issues for you if you make promises to the client about backdating that the insurance company does not accept.

What’s more, ensure that you advise the client of any differences in coverage between the prior coverage and any proposed replacement coverage.

How could a claim regarding a duty to notify play out?

Here is an example of why it can be risky to have a practice of notifying insureds of late payments. An agent insures multiple properties for a client through a number of different insurers. The client has a history of addressing payments late, and the agent often, but not always, contacts the client regarding pending cancellations. The agent has a debit card on file for the client and could use it to make payments at the client’s direction, but does not make payments without direction. One of the client’s properties experiences a fire after their policy was cancelled for non-payment – the agent has not contacted the client regarding this policy cancellation. The carrier disclaims coverage due to the cancellation and will not consider reinstatement due to the poor payment history. The client alleges that the agent set the expectation for the client to rely on the agent for identifying policies that had been canceled or were pending cancellation – and to inquire if the agent should make premium payments on their behalf. A court could find in favor of the client, and the agent/his carrier will be responsible for the lack of coverage – despite the fact that the client received notice of cancellation directly from the insurer.

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Have You Reviewed Your Agency Procedure Manual Recently?

A procedure manual can be a great tool to ensure consistency within an agency. For it to be effective, it is important that the manual be reviewed regularly and updated as needed. Changes must be effectively documented and communicated to staff. A person/committee should be responsible for this process to ensure accountability. Keep in mind that in the event a claim resulting in an E&O lawsuit against your agency, the manual will be subject to discovery by the plaintiff. Having a procedural manual that is not followed by all staff will not bode well for you in the courtroom.

CLICK HERE to review a sample procedure manual. (Reprinted with permission from PIA Management Services Inc.)

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Check Out Our Agency Acquisition Checklist

Are you planning to buy an agency or a book of business? Our Agency Acquisition Checklist includes tips to help you navigate through key issues relating to errors & omissions when buying an agency or book of business.

CLICK HERE to access the checklist.

Ready to Help

Are you looking for risk management guidance on a particular topic? Reach out to Tabitha DeGirolano of our E&O team for help at tabitha.degirolano@uticanational.com.

This information and any attachments or links are provided solely as an insurance risk management tool. They are derived from information believed to be accurate. Utica Mutual Insurance Company and the other member insurance companies of the Utica National Insurance Group (“Utica National”) are not providing legal advice or any other professional services. Utica National shall have no liability to any person or entity with respect to any loss or damages alleged to have been caused, directly or indirectly, by the use of the information provided. You are encouraged to consult an attorney or other professional for advice on these issues.