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Tips & Traps: Why Brokers Should Not Cancel Insurance Contracts (and When They Can)
An insurer may cancel a contract of insurance if the insured fails to pay the premium. The insurer must give 3 business days notice of any cancellation in writing and, if requested, the reasons for the cancellation. If the insurer does not cancel the insurance correctly, the cancellation will not be effective.
Brokers must not cancel - Brokers must not cancel a contract of insurance because the client has not paid the premium. This rule-of –thumb applies unless the client tells them that they do not require the insurance or the insurer instructs the broker to do so. Brokers are their client’s agent and have no right to act without the client’s authority (unless the broker is acting under a binder.)
What brokers may do - When a client has not paid the premium to a broker within 90 days of the insurer accepting the risk, the broker must notify the non-payment to the insurer within 7 days after the 90 days (and may do so earlier, e.g. if it is outside credit terms). If the insurer decides to cancel the policy, the insurer may need to instruct the broker to do this for them (e.g. if the policy was arranged through Sunrise Exchange). It is quite acceptable for brokers to follow such an instruction.
Premium funders - Similarly, brokers should not cancel contracts of insurance on the instructions of a premium funder (e.g. if the client has failed to pay the instalments) without the client’s authority. Premium funders generally have a power of attorney from the client. They have the ability to instruct the insurer to cancel directly.
Risks for insurers - Many insurers (and brokers) still adopt the pre-Insurance Contracts Act practice of cancelling a policy back to inception if the client does not pay the premium. Such a cancellation is void, i.e. of no effect. This means that the policy remains on foot for the full policy period and, if the insurer does not send a notice of its intention to renew (or not) 14 days before the end of the policy period, a “continuing contract of insurance” will come into existence and the policy will be on foot for a further equivalent period (usually 12 months). This gives the insured 2 years “free” insurance (although they will have to pay the premium in the event of a claim).
Risks for brokers - If an insurer instructs a broker to cancel the policy back to inception, you are perfectly at liberty to do so. This will in fact assist your client as the cancellation will be void. If the insurer instructs you to cancel as and from a particular date, then ensure that you do so correctly, otherwise you could be liable to the insurer if a claim later arises and has to be paid because the cancellation was void.
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