Professional Lines Policy Cancellation – Proceeding with Caution, by Andrew J. Kelly, RPLU
The reasons a business has for terminating a professional lines insurance policy are often very different but can include the cancellation of an important vendor contract, low revenues, a change in business model, or even the termination of the business all together. Regardless of the reason for the desire to cancel coverage, it is important that an insured understand the consequences of policy cancellation not only with regard to the current policy, but past policies as well. I cannot tell you how many times in during my tenure in the insurance industry that I have seen an insured cancel a professional liability insurance policy without a complete understanding of exactly how a claim would be handled if discovered after a policy is cancelled.
The professional liability insurance space is very different from other insurance contracts because of the way coverage for prior policies in past years are addressed in the event of policy cancellation. Many policyholders automatically erroneously operate under the assumption that as long as coverage for a specific policy year is bought and paid for it continues in perpetuity even if the coverage for the next policy year is cancelled. This would be an incorrect and potentially very costly assumption. Almost all policies in the professional lines space whether they be errors and omissions, directors and officers liability, employment practices liability, or cyber liability insurance have wording in them that keeps coverage in force for the prior years of coverage only if coverage is maintained continuously each year. Once a policy is cancelled for any reason, the coverage for that year and, more importantly, any year prior years where coverage was in force is automatically lost.
This becomes an extremely tough lesson for many insured’s especially when reapplying for coverage and an attempt is made to go back and bridge the gap for the coverage that was lost after a policy has lapsed. I have always found it hard in the past to have explain the harsh reality to past policyholders that have cancelled their coverage that an insurance company is now declining to go back and cover the past exposure that has been lost which will leave the prior years that have already been paid for uncovered going forward. In the rare event that a market does go back and offer coverage for the prior years of coverage it can often cost multiples of the expiring premium, thus making it cost prohibitive, since many markets will automatically debit any account that has been subject to a policy cancellation.
If an insured does decide to move forward with a policy cancellation it becomes extremely important that the insured work with their agent and legal counsel to properly consider the consequences of policy cancellation to their business in the event of a claim after policy cancellation. Additional claim reporting windows, or extended reporting periods as they are called in the industry, can be available, but are subject to each policy’s terms and conditions, are usually only available on a one time basis, cannot be renewed, often cost 150 percent to 300 percent (or more) of the policy premium with the premium due to prior to purchase, are fully non-refundable, and only provide coverage for claims where the issue that caused the claim and the claim itself are inside of the window in which coverage was in force and honored by the carrier prior to policy cancellation. It is important that any insured that is thinking about cancelling a policy have the proper conversations with their agent of record as far in advance of possible of the date the policy is cancelled so that the insured can understand what policy cancellation means in practical terms to their risk exposure in the event of a claim.
Andrew J.Kelly, RPLU
Vice President
Alexander J. Wayne & Associates, Inc.
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