In the fast-paced world of tech startups and business planning, you might not even consider whether your insurance policies could be yanked out from under you. After you have secured basic insurance to protect yourself and your assets against loss and liability, can your insurance company cancel your coverage at any time? Surprisingly, under some circumstances, the answer is yes. But you can protect against this with some advance preparation.
For some forms of insurance—like health, life, auto or homeowner’s insurance—there are statutory limitations on an insurance company’s right to cancel. But, it’s a different story for commercial insurance, purchased to protect your business assets and executives.
In California (and various other states), the insurance company has a brief window of 60 days after a policy is issued to cancel the coverage. After 60 days, the general rule is that an insurance company cannot cancel coverage, except for non-payment of premium. But, this can be changed by the insurance company by adding a provision to its policy permitting cancellation.
For example, some policies contain the following provision:
We may cancel this policy by mailing or delivering to the first Named Insured written notice of cancellation at least 30 days before the effective date of cancellation.
You might not think to look at the fine print of your insurance policy until after you have tendered a claim and then received a cancellation notice from your insurer. Or, you might receive a notice of cancellation out of the blue without any warning. If the insurance company has inserted a provision like the one above in its policy, it is generally enforceable.
Here’s what you can do to avoid such a situation:
- Ask to see the policy form before you agree to pay for it (that is, before it is officially bound). Sometimes, you can request that cancellation provisions be removed or more narrowly limited to certain circumstances (like to a misrepresentation in your insurance application or a material change in your business).
- If you have tendered a claim before receipt of the cancellation notice, you may be able to force the insurance company to pay for the claim. At the very least, you might be entitled to the return of some portion of the premium you paid.
Here’s the bottom line: Check the proposed language of any policy you are about to purchase to see if the insurance company has reserved for itself the right to cancel coverage for any reason. If so, request that they limit cancellation to non-payment of premium alone. If they won’t modify the policy, you might want to go with a different insurer.