Best Practices for Cancellations and Nonrenewals

Having coverage cancelled or nonrenewed can be very traumatic for the client. While this may occur for reasons that have nothing to do with their insurability, such as when the agency and company terminate a relationship, the client is likely to take this news personally. It’s important to contact the customer immediately and let them know what steps, if any, will be taken to replace coverage. Remember that insurance companies must provide legal notice of cancellation and nonrenewal and that the insured is entitled to know the reason for the cancellation (usually upon written request).

This is an area where knowledge of state law is vitally important. Familiarize yourself with Texas laws and regulations regarding cancellation and nonrenewal.

One of the most troublesome areas for agents in terms of E&O is direct bill policies that are cancelled for nonpayment of premium. Many agents have a practice of calling or otherwise notifying insureds whose premiums are overdue. This practice is very dangerous, since it can lead the client into a false sense of security. The first time the agent fails to notify the client, and coverage terminates, they may sue the agent since they had always notified them in the past when their coverage was in jeopardy. Agents should be cautious about this practice. Either do it all the time for every client, or don’t do it at all. If you do it now and want to stop doing it, notify all your clients that you will no longer be providing the service.

We sometimes err by advising a client that a policy that is being cancelled will be reinstated by the company. Never tell a client this is the case unless you have written confirmation from the carrier.

Policies that are issued on a claims-made basis require special handling due to the extended reporting period option. There is a time limit to elect this option, and the insured should be notified immediately.

In This Section:

Best Practices Ideas for Cancellations and Nonrenewals
Case Studies
Sample Letters / Documents / Wording
Sample Procedures


The Best Practices for Avoiding E&O Claims When Handling Cancellations and Nonrenewals

  • DON’T indicate to the customer that the insurer will rescind a notice of cancellation unless you have written confirmation from the insurer (see Case Study #2)
  • DON’T make it a practice to contact customers who receive notices of intent to cancel for nonpayment (see Case Study #3)
  • If you have contacted clients in the past when premiums were overdue, send them a letter to advise that this practice has been discontinued (see Sample Letter #1)
  • Use your agency management system to identify those customers who have been contacted in the past regarding late payments
  • DON’T make it a practice to advance premium payments on behalf of your clients
  • Advise clients, both new and renewal, in writing, of the agency’s credit policy
  • Do nothing to hinder the insurer’s right to cancel
  • Be certain to notify other parties of interest (certificate holders, additional insureds, loss payees, mortgagees, etc.) if you have made a commitment to do so
  • Preserve all notices of intent to cancel received from a finance company and place them in the insured’s file
  • Notify the insured immediately if coverage is being replaced, including any change in policy terms or conditions (see Case Study #1) (see Sample Letter #2)
  • Notify the insured immediately if the agency will not make an attempt to replace coverage (see Sample Letter #3)
  • If coverage is on a claims-made basis, inform the insured of the need for “tail” coverage and the requirements to secure it
  • If a policy is cancelled because the insured has ceased operations, remember to recommend discontinued products or completed operations coverage
  • Conduct an “exit interview” with clients whose policies have been canceled or nonrenewed (see E&O Tip)
  • Establish a written procedure for handling cancellations and nonrenewals, including rules for reinstatement or replacement of coverage (See Sample Procedures)