Why You Should Always Avoid Insurance Coverage LapsesNovember 15, 2018
An insurance policy is almost definitely low on the list of enjoyable annual purchases. Whether you own a business, a home, a car, or other kinds of valuable property, it’s very likely that you either have, or will need, an insurance policy. Sometimes insurance buyers either forget to pay their insurance bill and their policy cancels because of it or they elect to let a policy lapse because of a seasonal business or another reason.
There are times when it is in your best interest to cancel or non-renew an insurance policy that is no longer needed, but it is important to determine that it is definitely not needed before doing so. There are significant impacts and ramifications for having lapses in insurance coverage that might come back to haunt you in the future. Here are a few things to consider before you let your coverage lapse and why you should always avoid insurance coverage lapses:
1. Will you need the policy in the future?
Insurance companies look at many things when writing a policy for a new customer. Most insurance companies want to establish long-lasting relationships with their customers. This is because of the costs of putting new business on the books. Companies that retain their customers at a high rate show stability and long business relationships tend to equate to more profitability.
Proof of Prior Coverage with no Lapses
Some companies elect not to write business for new start-ups because of the high turnover rate and attrition associated with these policies. Often, it is these policies that go into frequent cancellation for non-payment of premium. This results in additional workload, paperwork, and expenses for the insurance company which writes the policy. Furthermore, insurance companies determine rates and the favorability or acceptability of risks based on large statistical data sets. Some insurance companies may have actuarial data that show frequent cancellations for non-payment of premium to be a performance indicator about the account; meaning it may be indicative of operations which result in a higher claims occurrence.
For all of the above reasons, many insurance companies will not offer a policy unless the customer has proof of prior coverage with no lapses. Even fewer companies will agree to write a policy after it has been canceled for non-payment. Others may agree to write the coverage, but it may come with a surcharge or a policy debit because the risk is less desirable given its history or lack thereof.
Maintain Coverage for Seasonal Businesses
So, if you have a seasonal business such as landscaping or contracting, it may not be in your best interest to let your policy lapse in the Winter off-season. Considering ways to afford to maintain the policy for the entire year is likely a better option and more cost-effective in the long run.
Many policies for start-up companies are issued at a minimum premium because the company is still small. The premium for some liability policies may be $500/year, or even less depending on your type of business. Letting the policy lapse for 6 months to save $250 could very well cost you several multiples of that amount if you plan on resuming your operations again in the Spring. You may find your company options limited and your annual premium with a new company is much higher than the company who had your coverage last year.
When deciding to start a business or when running a seasonal business, put insurance premiums into your business plan budget and you won’t be caught off guard by premiums that come due during slow times of the year.
2. Can you afford the consequences of having no insurance?
Not carrying insurance has huge consequences in many situations. Auto accidents are one of the first things that come to mind when discussing uninsured individuals. Failing to carry auto liability insurance can leave you vulnerable to incurring debilitating costs to compensate injured parties or pay for your legal defense bills. Furthermore, damage to your own car will need to be paid out of pocket. Most times, an insurance policy is cheaper than buying a replacement vehicle.
If you fail to insure your business’s property and liability exposures, you may be risking the financial solvency of your livelihood and income stream. Failure to carry some insurance such as Worker’s Compensation causes common law defenses to be forfeited and opens up business owners to losses based on claims of pain and suffering incurred by injured workers. Significant numbers of small businesses are forced to shutter their doors each year because they did not have cyber liability insurance to compensate for losses resulting from a data breach. These are just a few examples of the onerous costs that can occur when the decision is made to forego insurance coverage.
3. Do you plan on purchasing any insurance in the future?
If you decide to let your insurance policy go into cancellation because the bill has remained unpaid, you should consider a few things before making that decision. If you will need insurance in the future, it is a good idea to avoid policy cancellations and late payment of premiums due. Much like unpaid bills negatively affect your credit score, your insurance score can be adversely affected by these actions and it can make your insurance in the future more expensive. Similar to how lenders will look at your credit score, insurance companies will often consider an insurance score to determine rating tiers or other pricing consideration.
This means that if you have a history of non-payment, late payment, or cancellation, you may become ineligible for the insurance company’s best programs or pricing. The best rates are reserved for insureds that possess good risk indicators and, therefore, justify paying lower premiums for their coverage, as they are statistically less likely to incur a loss. Consider how cancellations will impact your future buying choices and the rates you will have available to you before letting a policy lapse.
4. Do you operate a business within a niche market?
If your company has unique components that differ from typical types of businesses that are commonly found on main street America, you need to keep that in mind before letting your insurance policy lapse. Many agricultural types of operations are already very limited in terms of insurance markets that are available to them to secure coverage for their operations. Likewise, if you are operating any kind of higher risk exposure type of operation, you probably have experienced difficulties in finding insurance.
Limited Options Available
Some of these types of businesses may be limited to just a handful of companies. If a policy lapses and the insuring company will not reinstate the canceled coverage, there could be scenarios where no other standard markets are available to write the coverage. Insureds in this situation can often find themselves having to obtain coverage for their operations through an excess and surplus lines market with a non-admitted carrier. This carries with it several implications, but the most noticeable is the sticker shock that often comes with these policies. They are often much more expensive than the coverage that was obtained through a standard market and the additional costs incurred only make budgeting for a small business even more difficult. In addition, premiums for E & S policies are often due at the inception (beginning) of the policy.
If you have a seasonal business, or you are having difficulty paying premiums because of a slow time in your business, discuss payment options with your agent. Often, premium finance is available to insureds, or your agent may be able to find other ways to save you money without having your policy go into cancellation for non-payment. It is important to understand how insurance companies assess risk and profitability and all of the ramifications of insurance lapses before you decide to let your policy lapse. Keep open communication with your agent to avoid unintended consequences and keep yourself informed.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.