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CANCELLATION OF POLICIES
Every so often, a property loss and a purportedly cancelled policy of insurance cross paths. Accordingly, it is important for you to know something of the rules governing cancellations as, at least in New Jersey, they are very specific and failure to adhere to them may negate the cancellation.
A statute, N.J.S.A. 17:29C-1, gives the Commissioner of Banking and Insurance the power to require 30 days written notice of cancellation or nonrenewal. Pursuant to that statute, the Commissioner has established rules set out in the New Jersey Administrative Code at Section 11:1-20.2. You can Google "New Jersey Administrative Code," then select the "Michie" link.
The time requirements are straightforward.
- Cancellation for nonpayment of premium - 10 days. If the premium is paid within the 10 days, the cancellation is not effective.
- Cancellation for "moral hazard" - 10 days.
"Moral hazard" is defined very specifically to include (1) the risk, danger or probability that the insured will destroy the property or permit it to be destroyed for the purpose of collecting insurance proceeds, (2) a change in the circumstances of the insured that will increase the probability of such destruction, (3) a substantial risk, danger or probability that the character, circumstances or personal habits of the insured may increase the possibility of loss or liability for which an insurer will be held responsible, and (4) any change in the character or circumstances of the insured that will increase the probability of such a loss or liability.
- All other cancellations/nonrenewals - 30 days minimum, 120 days maximum. Failure to notify a mortgagee or loss payee will invalidate the cancellation only to the extent of the mortgagee or loss payee's interest.
Service is also specified.
- Notices of cancellation and nonrenewal must be sent by certified mail or by first class mail if at the time of mailing the insurer obtains a date stamped proof of mailing from the Postal Service showing the name and address of the insured and the insurer has retained a duplicate copy of the mailed notice.
The basis of the action must be articulated.
- No cancellation or nonrenewal shall be valid unless the notice contains the standard or reason upon which the termination is premised and specifies in detail the factual basis upon which the insurer relies.
If the insured requests the cancellation or nonrenewal, the insurer is not required to send any notices as set forth above, but must maintain proof in its file of the insured's request.
If the premium has been financed, the cancellation process gets trickier. Ordinarily, a premium finance company will obtain a Power of Attorney from the insured authorizing it to act on behalf of the insured. Accordingly, the premium finance company can request cancellation of the policy and the insurer does not have to give the insured any notice. The New Jersey Legislature addressed this issue with another statute, N.J.S.A. 17:16D-13, which establishes a two-step process for the cancellation of the policy for failure to pay the premium to a premium finance company. (1) The premium finance company has to mail the insured 10 days written notice of the intent to cancel unless the default is cured within the 10 day period. A copy of this notice of intent must also be given to the insurance agent or broker. (2) After the expiration of the 10 day period, the premium finance company may request cancellation of the policy by mailing to the insurer a notice of cancellation. The premium finance company must then also mail notice of the cancellation to the insured and the agent or broker, setting forth an effective date of cancellation that is not earlier than 3 days after the date of mailing.
All notices of cancellation or nonrenewal, other than for nonpayment of premium, must also contain a clearly worded and prominently displayed statement advising the insured of the ability to file a written complaint with the NJ Department of Banking and Insurance, giving its address, and advising the insured to file any such complaint immediately.
Next time, we will review the bases for cancellation/nonrenewal.
As always, if we can assist you or your insured in regard to any of these matters, please feel free to contact me at 973-538-4100 or by email at firstname.lastname@example.org. We are here to help!