Laws and rules regarding cancellation of workers compensation policies; Pro rata and short term examples.
*IC 22-3-5-5 (c) (5) reads “Any termination of this policy by cancellation shall not be effective as to employees of the insured covered hereby unless at least ten (10) days prior to the taking effect of such cancellation, a written notice giving the date upon which such termination is to become effective has been received by the worker’s compensation board of Indiana at its office in Indianapolis, Indiana.”
Several sections of the Indiana Code deal with policy cancellation. The following table summarizes the law.
|Indiana Code||Reason||Number of days notice for policies effective:|
|greater than 90||less than 90|
|22-3-5-5(c)(5)||Notice received by WC Board*||10||10|
|27-1-31-2 (1)||Premium unpaid||10||10|
|(2) Change in scale of risk||45||30|
|(3) Fraud or misrepresentation||20||20|
|(4) Safety noncompliance||45||30|
|(5) Reinsurance canceled||45||30|
|27-7-2-31||Assigned Risk policies – unpaid premium: “No employer who does not pay the advance premiums or premium when due, shall be entitled to insurance, nor shall any coverage be extended until all obligations to pay worker’s compensation insurance premiums contracted during the previous twelve (12) months have been paid.”|
|27-7-2-37||Assigned Risk policies: WC Board & ICRB must approve cancellation|
In all cases, the carrier must issue a cancellation notice (which is entered into the NCCI policy database). The Policy Termination/Cancellation/Reinstatement Notice (WC 89 06 09 B) is located in The Forms Manual of Workers Compensation and Employers Liability Insurance under the Notice Forms & Rules tab.
The WC Board requires use of NCCI’s Proof of Coverage (POC) System, so State Form 116567, No. 49-A is no longer accepted. Per the Workers Compensation Act, the cancellation becomes effective ten (10) days after receipt.
Note that some minimum premium policies can be cancelled pro-rata. Refer to the Basic Manual.
Scale of Risk
The statute provides that a carrier may cancel a policy due to a change in the scale of the risk. Both the Department of Insurance and Bureau informally agree that the statute is intended to protect the employer from arbitrary cancellation from its carrier. We also agree that a change in the “scale of risk” refers to a change in the degree of hazard, not a change in the size of the employer. Employers constantly change size through numbers of employees, payroll fluctuations, or by adding or deleting locations. A change in the scale of the risk would be a more obvious change in the hazard like a jewelry store becoming a machine shop.
Carriers have the opportunity via a nonrenewal notice to end coverage for any reason. However, the statute requires that the carrier give advance notice of at least 45 days prior to the expiration of the existing policy. If a 45 day advance notice (prior to policy expiration) is not given, then the carrier must renew the policy for at least a full year unless:
- the insured is willing to cancel coverage at an earlier date, or
- one of the statutory reasons to cancel applies.
Note: as of July 1, 2013 short term policies are now permitted in Indiana.
Assigned Risk Policy
Indiana law requires the ICRB and WC Board to approve cancellation of assigned risk policies (IC 27-7-2-31 and IC 27-7-2-37). Premium or a noncompliance matters must be outstanding for at least thirty days before the ICRB will consider a cancellation request. The servicing carrier must issue an original notice with at least two follow-up notices during that time (a total of 3 notices). The servicing carrier can submit this documentation to the ICRB requesting cancellation. Upon ICRB and WC Board approval, the carrier can then issue its cancellation.
If the ICRB has documentation that a lawsuit is pending over disputed premium and both parties (carrier & insured) are aware of the litigation, a new assignment can be made through the assigned risk pool. The new assigned risk carrier will be notified of the disputed premium.
Basic Manual, Indiana State Rule Exceptions (green pages – Applicable to Assigned Risk Policies Only), Indiana Workers Compensation Insurance Plan of Operation (“Plan of Operation”):
- Article I, 1.06 definition of Employer, “common management or ownership”
- Article II, 2.02(c) Good Faith Rules of Eligibility
- Article II, 2.07 Premium Obligations
- Article III, 6.02 Cancellation of Policy, “opportunity to cure”
Under the Plan of Operation for the Indiana Assigned Risk Reinsurance Pool, both Section 2.02(c) and Section 2.07 state that if, subsequent to policy issuance, the employer does not meet all Undisputed Premium obligations under the current policy or previous policies, the insured’s present servicing carrier retains the right to cancel a policy currently in force under the Plan.
Reinstate Assigned Risk Policy
Indiana Assigned Risk Plan of Operation Article V, Section 6.03 reads as follows:
- 6.03 Effective Date of Policy
Policies must be issued, renewed, or reinstated without a lapse in coverage when premium is received or U.S. postmarked prior to the policy effective date or cancellation date.
Premium Finance Company
As of July 15, 2002, ICRB now advises servicing carriers to accept premium finance company’s notice to cancel as the insured’s request, provided a properly worded power of attorney clause is present in the finance agreement.
Sometimes an agent will front the deposit for his client and the client does not pay back the agent. In such cases, the ICRB nor the servicing carrier have authority to grant a request from the agent to cancel the policy. However, if the agent has a legal finance agreement with the right to cancel, then the carrier can honor the request. Reference NCCI Basic Manual Assigned Risk Supplement, Section 1, Rule B.1.k(2)(d), page PLAN-16
Types of cancellations:
A carrier can cancel a policy two ways: either Pro Rata or Short Rate.
Pro Rata Cancellation
This method is a proportionate way to cancel the policy with no penalty to the insured. It is used when the cancellation is:
- initiated by the carrier (Basic Manual Rule BM‐CANR‐C5F65, Cancellation Provisions Table 1)
- insured retiring from business (Basic Manual Rule BM‐CANR‐C5F65, Cancellation Provisions Table 2) (old rule X.C.)
- assigned risk insured replacing coverage through voluntary market (IC 27-7-2-35)
Minimum Premium Policy
A minimum premium policy can be pro-rated when the policy is not effective for a full year. Refer to Basic Manual Rule BM‐CANR‐U021D.
This means the final premium can be something less than the annual minimum premium. The only instance where the full minimum premium applies is when the insured cancels the policy, but is not retiring from business.
Short Rate Cancellation
A short rate cancellation is used when the cancellation is initiated by the insured (except as noted above). This method applies a slight penalty or “higher rate” to the insured for canceling. The higher rate applies to the expired portion (period coverage was in effect) of the policy. The higher rate is justified because of the carrier’s expenses to issue the policy (yet unable to spread the expenses out over the full year as originally planned), and the expense of issuing the cancellation and return premium. The short rate penalty factor is multiplied after the modified premium and before any premium discount if applicable.
Tables for both pro rata and short term cancellations are in the Basic Manual, Appendix B.
The short rate table contains two multipliers: a percentage and a factor. The reason is that there are two different methods of calculating a short rate cancellation. Appendix B in the Basic Manual provides an example using the short rate percentage. If the carrier decides not to calculate the cancellation using a percentage, a factor may be applied. An example of this method is shown in the Basic Manual User’s Guide. Whether using either of the two methods, the resulting short rate premium is the same.
Furthermore, the pro rata table is broken down by months in order to help the carrier calculate the number of days the policy was in effect. This is done by subtracting the number of days in the year coinciding with the effective date from the number of days in the year coinciding with the cancellation date.