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Cancellation

Laws and rules regarding cancellation of workers compensation policies; Pro rata and short term examples.;

 

Summary

Several sections of the Indiana Code deal with policy cancellation. The following table summarizes the law.

 

The Indiana Code is available on the State of Indiana website at this address: http://www.state.in.us/legislative/ic/code/

 

 

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

27-1-31-3

nonrenewal 

45

45

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

 

 

*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."

 

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.

 

Effective 1/1/98, the WC Board uses the NCCI Proof of Coverage (POC) System, so State Form 116567, No. 49-A is no longer required. Per the Workers Compensation Act, the cancellation becomes effective ten (10) days after receipt. Also reference ICRB circular IN-92-4 issued February 28, 1992.

 

Note that some minimum premium policies can be cancelled pro-rata. Refer to Basic Manual Rule 3.A.3, pages R23, old Rule X.B.4.

 

 

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 insurer. 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. We do not view such size changes as a change in the scale of the risk or hazard. 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.

 

 

Nonrenewal

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

Law Summary

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). Our long standing procedure is that premium or a noncompliance matter must be outstanding for at least thirty days. The servicing carrier must issue an original notice with at least two follow-up notices during that time (that's 3 total notices). The servicing carrier can submit this documentation to the ICRB requesting cancellation. Upon ICRB and WC Board approval (usually within a few days), the carrier can then issue its cancellation notice per normal procedure.

 

If the ICRB has documentation that a lawsuit is pending over disputed premium and both parties (carrier & insured) are aware of the litigation, we can make a new assignment through the assigned risk pool. We will alert the new assigned risk carrier regarding the disputed premium.

 

 

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Rule References

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. Please refer to ICRB Circular 2002-05 in the attached PDF file.

[Circular 2002-05.pdf]

 

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

 

 

Cancellation Form

Indiana uses the standard cancellation form in the NCCI Forms Manual. It is called the Policy Termination/Cancellation/Reinstatement Notice, WC 89 06 09 B, issued 7/1/96. It is located in the "Notice Forms & Rules" tab in the back of the manual.

 

 

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 3.A.3.b, Cancellation Provisions Table 1) (old rule X.B.) 
  • insured retiring from business (Basic Manual Rule 3.A.3.b, Cancellation Provisions Table 2) (old rule X.C.) 
  • assigned risk insured replacing coverage through voluntary market (IC 27-7-2-35)

Minimum Premium Policy

Basically, a minimum premium policy can be pro-rated when the policy is not effective for a full year. Refer to Basic Manual Rule 3.A.3.b, Page R23 (old Rule X.B.4).

 

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 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. Appendix section located between the R pages and C pages in the manual.

 

Example: $1,000 one year policy canceled after 6 months or 182 days (January 1 to July 1), premium would be:

 

Pro Rata

Short Rate

$499

$600

($1,000 x .499)

($499 x 1.2033)
 or ($1,000 x .6)

 

The short rate table contains two multipliers: a percentage and a factor. The reason being is there are two different methods of calculating a short rate cancellation. Appendix B, Page AB1 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. The following is an example:

 

·         Effective date: March 3, 2008

·         Cancellation date: May 21, 2008

·         March 3 = 62 number of days in the year

·         May 21 = 141 number of days in the year

·         The difference of 62 from 141 = 79

·         The policy was in effect for 79 days

 

 

Bankruptcy Ruling

The U.S. Supreme Court ruled in June 2006 that claims for unpaid workers compensation premiums do not have priority in bankruptcy actions. Carriers are placed in the same category as unsecured creditors. For more information on the case Howard Delivery Service Inc. vs. Zurich American Insurance Company, please refer to the National Underwriter article titled "WC Insurers Lose U.S. Bankruptcy Ruling" dated June 26, 2006, in the attached PDF file.

[Bankruptcy - NU article 6-26-06.PDF]

 

 

 


Related Files

The material in this document has been prepared and shared for informational purposes only and should not be relied upon as legal advice on any particular situation.