Cancellation vs. Non Renewal

There are 2 ways to end an insurance policy: cancellation or non renewal. What is the difference between cancellation and non renewal?

• Non renewal is when a customer does not pay for the following year. The policy just expires. For example, a policy begins on 01/01/2000 and expires on 01/01/2001. No payment was made in order for the policy to continue, so it ended with “non renewal”.
• Cancellation is when a customer requests insurance coverage to stop before the policy expires. For example, a policy begins, and then 1 month later the customer decides to cancel. This usually means that the insurer is leaving the provider for another. In most cases, a cancellation fee will apply.

Cancellation Fee

Your house insurance quote may say, “No Flat Cancellation – 25% Minimum Earned of the total premium”. That is to say that at least 25% of the total premium payment has no chance of being refunded if you cancel before the end of the policy term.  In other words, don’t cancel your insurance before the policy expires.

If you are selling your house and provide a HUD Statement, cancellation fees may not apply. However, if your policy is a 3 month vacant house policy, the premium is 100% earned. That means if the policy begins, but the house is sold the next day, there is no refund.

Fees fully earned

What does “fees fully earned” mean? If the homeowner cancels their insurance policy, the fees won’t be refunded to them. On your homeowners quote, you may have seen words like “policy fee $75”, or “inspection fee $100”. These are the fees that are nonrefundable upon cancellation.

Homeowners Inspection Fee

An inspection fee implies that an inspector will be sent to the home to inspect. The purpose of this is to make sure the home is in good condition. The inspector themselves would receive the fee. This is the reason that the fee is not refundable. This fee is present year after year.

Homeowners Policy Fee

A policy fee is a onetime fee that does not go up or down based on premium. What’s the policy fee for? Only the insurance provider knows. Most surplus lines insurance have a policy fee. This fee is present year after year.

What If The Insurance Company Cancels?

If an insurance company cancels insurance with their customer, there should be a full refund. Very likely, the fees will still not be refunded. An insurance provider may cancel if a house fails a house inspection. They may also cancel after paying a claim. It’s unlikely that they would cancel for claims like lightning, tornado, etc. In those instances, the damage was not the fault of the insurer. It’s more likely that they would cancel for things they feel is the insurer’s fault. For example, if a guy fell asleep in bed with a cigarette and burned his house down, the insurance company might cancel afterwards. But just like the customer, they can cancel for any reason.

How Homeowner Insurance Refunds Work

A refund is calculated by how long is left in the policy period. If you cancel half way through a policy period, the most you will get is 50% of what you paid. This is called prorating. Let’s say that an insured customer bought insurance for $2000 + fees. Half way through the year, they sell the house and cancel their insurance. If no cancellation fees apply, that customer should get $1,000 back minus fees. Why wouldn’t they get the full $2000 back? It’s because the insurance was applied and their home was protected for that first half year. The insurance provider sustained risk of loss for that time.

How do cancellation fees apply to the refund? Let’s say that halfway through the policy period, the customer cancelled his insurance and insured with another provider. That means of the $1000 left, the insurance company would keep 25% ($250), and refund the customer 75% ($750).

If you are considering cancelling your insurance coverage, ask your agent what amount you should expect in return.